Time Value of Money Concepts Review Quiz
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Questions and Answers

What is the formula for future value?

  • $FV = PV(r - 1)^t$
  • $FV = PV(1 - r)^t$
  • $FV = PV(r + 1)^t$
  • $FV = PV(1 + r)^t$ (correct)

    • What does the interest rate represent in the context of time value of money?

  • The present value of money
  • The cost of capital
  • The 'exchange rate' between earlier money and later money (correct)
  • The exact value of future money

    • What is the formula to find the present value given the future value?

  • $PV = \frac{FV}{(1 + r)^t}$ (correct)
  • $PV = FV(1 - r)^t$
  • $PV = FV(r - 1)^t$
  • $PV = FV(1 + r)^t$

    • What happens to the present value for a given interest rate as the time period increases?

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

    What happens to the present value for a given time period as the interest rate increases?

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

    What is the formula to find the future value of an investment?

    <p>$FV = PV(1 + r)^t$</p> Signup and view all the answers

    What does the interest rate represent in the context of time value of money?

    <p>Exchange rate between earlier money and later money</p> Signup and view all the answers

    What is the formula to find the present value of a future amount?

    <p>$PV = FV / (1 + r)^t$</p> Signup and view all the answers

    How does the present value change for a given interest rate as the time period increases?

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

    What is the relationship between the present value and the interest rate for a given time period?

    <p>Present value decreases as the interest rate increases</p> Signup and view all the answers

    Study Notes

    Time Value of Money

    • The formula for future value is: FV = PV x (1 + r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of periods.

    Interest Rate Representation

    • The interest rate represents the rate at which money grows or declines over time.

    Present Value Formula

    • The formula to find the present value given the future value is: PV = FV / (1 + r)^n.

    Effect of Time Period on Present Value

    • As the time period increases, the present value decreases for a given interest rate, meaning that the further in the future the payment is, the less it is worth today.

    Effect of Interest Rate on Present Value

    • As the interest rate increases, the present value decreases for a given time period, meaning that higher interest rates reduce the present value of a future payment.

    Future Value Formula

    • The formula to find the future value of an investment is: FV = PV x (1 + r)^n.

    Present Value Change

    • As the time period increases, the present value decreases for a given interest rate.

    Present Value and Interest Rate Relationship

    • There is an inverse relationship between the present value and the interest rate for a given time period, meaning that as the interest rate increases, the present value decreases, and vice versa.

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    Description

    Test your understanding of the time value of money concepts with this review outline quiz for FIN 626. Topics include future value, present value, multiple cash flows, annuities, perpetuities, and basic definitions such as interest rate and discount rate.

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