Chapter 4 questions

If you invest for a single period at an interest rate of r, your money will grow to _____ per dollar invested.

( 1 + r )

Time value of money tables are not as common as they once were because:

- it is easier to use inexpensive financial calculators instead - they are available only for a relatively small number of interest rates

Which of the following are the primary as well as easy ways used to perform financial calculations today?

- spreadsheet functions - financial calculator

Which formula below represents a present value factor?

1 / (1+r)^t

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?

1.4400

Which of the following is the correct Excel function to calculate the present value of $300 due in 5 years at a discount rate of 10%?

= PV (0.10, 5, 0, -300)

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?

Because the $100 is an outflow from you which should be negative.

FV = _____ * (1+r)^t

PV

Future value is the _____ value of an investment at some time in the future.

cash

The idea behind _____is that interest is earned on interest.

compounding

The process of accumulating interest on an investment over time to earn more interest is called _____.

compounding

In a present value equation, the _____ rate can be found using the PV, FV, and t.

discount

Calculating the present value of a future cash flow to determine its worth today is commonly called _____ valuation.

discounted cash flow (DCF)

T/F: Future value refers to the amount of money an investment is worth today.

false

T/F: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

false

T/F: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

false

A dollar received one year from today has _____ value than a dollar received today.

less

When dealing with compound interest, it is more financially advantageous to have a _____ time horizon for investment.

longer

Given an investment amount and a set rate of interest, the _____ the time horizon the _____ the future value.

longer; greater

The concept of the time value of money is based on the principle that a dollar today is worth _____ a dollar promised at some time in the future.

more than

The current value of a future cash flow discounted at the appropriate rate is called the _____ value.

present

With discounting, the resulting value is called the _____ value; while with compounding the result is called the _____ value.

present; future

With _____ interest, the interest is not reinvested.

simple

What is the primary difference between the time value of money data entries in your calculator and in a spreadsheet function?

the interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal.

T/F: Given the PV, FV, and life of the investment, you can determine the discount rate

true

If you invest a rate of r for _____ periods, under compounding, your investment will grow to (1 + r)^2 per dollar invested.

two