finance exam 2

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

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.

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

Simple interest:

interest earned only on the initial principal. → If you keep the interest you earned in an account, you should expect that interest to make interest. This is called interest on interest.

Time and present value are inversely related, all else held constant.

Which one of the following statements correctly defines a time value of money relationship?

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.

"time value of money"

represents the idea that money is worth different values at different periods of time.

Future value

the value of an investment at some future period.