Chapter 6

Compound interest is interest solely earned on the initial investment.

False

The Rule of 72 provides the exact amount of time it will take to double an investment given an earnings rate.

False

The application for an annuity due is the same as the ordinary annuity, except that the first deposit of the annuity due is made at the end of the first period.

False

The difference between the present value of an annuity due and the present value of an ordinary annuity is that the annuity due's payments are made at the end of each period rather than at the beginning, as for an ordinary annuity.

False

The future value of an annuity due is the future amount to which a series of deposits of various sizes will increase when deposited at the beginning of equal interval periods on the basis of a defined interest rate.

False

The present value of an annuity due is the value today of a series of equal payments made at the beginning of each period for an infinite number of periods.

False

Yield to maturity (YTM) is the rate of return that will make the discounted cash flows of a bond equal to the future price of that bond

False

A serial payment is a payment that increases at a constant rate (usually inflation) on an annual basis.

True

Internal rate of return (IRR) is a method of determining the exact discount rate to equalize cash inflows and outflows, thus allowing comparison of rates of return on alternative investments of unequal size and investment amounts.

True

Net present value (NPV) is the difference between the present value of discounted cash flows and the initial cash outflow (investment).

True

Net present value analysis (NPV) is a commonly used time value of money technique employed by businesses and investors to evaluate the cash flows associated with capital projects and capital expenditures.

True

Opportunity cost is the highest-valued investment alternative not chosen by an investor.

True

Perpetuity is a payment that remains constant indefinitely.

True

Present value is what a sum of money to be received in a future year is worth in today's dollars on the basis of a specific discount rate.

True

Real rate of return is the nominal earnings rate reduced by the inflation rate.

True

The Rule of 72 is a method of approximation that estimates the time it takes to double the value of an investment when the earnings (interest) rate is known.

True

The future value is the future amount to which a sum of money today will increase on the basis of a defined interest rate and period.

True

The future value of an ordinary annuity is the future amount to which a series of deposits of equal size will increase when deposited at the end of equal interval periods on the basis of a defined interest rate.

True

The internal rate of return (IRR) is the exact discount rate that equates the cash inflows and outflows.

True

Time value of money (TVM) is one of the most useful and important concepts in finance and personal financial planning.

True

Timelines are a useful tool to visualize cash flows—both in and out.

True

Unequal cash flows affect the future value of an investment.

True