Ch. 5: Part 1
A dollar invested today at 8.0 percent interest compounded annually will be worth _______ three years from now.
$1.2597 FV=$1.00(1+0.08)^3
What is the future value of $100 invested for 4 years at 10% interest?
$146.41 FV=$100 x (1+.1)^4=$146.41
Compound growth means that value increases after t periods by:
(1 + growth rate)^t
If the interest rate (r) increases, what will happen to present value (PV) over time?
PV will decline Rationale: If the interest rate increases, the present value will decrease over time.
True or false: the discount factor refers to the present value of a $1 future payment.
True
Discounting a future value FV at interest rate r over time t is termed a ______________ calculation.
discounted cash-flow
Present value is calculated using a ____________________ calculation.
discounted cash-flow
The time value of money concept states that a dollar today is worth _______ a dollar tomorrow.
more than
The value in t years of an investment made today at interest rate r is called the ___________ of your investment.
future value
A dollar invested today at 7.5 percent simple annual interest will be worth _______ one year from now.
$1.075 FV = $1.00 + $0.075
When money is invested at compound interest, the growth rate is equal to the __________.
interest rate
Joseph signs a contract with a company that will pay him $25,000. Following the principles of the time value of money, Joseph would be best off if he received payment:
at the beginning of the project Rationale: The time value of money states that a dollar today is worth more than a dollar tomorrow. Therefore, if he received the $25,000 at the beginning of the project, he would have 3 months to invest his money and have it grow.
Interest income is _____________ to interest rate.
directly proportional
Another name for the interest rate used to calculate PV is the ______ rate.
discount
A dollar invested today at 7.5 percent interest compounded annually will be worth _______ one year from now.
$1.075 FV=$1.00(1+0.075)^1
A dollar invested today at 8.0 percent simple annual interest will be worth _________ three years from now.
$1.24 Rationale: With simple interest, the bank calculates interest only on the principal investment: $1.00 + $.08 + $.08 + $.08 = $1.24. Do not confuse this with compound interest, which computes interest earned on interest.
Assume you have $100 to invest today. Investing it at 5% interest compounded annually will yield _______ in 10 years, while investing it at 6% interest compounded annually will yield _______ in 10 years.
$162.89; $179.08
Which of the following is the correct formula for the discount factor?
1/(1+r)t
At a rate of interest of 10% (r), the present value (PV) or $100 will ___________ as the time period (t) ________________.
decrease; increases Rationale: Present value will decrease as the time period increases. This follows the time value of money concept that a dollar today is worth more than a dollar tomorrow.
If you are promised $100 in one year, $200 in two years, and $300 in 3 years, then those promises combined equal ______ $600 today.
less than Rationale: This relates to the time value of money concept - $1 is worth more today than it is in the future. Therefore, any funds that you receive in the future will be worth less than they are if you received them today.
