FIN EXAM 2
To find the present value of an annuity of $100 per year for 10 years at 10% per year using the tables, find a present value factor of 6.1446 and multiply it by ______.
$100
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
true
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
1.21
Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?
1.4400
Which formula below represents a present value factor?
1/(1+r)^t
Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?
=PV(0.10,10,-100,0,0)
Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12% compounded quarterly to an EAR?
EFFECT (0.12,4)
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, 1+r for a single period
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.
compounding
The idea behind ______ is that interest is earned on interest. a. reinsurance b. rebounding c. simplification d. compounding
compounding
An ordinary annuity consists of a(n) ________ stream of cash flows for a fixed period of time.
level
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1+ r).
ordinary
The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
True or false: The formula for a present value factor is 1/(1+r)^tr
present
With __________ interest, the interest is not reinvested.
simple
Which of the following processes can be used to calculate the future value of multiple cash flows?
-Compound the accumulated balance forward one year at a time -Calculate the future value of each cash flow first and then sum them
Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r per cent interest?
PV=FV/ (1+r)^t
True or false: The annuity present value of an amount C is calculated as C multiplied by {1-[1/(1+r)t]}r1-[1/(1+r)t]/r.
true
True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.
true
True or false: The present value is the sum of all expenses in a project.
false
Which of the following is the correct Excel function to calculate the present value of $300 due in 5 years at a discount rate of 10%?
=PV(0.10,5,0,-300)
Which of the following is a perpetuity?
A constant stream of cash flows forever
The basic present value equation is:
PV = FVt/(1 + r)^t
An annuity with payments beginning immediately rather than at the end of the period is called an _________.
annuity due
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the _______ of the period.
end
True or false: Given the PV, FV, and payment amount, you can determine the number of periods.
false
True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).
false REAL FORMULA: ISEFFECT(nominal_rate, npery).
The amount an investment is worth after one or more periods is called the _____ value. a. present b. anticipated c. expected d. future
future
The real world has moved away from using _____________________________ for calculating future and present values.
time value of money tables
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
C/r is the formula for the present value of a(n) ____.
C/r is the formula for the present value of a(n) ____.
For a given time period (t) and interest rate (r), the present value factor is _______ the future value factor. (Select all that apply.)
the reciprocal of 1 divided by
Which of the following methods are used to calculate present value?
- an algebraic formula - a time value of money table - a financial calculator
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.
Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.
Discount Cash Flow
Using the PV, discount rate, and ______ , you can determine the number of periods. (Enter abbreviation only.)
FV
Using the PV, discount rate, and _________ , you can determine the number of periods. (Enter abbreviation only.)
FV
When calculating annuity present values using a financial calculator, the __________ amount is left blank. (Enter the 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
If FV= PV x (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 formula for the future value of an annuity factor?
[(1+r)t-1]/r
Future value is the ________ value of an investment at some time in the future.
cash
True or false: Future value refers to the amount of money an investment is worth today.
false
True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.
false
True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.
false
EAR = (1 + _________ rate/m)^m - 1
quoted
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.
effective
You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the _____ value on the financial calculator.
N
FV =_________ ×(1 + r)t
PV
If you invest at a rate of r for ________ periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
two
One step in calculating an EAR is to _______ the quoted rate by the number of times that the interest is compounded.
divide
The present value is the current value of the _________ cash flows discounted at the appropriate discount rate.
future
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
Given an investment amount and a set rate of interest, the _____ the time horizon the _____ the future value.
longer; greater
With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.
present; 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
An annuity due is a series of payments that are made ____.
at the beginning of each period
The process of accumulating interest in an investment over time to earn more interest is called _________. a. growth b. add on interest c. compounding d. simple interest
c. compounding
Future value is the _________ value of an investment at some time in the future.
cash
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
When finding the present or future value of an annuity using a financial calculator, the ______ ______ should be entered as a percentage.
interest rate
The ___________ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.
payment
The formula for the ______ value interest factor of an annuity is: [1- 1/(1+r)^τ]/r.
present
The formula for the future value of an annuity factor is [(1+r)^t -1]/r.
true
True or false: Interest rates can be quoted in various ways.
true
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
True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
false
When dealing with compound interest, it is more financially advantageous to have a _____ time horizon for investment.
longer
The annuity present value factor equals one __________ the present value factor all divided by the discount rate.
minus
The general formula for ______ is (1+quoted rate/m)^m - 1.
the EAR
Which of the following are the primary as well as easy ways used to perform financial calculations today?
Financial Calculator & Spreadsheet functions
True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.
true
The cash flows of an annuity due are the same as those of an ordinary annuity except that there is an extra cash flow at Time _________.
zero
The current value of a future cash flow discounted at the appropriate rate is called the _____ value.
present
In a present value equation, the _________ rate (r) can be found using the PV, FV, and t. (Enter one word per blank.)
discount
True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.
false
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.
The formula for the present value of an annuity due is:
(1+r)×(PV of an ordinary annuity)