FIN CH. 5

decline

as the length of time until payment grows, present values ____.

assumed interest rate

future values depend critically on the ____, particularly for long lived investments.

1 + r

in general, if you invest for one period at an interest rate of r, your investment will grow to ____ per dollar invested.

future value

refers to the amount of money an investment will grow to over some period of time at some given interest rate (the cash value of an investment at some time in the future)

time value of money

refers to the fact that a dollar in hand today is worth more than a dollar promised at some time in the future

discount rate

steve just computed the present value of $10,000 bonus he will receive in the future. the interest rate he used in this process is referred to as what?

discounting

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

compounding

the process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called ____.

the rate you can earn by investing

the trade-off between money now and money later depends on what?

basic present value equation

we frequently need to determine what discount rate is implicit in an investment. we can do this by looking at the _____.

the factors are reciprocals of each other

what is the relationship between present value and future value interest factors?

discount factor

when finding the present value, the quantity 1/(1+r)^t is used to discount a future cash flow and is often called a _____.

simple interest

with ____, the interest is not reinvested, so interest is earned each period only on the original principal.

decreases

your grandmother has promised to give you $5000 when you graduate from college. she is expecting you to graduate two years from now. what happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

present value

____ is just the reverse of future value. instead of compounding the money forward into the future, we discount it back to the present.

discounted cash flow valuation (DCF)

calculating the present value of a future cash flow to determine its worth today is commonly called ____.

compound interest

compounding the interest means earning interest on interest, so we call the result _____.