True-False - Chapter 6

1. The time value of money refers to the fact that a dollar received today is worth less than a dollar promised at some time in the future.

False

11. In determining present value, a company moves backward in time using a process of accumulation.

False

12. The unknown present value is always a larger amount than the known future value because dollars received currently are worth more than dollars to be received in the future.

False

13. The rents that comprise an annuity due earn no interest during the period in which they are originally deposited.

False

17. The future vale of an annuity due factor is found by multiplying the future value of an ordinary annuity factor by 1 minus the interest rate.

False

19. The future value of a deferred annuity is less than the future value of an annuity not deferred.

False

3. Simple interest is computed on principal and on any interest earned that has not been withdrawn.

False

6. The future value of an ordinary annuity table is used when payments are made at the end of each period.

False

7. The present value of an annuity due table is used when payments are made at the end of each period.

False

10. The future value of a single sum is determined by multiplying the future value factor by its present value.

True

14. If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the future value of the annuity due will be greater than the future value of the ordinary annuity.

True

15. If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the present value of the annuity due will be greater than the present value of the ordinary annuity.

True

16. The number of compounding periods will always be one less than the number of rents when computing the future value of an ordinary annuity.

True

18. The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

True

2. Interest is the excess cash received or repaid over and above the amount lent or borrowed.

True

20. At the date of issue, bond buyers determine the present value of the bonds' cash flows using the market interest rate.

True

4. Compound interest, rather than simple interest, must be used to properly evaluate long-term investment proposals.

True

5. Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

True

8. If the compounding period is less than one year, the annual interest rate must be converted to the compounding period interest rate by dividing the annual rate by the number of compounding periods per year.

True

9. Present value is the value now of a future sum or sums discounted assuming compound interest.

True