FIN 301 Ch 5

period * rate = 72

What is the Rule of 72?

= PV * (1 + r)^t

What is the formula for future value?

c. decreases

As the discount rate increases, the present value of a $500 lump sim to be received six years from now: a. remains constant b. also increases c. decreases d. becomes negative e. will vary but the direction of the change is unknown

$13,382.26

Assume you deposit $10,000 today in an account that pays 6% interest. How much will you have in 5 years?

a. future

The amount an investment will be worth after one or more periods of time is the _____ value. a. future b. present c. principal d. discounted e. simple

c. present

The current value of future cash flows discounted at the appropriate discount rate to current time is called the ______ value. a. principal b. future c. present d. simple e. compound

e. discount

The interest rate used to calculate the present value of future cash flows is called the ______ rate. a. free b. annual c. compound d. simple e. discount

$14,235.89

You expect to receive $20,000 at the end of 3 years from now. At a rate of 12%, what is the present value of that future lump sum of money?

8 years

You have been offered an investment that will pay you 9% per year. If you invest $15,000, how many years until you have $30,000?

$58,130.52

You have set up a trust that will pay you $150,000 in 11 years. If the discount rate is 9%, how much is the fund worth today?

7%

You've been offered an investment that will double your money in 10 years. What rate of return are you being offered?

compound interest

interest earned on both the initial principal and the interest reinvested from prior periods

interest on interest

interest earned on the reinvestment of previous interest payments

simple interest

interest earned only on the original principal amount invested

d. compound

Interest earned on the reinvestment of previous interest payments is called ______ interest. a. free b. annual c. simple d. compound e. superficial

= FV / (1 + r)^t

What is the formula for present value?

(1+ r)^t

What is the future value factor?

discounted cash flow valuation

calculating the present value of a future cash flow to determine its value today

compounding

the process of accumulating interest on an investment over time to earn more interest