Module Two - 2

Example of a lower interest rate than expected.

Phillippe invested $1000 ten years ago and expected to have $1800 today. He has neither added nor withdrawn any money since his initial investment. All interest was reinvested and compounded annually. As it turns out, he only has $1680 in his account today.

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

Statement that correctly defines a time value money relationship

later; sooner; higher

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 interest, then you can deposit a smaller lump sum today.

increase

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two year from now rather than the expected three years, the present value of this gift will

Perpetuity

unending equal payments paid at equal time intervals

interest on interest

Art invested $100 two years ago at 8% 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

In today's dollars, Chang Lee's money is worth more than Soo Lee's

Chang Lee is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. This statement is true if both individuals apply a discount rate of 7%

Compounding

Christina invested $3,000 fiver years ago and earns 2$ 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

Ordinary annuity

Equal payments pads at the end of regular intervals over a stated time period

Decrease in the interest rate

Example of increasing the present value of a set amount to be received sometime in the future

8% interest for 10 years

Example of producing the lowest present value interest factor

Present value

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the

Future Value

You are investing $100 today in a savings account. What term refers to the total value of this investment on year from now

Discount rate

Steve just computed the present value of a $10,000 bonus he will receive next year. the interest rate he used in his computation is referred to as the

Discounting

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

Compound interest

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

discounted cash flow valuation

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