Time Value of Money

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Questions and Answers

The present value of a single amount can be represented as

PV0 = FVn(PVIFAi,n)
a and c
PV0 = FVn(PVIFi,n) (correct)
PV0 = FVn[1/(1 + i)] (correct)

The basic future value equation is given by

FVn = PV0(PVIFi,n)
FVn = PV0(FVIFi,n) (correct)
FVn= PV0(FVIFAi,n)
FVn = PV0(1/(1 + i))"

The process of finding present values is frequently called

annualizing
leasing
discounting (correct)
compounding

The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by the ordinary annuity interest factor by

multiplying, (1 + i) (B) Signup and view all the answers

Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the

present value of an annuity (A) Signup and view all the answers

An annuity due is one in which _____.

payments or receipts occur at the beginning of each period. (D) Signup and view all the answers

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases during the next 20 years?

It will be worth less (B) Signup and view all the answers

You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would improve the present value of your cash flows?

extend the cash flows over a longer period of time, and decrease the discount rate (A) Signup and view all the answers

If the present value of a given sum is equal to its future value, then _____.

the discount rate must be zero (C) Signup and view all the answers

Using the "Rule of 72", about how long will it take a sum of money to double in value if the annual interest rate is 9 percent?

8 years (D) Signup and view all the answers

The present value of an ordinary annuity is the

sum of the present value of a series of equal periodic payments (D) Signup and view all the answers

When a loan is amortized over a five year term, the _____.

amount of interest paid is reduced each year (C) Signup and view all the answers

Annuity due calculations are especially important when dealing with

lease contracts (B) Signup and view all the answers

The more frequent the compounding, the _____.

greater the effective interest rate (D) Signup and view all the answers

The effective rate of interest will always be _____ the nominal rate.

equal to or greater than (B) Signup and view all the answers

Which of the following is worth more?

Future value of an annuity due of PMT dollars per year for n years discounted at i percent. (A) Signup and view all the answers

The annual effective rate of interest (ieff) is a function of:

both the nominal rate of interest and the number of compounding periods per year. (D) Signup and view all the answers

The __ of a perpetual stream of equal, annual returns (PMT) discounted at i% per year is equal to _.

present value; PMT/i (C) Signup and view all the answers

Annuity due calculations are most common when dealing with:

lease contracts (A) Signup and view all the answers

The difference between an ordinary annuity and an annuity due is:

the timing of the payments (C) Signup and view all the answers

Determine how much $1,000 deposited in a savings account paying 8% (compounded annually) will be worth after 5 years.

$1,469 (D) Signup and view all the answers

The amount of simple interest is equal to the product of the principal times_ times .

rate per time period, the number of time periods (C) Signup and view all the answers

A(n) is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever).

perpetuity (D) Signup and view all the answers

When using a present value of an annuity table

b and c only (D) Signup and view all the answers

When using a future value of an annuity table

all of these (D) Signup and view all the answers

____is interest that is paid not only on the principal, but also on any interest earned but not withdrawn during earlier periods.

compound interest (D) Signup and view all the answers

____is the return earned by someone who has forgone current consumption.

interest (D) Signup and view all the answers

More frequent compounding results in future values and _ present values than less frequent compounding at the same interest rate.

higher, lower (C) Signup and view all the answers

The present value of a(n)_____ is determined by dividing the annual cash flow by the interest rate.

perpetuity (C) Signup and view all the answers

Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the

present value of an annuity (A) Signup and view all the answers

Flashcards

Discounting

The process of calculating the present value of future cash flows.

Perpetuity

A financial instrument that pays a fixed amount per period, forever.