ECO-334 Intro to Financial Analysis CH3

What are the implications of the time value of money concept?

A dollar today is worth more than a dollar tomorrow A dollar tomorrow is worth less than a dollar today

What would lower the present value of a future amount?

A higher level of risk A longer period of time A higher level of interest rate

The ______ is the annual interest rate without consideration of compounding

Annual Percentage Rate

What is the general compounding formula for calculating the annual return on an investment when there is more than one compounding period in a year?

C0(1 + r/m)^m

Fixed payment loans are typically used for which of the following:

Car Loans Mortgages Student Loans

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year

Compounding

Future Value Formula

FV = C0 × (1 + r)^τ

Which of the following payment methods amortizes a loan?

Fixed payments that result in a zero loan balance Interest plus fixed amount

Discounting is the process of converting ______ dollars into a ______ value

Future, Current

A stream of cash flows that grows at a constant rate for a finite period is called a(n) _____

Growing Perpetuity

Which one of the following is the correct formula for the one-period present value?

PV = FV/(1 + r)

Which of the following represents an infinite and constant stream of cash flows?

Perpetuity

The value of a future cash flow stated in today's dollars is referred to as the _____

Present Value

Which of the following is true about a partial amortization loan?

The amortization period is longer than the loan period. The monthly payments do not fully pay off the loan by the end of the loan period. The borrower makes a large balloon payment at the end of the loan period.

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually

Effective