Chapter 4 Questions
The amount an investment is worth after one or more periods is called the ______ value.
future
The present value is the current value of the ______ cash flows discounted at the appropriate discount rate.
future
What is the multi-period formula for compounding a present value into a future value?
FV = PV×(1 + r)t
T/F: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
false
If you invest at a rate of r for ___ periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
two
Future value is the ____ value of an investment at some time in the future.
cash
Calculating the present value of a future cash flow to determine its worth today is commonly called __________ ____ ____ (___) valuation.
discounted cash flow (DCF)
T/F: Future value refers to the amount of money an investment is worth today.
false
T/F: 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
T/F: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.
false
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
Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?
1.4400
Which formula represents a present value factor?
1/(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)
With discounting, the resulting value is called the _______ value; while with compounding the result is called the _______ value.
present; future
What are the primary as well as easy ways used to perform financial calculations today?
- financial calculator - spreadsheet functions
Time value of money tables are not as common as they once were because:
- it is easier to use inexpensive financial calculators instead - they are available for only a relatively small number of interest rates
With ______ interest, the interest is not reinvested.
simple
T/F: The formula for a present value factor is 1(1+r)t
true
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
The idea behind ___________ is that interest is earned on interest.
compounding
The process of accumulating interest in an investment over time to earn more interest is called ___________.
compounding
T/F: If you invest for two periods at an interest rate of r, then your money will grow th (1 + r) per dollar invested.
false
T/F: The present value is the sum of all expenses in a project.
false
When dealing with compound interest, it is more financially advantageous to have a ______ time horizon for investment.
longer
Given an investment amount and a set rate of interest, the _______ the time horizon the ________ the future value.
longer; greater
The current value of a future cash flow discounted at the appropriate rate is called the _______ value.
present