Time Value of Money - Chapter 5
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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

    <p>multiplying, (1 + i)</p> 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

    <p>present value of an annuity</p> Signup and view all the answers

    An annuity due is one in which _____.

    <p>payments or receipts occur at the beginning of each period.</p> 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?

    <p>It will be worth less</p> 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?

    <p>extend the cash flows over a longer period of time, and decrease the discount rate</p> Signup and view all the answers

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

    <p>the discount rate must be zero</p> 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?

    <p>8 years</p> Signup and view all the answers

    The present value of an ordinary annuity is the

    <p>sum of the present value of a series of equal periodic payments</p> Signup and view all the answers

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

    <p>amount of interest paid is reduced each year</p> Signup and view all the answers

    Annuity due calculations are especially important when dealing with

    <p>lease contracts</p> Signup and view all the answers

    The more frequent the compounding, the _____.

    <p>greater the effective interest rate</p> Signup and view all the answers

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

    <p>equal to or greater than</p> Signup and view all the answers

    Which of the following is worth more?

    <p>Future value of an annuity due of PMT dollars per year for n years discounted at i percent.</p> Signup and view all the answers

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

    <p>both the nominal rate of interest and the number of compounding periods per year.</p> Signup and view all the answers

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

    <p>present value; PMT/i</p> Signup and view all the answers

    Annuity due calculations are most common when dealing with:

    <p>lease contracts</p> Signup and view all the answers

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

    <p>the timing of the payments</p> 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.

    <p>$1,469</p> Signup and view all the answers

    The amount of simple interest is equal to the product of the principal times_____ times____ .

    <p>rate per time period, the number of time periods</p> 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).

    <p>perpetuity</p> Signup and view all the answers

    When using a present value of an annuity table

    <p>b and c only</p> Signup and view all the answers

    When using a future value of an annuity table

    <p>all of these</p> 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.

    <p>compound interest</p> Signup and view all the answers

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

    <p>interest</p> 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.

    <p>higher, lower</p> Signup and view all the answers

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

    <p>perpetuity</p> 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

    <p>present value of an annuity</p> Signup and view all the answers

    Study Notes

    Time Value of Money - Chapter 5

    • Simple interest is calculated by multiplying principal by interest rate, by the number of time periods.
    • Present value represents the present worth of a future sum of money.
    • Future value represents the value of an asset or cash flow at a specified date in the future.
    • The process of finding present values is called discounting.
    • Annuity due refers to an annuity in which payments are made at the beginning of each period.
    • A perpetuity refers to a financial instrument that agrees to pay an equal amount of money per period into the indefinite future.
    • The effective rate of interest is determined by dividing the annual cash flow by the interest rate.
    • The effective interest rate is the actual rate of interest earned.
    • The nominal rate is the stated annual interest rate.

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    Description

    This quiz covers key concepts from Chapter 5 on the Time Value of Money. Explore topics such as simple interest, present and future value, and different types of annuities. Test your understanding of effective and nominal interest rates as you delve into financial calculations.

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