Ch 5 Study Questions
How much is $100 at the end of each year forever at 10% interest worth today?
$1,000
Find the future value of an annuity of $100 per year for 10 years at 10 percent per year.
$1,593.75
You put $100 in the bank now, $200 in the bank a year from now, and $300 in the bank in two years. How much money will you have available 3 years from now if you earn a 7.5% rate of interest? (Calculate the future value of this stream of cash flows. Refer to Example 5.6.)
$100 x (1.075)3 + $200 x (1.075)2 + $300 x (1.075) = $677.85
You will receive $100 in 1 year, $200 in 2 years and $300 in 3 years. If you can earn a 7.5% rate of interest, what is the present value of this stream of cash flows? (Please note that you receive nothing immediately - there is no initial payment).
$100/(1.075)1 + $200/(1.075)2 + $300/(1.075)3 = $507.58
Today you deposit $1000 in an account paying 6% interest. At the end of years 1, 2 and 3 you will deposit $100 in that account. What is the present value of that stream of cash flows?
$1000 + $100/(1.06)1 + $100/(1.06)2 + $100/(1.06)3 = $1,267.30
Today you deposit $1000 in an account paying 6% interest. At the end of years 1, 2 and 3 you will deposit $100 in that account. How much will you have at the end of year 4?
$1000(1.06)4 + $100(1.06)3 + $100(1.06)2 + $100(1.06)1 = $1,599.94
$200 at the end of each year forever at 10% per year is worth how much today?
$2,000.00
What is the present value of an annuity consisting of 20 end of year payments of $500 when the interest rate is 11 percent? Use your financial calculator.
$3,981.66
What is the present value of an annuity consisting of 100 end of year payments of $50,000 when the interest rate is 6 percent? Use your financial calculator.
$830,877.31
Which of the following statements are true regarding the present value of a stream of cash payments?
- real cash payments should be discounted using a real interest rate. - nominal cash payments should be discounted using a nominal interest rate
A dollar invested today at 8.0 percent interest compounded annually will be worth _______ three years from now.
1.2597
A dollar invested today at 7.5 percent interest compounded annually will the work ______ one year from now.
FV=$1.00(1+0.075)1 = $1.075
True or false: The time value of money functions that are provided by your financial calculator are also available as functions in an Excel spreadsheet.
True
Which of the following is a perpetuity?
a constant stream of cash flows forever
Inflation can be defined as:
an overall general rise in prices
The effective annual interest rate is also known as the ______________.
annually compounded rate
A fixed stream of cash flows that ends after a specified number of years is called a(n):
annuity
A series of level payments that begins immediately for a specified period of time is called a(n):
annuity due
Joseph signs a contract with a company that will pay him $25,000. Following the principles of the time value of money, Joseph would be best off if he received payment:
at the beginning of the project
A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.
fixed
An annuity due is a series of level payments that begin ____.
immediately
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
The time value of money concept states that a dollar today is worth _______ a dollar tomorrow.
more than
Match the financial calculator keys on the left below with their correct functions listed on the right.
n = number of periods i = interest rate expressed as a percentage PV = present value FV = future value PMT = constant recurring payment
Which type of interest rate is generally quoted for loans and by banks and other financial institutions?
nominal
A stream of cash flows means that ________.
payments are made over time
The interest rate on the financial calculator is expressed as a
percentage
In Excel, cash inflows are recognized as ______ values and cash outflows are recognized as ______ values. Interest rates should be entered as ______
positive; negative; decimals
Real cash flow must be discounted by the
real interest rate
Real-world investments often involve many payments received or paid over time. Managers refer to this as a
stream of cash flows
The best known price index used by economists who measure inflation is ________.
the consumer price index (CPI)
Which of the following is a proper definition for the effective annual interest rate?
the interest rate that is annualized using compound interest
The future value of an annuity that lasts n years is equal to
the present value allowed to grown n years
True or false: the nominal interest rate can be defined as an interest rate quoted today by a financial institution on a loan or investment, such as an APR or a periodic rate.
true