Finance Exam Two
Discount Factor Equation
1/(1+r)^t
Growing Perpetuity
A growing stream of cash flows that continue forever
Growing Annuity
A growing stream of cash flows with a fixed annuity
Annuity
A series of equal cash flows for a finite period of time
Uneven Cash Flows
A series of uneven cash flows over a period of time
Annuity Due
An annuity when the 1st payment occurs at the beginning of the period
Ordinary Annuity
An annuity when the 1st payment occurs at the end of the period
Perpetuity
An annuity where the cash flows continue forever
The interest rate that is most commonly quoted by a lender is referred to as the:
Annual percentage rate
Interest on Interest
If you keep the interest you have earned in an account, you should expect that interest to make interest. This is called what?
Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:
Increase
Compound Interest
Interest earned on both the initial principal and the interest reinvested from prior periods
Simple Interest
Interest only earned on the initial principle
Discount Factor
Represents the present value of one dollar
The interest earned on both the initial principal and the interest reinvested from prior periods is called:
Compound Interest
Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:
Compounding
Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:
Discount Rate
Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:
Discounting
An ordinary annuity is best defined as:
Equal payments paid at the end of regular intervals over a stated time period.
Time Value of Money
The idea that money is worth different at different periods of time
Annual Percentage Rate
The interest rate charged per period multiplied by the number of period per year
Effective Annual Rate
The interest rate expressed if it were compounded once a year
Discount
The process of calculating the PV of future cash flows
Discounted Cash Flows
The process of calculating the present value of a future stream of cash
Discount Rate
The rate used to calculate the present value of future cash flows
Future Value
The value of an investment at some future period
Present Value
The value today of future cash flows discounted at the appropriate discount rate
Which one of the following statements correctly defines a time value of money relationship?
Time and present value are inversely related, all else held constant
Intrinsic Value
the discounted value of the cash that can be taken out of a business during its remaining life
