Fin. Chap 4

If you invest at a rate of r for two periods, under compounding

your investment will grow to (1+r)2 per dollar invested.

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

(1+r)

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 5 years at a discount rate of 10%?

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

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

An algebraic formula, 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

Cash value of an investment at some time in the future

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

Compounding

rate can be found using the PV, FV, and t.

Discount

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

FV = PV×(1 + r)t

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

Future value

Using the PV, discount rate, and ___you can determine the number of periods

Future value

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

Present value

With ____interest, the interest is not reinvested.

Simple

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

discounted cash flow (DCF)

Using the PV, discount rate, andIf FV= PV x (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)

The basic present value equation is:

PV = FVt/(1 + r)t

Future value

refers to the amount of money an investment will grow to over some period of time at some given interest rate.

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

the reciprocal of, 1 divided by

If you invest for one period at an interest rate of r,

then your money will grow th (1 + r) 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

Given the PV, FV, and life of the investment, you can determine the discount rate

True

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

Two

With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.

present; future

The process of leaving your money and any accumulated interest in an investment for more than one period is called

Compounding