CH 5 Questions
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ---?
$121.00 FV = $100 x 1.10^2 = $121
If you invest $100 at 10 percent simple interest, how much money will you have in 10 years?
$200 FV= $100+10($100x.10)= $200 simple FV=$100(1.10)^10=$259.37 compound
If you invest for a single period at an interest rate of r, your money will grow to ---- per dollar invested
(1+r)
Suppose we invest $100 & get back $236 in 10 years, what rate of interest will we achieve?
9.0% PV=-$100 FV=$236.74 N=10 using FV = PV (1+r)n
suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem?
= NPER ( 0.06, 0, -6000, 10000 )
Which of the following are correct spreadsheet functions?
Future Value = FV ( rate, nper, pmt, pv) Discount rate = RATE ( nper, pmt, pv, fv ) Present value = PV ( rate, nper, pmt, fv )
Which of the following investments would result in a higher future value? Investment A - 12% APR for 10 years Investment B- 12% APR for 12 years
Investment B
The basic present value equation is
PV= FV / ( 1+r ) ^t
If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find a(n)
Present Value
The difference between---- interest and compound interest is that the amount of compound interest earned gets ( bigger or smaller)---- every year
Simple; bigger
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be reinvested, yielding a greater amount in the future.
Assuming the interest rate offered for a 10 year investment plan is same as for a 4 year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?
a) 4 year investment b) 10 year investment c) there is no difference in the required deposit Answer: 10 year deposit
True of false: when using the time value of money features of a financial calculator, you should key in the interest rate as a decimal
false
Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the decimal interest rate?
r = (1000/100)^ (1/10) -1
true or false: given the same rate of interest, more money can be earned with compound interest than with simple interest?
true
True of false : the formula for a present value factor is 1/ (1+r)^t
true: this is the present value interest factor, not the present value itself. In order to get PV, you need to multiply FV by this factor Notice how as the denominator becomes larger due to higher interest or longer periods, it reduces the factor
True of false: small changes in the interest rate affect the future value of a small term investment more than they would affect the value of a long term investment
False: Small rate differences can be worth thousands of dollars, especially when either the amount or the time period is large
The idea behind ----is that interest is earned on interest
Compounding
Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?
FV= $100 X (1.10)^3
You invest $500 at 10 percent interest. At the end of 2 years with simple interest you will have ---and with compound interest you will have ---
$600; $605 PV = -500 OUTFLOW N= 2 I/Y = 10 CPT FV = 605 COMPOUND INTEREST = 605-105 SIMPLE INTEREST 2X ( 500 X.10) SIMPLE INTEREST FV = 100 +500=600 from textbook: with simple interest you earn $500 x .10 = $50 each year, your total will be $500+100 = $600. with compound interest, you will have $500(1.10)^2 = $605 at the end of the two years. Given the same rate of interest, the FV will always be higher with compound interest
If you plan to out a $10,000 down payment on a house in five years & you can earn 6% per year, how much will you need to deposit today?
$7,472.58 A=P(1+r/100)^n where A=future value P=present value r=rate of interest n=time period 10000=P(1.06)^5 P=10000/1.06^5
The present value interest factor for $1 at 5% compounded annually for 5 years [ PVIF (5%,5)] IS
.7835
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
1. Sales growth 2. Dividend growth
Which of the following methods can be used to calculate present value?
1. a financial calculator 2. an algebraic formula 3. a time value of money table
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
1.21
How long will it take $40 to grow to $240 at an interest rate of 6.53% compounded annually?
28.33 years Using a financial calculator, enter -40 for PV, 240 for FV, and 6.53 for I/Y. Solve for N. Notice you must enter the 40 as a negative, or your calculator will not be able to solve the problem pv: -40 fv: 240 i/y: 6.53 cmpt N
Future Value is the cash value of an investment at some time in the future
Cash
True or false: discounting is the opposite of compounding
True: compounding increases money forward in time, discounting reduces money back in time