Chapter 8
With respect to the time value of money, the present value of a given dollar amount has what kind of relationship to the discount rate used in computing the present value?
a negative relationship
With respect to the time value of money, the future value of a given dollar amount has what kind of relationship to the rate of interest used in computing the future value?
a positive relationship
An annuity is best defined as:
a series of equal payments occurring at equal time intervals for a specified number of periods
A perpetuity can be described as:
an annuity that goes on forever
The discount rate can best be described as:
an opportunity cost
What is the present value of $100,000 to be received in 15 years with an annual discount rate of 5%? This amount is discounted monthly.
$ 47,310
You want to start saving for retirement. If you deposit $2,000 at the end of each year for the next 60 years and earn an 11% annual rate of return on the investment, how much will you have when you retire if the above payments are made at the beginning of each year?
$10,556,246
You deposit $10,000 in a bank and plan to keep it there for five years. The bank pays 8% annual interest compounded continuously. Calculate the future value at the end of five years.
$14,918
What is the future value of an annuity due if your required return is 10%, and annual payments are $1,000 for 10 years?
$17,531
What a deal! Your new car only costs $28,300 after rebates and trade. If you finance it for 60 months at 6% annual interest, what will be your monthly payment?
$547.12
Your parents have promised to give you $25,000 on your wedding day if you wait 10 years to get married. Your sister is getting married today. What amount should she receive in today's dollars to match your gift? The appropriate discount rate is 12%
$8,049
The future value interest factor for a single dollar amount is:
(1 + k)^n
If (1) the interest rate has been increased and (2) the compounding frequency has been increased, what impact would this have on the future value of the single dollar amount you just deposited?
(1)increase; (2)increase
If you (1) decrease your required return and (2) decrease the number of periods, what effect would this have on your calculation of the present value of a given dollar amount?
(1)increase; (2)increase
The present value interest factor for a single dollar amount is:
1/(1 + k)^n
As the discount rate increases, the present value of a given positive cash flow to be received at a particular time in the future:
gets closer to zero
As the discount rate decreases (including negative values), the present value of a given positive cash flow to be received at a particular time in the future:
gets larger without limit
Compound interest can best be described as:
interest earned on interest and interest earned on the original principal
When we consider the time value of money, a dollar received in the future:
is worth less than a dollar received today
To calculate the present value of an annuity due you would take the present value of an ordinary annuity answer and _____ and to calculate the future value of an annuity due you would take the future value of an ordinary annuity answer and _____.
multiply by (1+k); multiply by (1+k)
