FIN 357 Chapter 5: Time Value of Money
If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?
$133.10
The discount rate is also called the rate of _____.
return
Interest earned only on the original principal amount invested is called _____ interest.
simple
The greater the number of time periods, the _____ (smaller/greater) the impact of compounding.
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
Interest earned on the original principal amount invested is called _____.
simple interest
The difference between _______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___________ every year.
simple, bigger
True or false: The formula for a present value factor is 1 / (1+r)^t .
True
_____ value is the cash value of an investment at some time in the _____.
future, future
Which of the following are correct spreadsheet functions?
= FV(rate, nper, pmt, pv, type) = rate(nper, pmt, pv, fv, type) = PV(rate, nper, pmt, fv, type)
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 (rate, pmt, -pv, fv) =NPER (0.06, 0, -6000, 10000)
The basic PV equation is:
PV = FV / (1+r)^t
When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.
the same
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
True
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.
present
Which formula below represents a present value factor?
1 / ( 1 + r )^t
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____.
$121.00
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
A dollar received one year from today has _____ value than a dollar received today.
less
A dollar received one year from today has ______ value than a dollar received today.
less
Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually?
= NPER(rate, pmt, pv, fv, type) = NPER(0.0653, 0, -40, 240)
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Dividend growth Sales growth
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 * (1.1)^3
True or false: The multi-period formula for future value using compounding is FV = (1 + r)^t.
False
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 leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called _____.
compounding
The _____ value is the current value of future cash flows discounted at the appropriate discount rate.
present
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 = (FV/PV)^(1/t) - 1
