Reading Assignment 4

Using the PV, discount rate, and , ___________ you can determine the number of periods. (Enter abbreviation only.)

FV

Which of the following is the multi-period formula for compounding a present value into a future value?

FV = PV × (1 + r)t

True or false: Future value refers to the amount of money an investment is worth today.

False

True or false: Given the PV, FV, and payment amount, you can determine the number of periods.

False

True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.

False

True or false: The present value is the sum of all expenses in a project.

False

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

False

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.

(1+r)

For a given time period (t) and interest rate (r), the present value factor is ______ the future value factor.

1 divided by the reciprocal of

Using a time value of money table, what is the future value interest factor for 10% for 2 years?

1.21

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?

1.4400

Which formula below represents a present value factor?

1/(1 + r)t

Which of the following is the correct Excel function to calculate the present value of $300 due in five years at a discount rate of 10 percent?

= PV(0.10,5,0,-300)

FV =_______ × (1 + r)t

PV

If FV = PV × (1 + r) is the single-period formula for future value, which of the following is the single-period present value formula?

PV = FV/(1 + r)

Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r percent interest?

PV = FV/(1 + r)t

The basic present value equation is ______.

PV = FVt/(1 + r)^t

What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?

The interest rate in your calculator is entered as a whole number, while in the spreadsheet function it is entered as a decimal.

True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

True

True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.

True

True or false: The formula for a present value factor is 1/(1+r)t1/1+rt.

True

Which of the following methods are used to calculate present value?

an algebraic formula a financial calculator a time value of money table

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?

because the $100 is an outflow from you which should be negative

Future value is the ______ value of an investment at some time in the future.

cash

Future value is the _______ value of an investment at some time in the future. (Enter only one word per blank.)

cash

The idea behind ______ is that interest is earned on interest.

compounding

The process of accumulating interest in an investment over time to earn more interest is called ______.

compounding

In a present value equation, the _________ rate (r) can be found using the PV, FV, and t. (Enter one word per blank.)

discount

Calculating the present value of a future cash flow to determine its worth today is commonly called ______ valuation.

discounted cash flow (DCF)

True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

false

Which of the following are the primary as well as easy ways used to perform financial calculations today?

financial calculator spreadsheet functions

Fill in the blank question. The present value is the current value of the __________ cash flows discounted at the appropriate discount rate.

future

The amount an investment is worth after one or more periods is called the ______ value.

future

Time value of money tables are not as common as they once were because:

it is easier to use inexpensive financial calculators instead. they are available for only a relatively small number of interest rates.

A dollar received one year from today has ______ value than a dollar received today.

less

When dealing with compound interest, it is more financially advantageous to have a _____ time horizon for investment.

longer

Given an investment amount and a set rate of interest, the ______ the time horizon the ______ the future value.

longer; greater

The concept of the time value of money is based on the principle that a dollar today is worth ______ a dollar promised at some time in the future.

more than

The current value of a future cash flow discounted at the appropriate rate is called the ______ value.

present

With discounting, the resulting value is called the ______ value, while with compounding the result is called the ______ value.

present; future

Fill in the blank question. With __________ interest, the interest is not reinvested. (Enter only one word per blank.)

simple

If you invest at a rate of r for _______ periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.

two

If you invest at a rate of r for ________ periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.

two