finance exam 2

FV=

$1 x (1+r)^t

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

1+r

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

1.21 ((1+.1)^2)

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

1.4400 ((1+.20)^2)

Which formula below represents a present value factor?

1/(1+r)^t

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

2

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

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

Using the PV, discount rate, and ___ , you can determine the number of periods. (Enter abbreviation only.)

FV

Which of the following is the multi-period formula for compounding a present value into a future value?

FV=PV*(1+r)^t

True or false: Given the PV, FV, and payment amount, you can determine the number of periods.

False

True or false: Future value refers to the amount of money an investment is worth today.

False (Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate.)

True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.

False (It'd grow to (1+r)^2.)

True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

False (It's called compounding)

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

False (The calculator is already programmed to interpret 10 as 10 percent.)

The basic present value equation is

PV = FV(sub t)/(1+r)^t

If FV = PV × (1 + r) is the single-period formula for future value, which of the following is the single-period present value formula?

PV = FV/(1 + r)

Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r percent interest?

PV = FV/(1+r)^t

What is the primary difference between 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.

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: Given the PV, FV, and life of the investment, you can determine the discount rate.

True

True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.

True

True or false: The formula for a present value factor is 1/(1+r)^t.

True

Which of the following methods are used to calculate present value?

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

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

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 in an investment over time to earn more interest is called ___.

compounding

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

discounted cash flow (DCF)

The amount an investment is worth after one or more periods is called the ______ value.

future

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

For a given time period (t) and interest rate (r), the present value factor is ______ the future value factor.

the reciprocal of 1 divided by

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

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

The real world has moved away from using ______ for calculating future and present values.

time value of money tables