Finance IV

The interest earned on both the initial principal and the interest reinvested from prior periods is called

compound interest

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called

discounting

Kurt won a lottery and will receive $1000 a year for the next 50 years. The current value of these winnings is called the

present value

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

A perpetuity is defined as

unending equal payments paid at equal time intervals

Which one of these will increase the present value of a set amount to be received sometime in the future?

decrease in the interest rate

Steve just computed the present value of a $10000 bonus he will receive next year. The interest rate he used in his computation is referred to as the

discount rate

The process of determining the present value of future cash flows in order to know their value today is referred to as

discounted cash flow valuation

An ordinary annuity is best defined as

equal payments paid at the end of regular intervals over a stated time period

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now

future value

Chang Lee is going to receive $20000 six years from now. Soo Lee is going to receive $20000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

in todays dollars, Chang Lees money is worth more than Soo Lees

Duane and Thad plan on retiring 27 years from today and plan to have the same amount saved at that time. In preparation for this Duanne is depositing $15000 today at an annual interest rate of 5.2 percent. How will Thad's deposit amount vary from Duanne's if Thad also makes a deposit today but earns an annual interest rate of 6.2 percent

$3381.39 less

This morning, DJ's invested $225000 to help fund future projects. How much additional money will the firm have 3 years from now if it can earn an annual interst rate of 4 percent rather than 3.5 percent?

$3632.88

You have a savings account valued at $1500 today that earns an annual interest rate of 8.7 percent. How much more would this account be worth if you wait to spend the entire balance in 25 years rather than in 20 years?

$4117.64

Al invested $3630 in an account that pays 6 percent simple interest. How much money will he have at the end of five years?

$4719

Twenty years from now, you want to spend $175000 for a fancy car. How much must you deposit as a lump sum today to achieve this goal at an annual interest rate of 6.6 percent?

$48740.95

You own a classic car currently valued at $64000. If the value increases by 2.5 percent annually, how much will the car be worth 15 years from now?

$92691.08

Which one of the following will produce the lower present value interest factor

8 percent interest for 10 years

Phillippe invested $1000 ten years ago and expected to have $1800 today. He has neither added nor withdrawn any money since his inital investment. All interest was reinvested and compounded annually. As it turns out, he only has $1680 in his account today. Which one of the following must be true?

He earned a lower interest rate than he expected

An invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8,64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as

interest on interest

Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire ____ rather than ____ and earn a ___ rate of interst, then you can deposit a smaller lump sum today

later, sooner, high

Marti's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much will the collection be worth in 2025?

$14077.16

Christina invested $3000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as

compounding

Your grandmother has promised to give you $10000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will

increase