Finance Chapter 3
A lump sum can be a one-time earlier but not a one-time later cash flow.
False
At an annual growth rate of 5%, the approximate time it would take for an amount to double could be found by dividing 5 by 72.
False
A "Lump Sum" would involve cash flows occurring at two or more different time periods.
False
Compounding is the process used to find a PV.
False
FVs are earlier values and PVs are later values
False
FVs represent what you need to invest later to have it grow into a specified earlier amount.
False
The discounting process adds the interest part to the future value to arrive at the present value.
False
There are a total of 5 variables in the basic TVM lump-sum formulas
False
With compound interest, interest is earned every period on that period's starting amount.
True
There are 3 basic Time Value of Money formulas covered in chapter 3 of our text.
False
Ceteris paribus, as a debtor and for the same annual interest rate, you would prefer simple interest to compound interest.
True
Present values are earlier values that appear rightward on a time line and future values are later values that appear leftward on a time line.
False
Ceteris paribus, the FV and the number of periods are inversely related.
False
The number of years it would take an investment to double is approximately equal to the annual interest rate divided 72.
False
There is an inverse relationship between the present value and the discount rate, meaning that they move in the same direction
False
The right-hand side variables in the discount rate formula represent the 3 key factors determining stock prices
False
With compound interest, interest is earned every period on only the original starting amount
False
Ceteris paribus, as a lender, you would prefer compound interest over simple interest.
True
Consider a two−year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).
True
FVs represent the amount that an earlier amount will grow into.
True
PVs are leftward on a time line and FVs are rightward on the time line.
True
To calculate how long it would take for an earlier amount to grow into a later amount, we would solve the lump-sum Time Value of Money formula for the variable "n".
True
What is "discounted" from the FV is the interest part to arrive at the PV.
True
