FIN Ch. 4
reasons why PV is less than face value
-opportunity cost -risk & uncertainty -discount rate = f (time, risk)
Which of the following statements is FALSE? A. With simple interest, the interest is not reinvested, so interest is earned each period only on the original principal. B. Both lenders and investors prefer more compounding. C. Amortizing a loan allows for a portion of principal to be paid with the interest each period principal so that the actual payments to interest will increase with each payment. D. Treasury Bills are pure discount loans sold by the US government that repay a fixed amount as one lump sum at some time in the future.
Amortizing a loan allows for a portion of principal to be paid with the interest each period principal so that the actual payments to interest will increase with each payment.
Which of the following statements is FALSE? A. Across a longer time period, a single cash flow grows to a larger future value B. For a higher interest rate, a single cash flow has a smaller present value C. If its payments last longer, an annuity has a larger present value D. For a higher interest rate, an annuity has a smaller future value
For a higher interest rate, an annuity has a smaller future value
Given an interest rate of zero percent, the future value of a lump sum invested today will always: A. Remain constant, regardless of the investment time period. B. Decrease if the investment time period is shortened. C. Decrease if the investment time period is lengthened. D. Be infinite in value.
Remain constant, regardless of the investment time period.
Which of the following statements is FALSE? A. The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows. B. Moving cash flows to the left on a time line is called discounting, and values are additive at any one point in time. C. Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate. D. To estimate the present value of future cash flows, the discount rate should be adjusted for both the timing or maturity of that cash flow and the inherent risk of that cash flow.
The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows.
Today, Courtney wants to invest an amount less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct? A. The period of time she has to wait until she reaches her goal is not affected by the compounding of interest. B. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal. C. The length of time she has to wait to reach her goal is directly related to the interest rate she earns. D. The period of time she has to wait decreases as the amount she invests today increases.
The period of time she has to wait decreases as the amount she invests today increases.
risk aversion
a dollar for certain is worth MORE than a risky dollar
time value
a dollar today is worth more than a dollar tomorrow
interest rate (r) also known as the:
discount rate
discounting
finding the PV of one or more future amounts (reverse of compounding)
for a given interest rate, the longer the time period, the _____ the future value
higher
for a given period, the higher the interest rate, the ______ the future value
higher
rule of 72 tells you:
how long it will take to double your money
compound interest
interest earned on principle AND on interest received
simple interest
interest earned only on the original principle
APR
rate required to be quoted by law
EAR
rate that would be earned if it were compounded once a year
for a given interest rate, the longer the time period, the ______ the present value
smaller
for a given number of periods, the higher the interest rate, the _____ the present value
smaller
future value
the amount an investment is worth after more time
present value
the current value of future cash flows discounted at the appropriate discount rate
