Chapter 5 Finance
The greater the number of time periods, the (smaller/greater) the impact of compounding.
greater
All else equal, the longer time period you have before you will need the money, the _____ (less/more) you will need to deposit today to have the same amount in the future.
less
The reason that interest rate risk is greater for ____ term bonds than for ____ term bonds is that the change in rates has a greater effect on the present value of the ____ than on the present value of the ____.
long; short; face value; coupon payments
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
In general, if you invest for one period at an interest rate of r, your investment will grow to
plus
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
The equation that results in the _______ value interest factor for a single deposit is as follows:
present
value is the current value of future cash flows discounted at the appropriate discount rate.
present
If we know the interest rate is 10 per cent per year and the money is invested for 10 years, then we can use the _____ to find the present value.
present value factor
If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.
present value factor
What are the two major forms of long-term debt?
public issue and privately placed
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 = (1000/100)(1/10) - 1
The discount rate is also called the rate of
return
Interest earned only on the original principal amount invested is called
simple
Interest earned on the original principal amount invested is called _____.
simple interest
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
What is the future value of $1,000 invested for 8 years at 6%?
$1,593.85
If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?
$133.10
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
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 percent for 2 years?
1.21
Which formula below represents a present value factor?
1/(1 + r)t
The equation that results in the _______ value interest factor for a single deposit is as follows: (1 + r)t
future
(smaller/greater) the interest rate changes, the greater the impact to the future value of an amount invested.
greater
Assuming the interest rate offered for a 10-year investment plan is same as for a 4-year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?
10-year investment
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____.
121
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(0.06,0,−6000,10000)
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(0.0653,0,−40,240)
Which of the following methods can be used to calculate present value?
A financial calculator An algebraic formula A time value of money table
value is the cash value of an investment at some time in the
Blank 1: Future Blank 2: Future
The two major forms of long-term debt are
Blank 1: public or publicly
Which of the following are correct spreadsheet functions?
Discount rate = RATE(nper,pmt,pv,fv) Future value = FV(rate,nper,pmt,pv) Present value = PV(rate,nper,pmt,fv)
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 X (1.10)^3
True or false: When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.
False
Which of the following investments would result in a higher future value?Investment A - 12% APR for 10 yearsInvestment B - 12% APR for 12 years
Investment B
The basic present value equation is:
PV = FVt(1+r)t
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Sales growth Dividend growth
True or false: Discounting is the opposite of compounding.
True
True or false: The correct future value interest factor in a time value of money table for $1 in 10 years at 10 percent per year is 2.5937.
True
True or false: The formula for a present value factor is
True
Future value is the ________ value of an investment at some time in the future.
cash
Discounting is the opposite of
compounding
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
rate is the rate used to calculate the present value of the future cash flows.
discount
Calculating the present value of a future cash flow to determine its value today is called _____.
discounted cash flow valuation
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
True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.
false
The equation that results in the _______ value interest factor for a single deposit is as follows:
future