FIN 3401-101

The idea behind ______ is that interest is earned on interest.

compounding

The basic present value equation underlies many of the:

most important ideas in corporate finance

Simple interest formula

principal x rate x time

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

(1+r)

Which of the following methods can be used to calculate present value? - a financial calculator - a time value of money table - random number generation - an algebraic formula

- a financial calculator - a time value of money table - an algebraic formula

Which of the following can be determined using the future value approach to compound growth developed in this chapter? - dividend growth - sales growth - erratic growth

-Sales growth -Dividend growth

Using a time value of money table, what is the future value interest factor for 10% for 2 years.

1.21

Present Value Interest Factor Formula

1/(1+r)^t

Assuming the interest rate offered for a 10 year investment plan is same as for a 4 year investment plan. Which of these two plans would require a smaller savings amount to be deposited today?

10 year investment The longer time period you have before you'll need the money, the less you'll need to deposit today at the same interest rate.c

The difference between _______ interest and compound interest is that the amount of compound interest earned (bigger or smaller) __________ every year.

Simple; bigger

True or False: Given the same rate of interest, more money can be earned with compound interest than with simple interest

TRUE Compound interest is also known as Interest on interest

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.

True or false: discounting is the opposite of compounding

True *Compounding increases money forward in time, discounting reduced money back in time.

The future value is the ___________ value of an investment at some time in the future

Cash

True or 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 difference can be worth thousands of dollars, especially when either the amount or the time period is large.