Chapter 5

The future value (FV) of an investment is what the investment will be worth after earning interest for one or more time periods.

True

The process of converting the initial amount into a future value is called discounting

false

The term (1+i) is the present value interest factor, often called simply the present value factor, for a single period, such as one year.

false

The time value of money implies that a dollar received today is worth less than a dollar to be received in the future because funds received today cannot be invested to earn a return.

false

The time value of money implies that the further in the future you receive a dollar, the more it is worth today

false

The time value of money is based on the idea that most people prefer to consumer goods tomorrow rather consume similar goods today.

false

The value of a dollar invested at a negative interest rate grows over time

false

There is no trade-off between money today and money at some future date and it does not depend the rate of interest you can earn by investing.

false

With a higher rate on an investment, less money is accumulated for any time period

false

Compound growth occurs when the initial value of a number increases or decreases each period by the factor (1 + growth rate).

true

Compound interest includes not only simple interest but also interest earned on the reinvestment of previously earned interest, the so-called interest earned on interest.

true

Computationally, the present value factor is the reciprocal of the future value factor, or 1/(1+i)

true

If the discount rate increases, then the present value of a potential investment would fall

true

Money has a time value because a dollar in hand today is worth more than a dollar to be received in the future.

true

The concept of compounding is not restricted to money, and any number that changes over time, such as the population of a city, changes at some compound growth rate.

true

The earnings from compounding drive much of the return earned on a long-term investment because the longer the investment period, the greater the proportion of total earnings from interest earned on interest.

true

The future value in three years of $5000 invested today at a rate of 10 percent is $6655

true

The growth in the future value of an investment over time is not linear, but exponential

true

The longer the time period that funds are invested, the greater the future value

true

The present value factor increases as the number of period decreases. The present value factor = 1/(1+i)

true

The present value is simply the current value of a future cash flow that has been discounted at the appropriate discount rate.

true

The present value of a dollar becomes smaller the father into future dollar is to be received

true

The principal is the amount of money on which interest is paid

true

The principal is the amount of the investment.

true

The term (1+i) is the future value interest factor, often called simply the future value factor, for a single period, such as one year.

true

The time value of money implies that a dollar received today is worth more than a dollar received tomorrow

true

The value of a dollar invested at a positive interest rate grows over time

true

With a higher interest rate on an investment, more money is accumulated for any time period.

true

The present value factor decreases as the number of periods decreases

false

The present value is what the investment will be worth after earning interest for one or more period.

false

The principal is the amount of interest earned each period.

false

A dollar today is worth less than a dollar received in the future.

false

Any number of changes that are observed over time in the physical and social sciences unfortunately do not follow a compound growth rate pattern and the future value formula cannot be used in calculating these growth rates.

false

Compounding is the process by which interest earned on an investment is spent so that in future periods, interest is not earned on the interest previously earned as well as the original depreciation amount.

false

Simple interest includes not only interest on interest but also interest earned on the reinvestment of previously earned interest, the so-called compound interest

false

The earning from compounding does not effect the return on a long-term investment because the longer the investment period, the smaller the proportion of total earnings from interest earned on interest.

false

The future value is simple the current value of future cash flow that has been discounted at the appropriate discount rate.

false

The future value is the value today of a future cash flow

false

The higher the discount rate, the higher present value of $1 for a given time period.

false

The lower the interest rate, the faster the value of an investment will grow, and the larger the amount of money that will accumulate over time.

false