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Questions and Answers
The present value of an investment is equal to its future value.
False
Time value of money analysis usually applies the concept of compound interest.
True
The nominal rate of interest is expressed on an annual basis.
False
The compounding period determines how often interest is compounded.
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The future value of an investment is determined by subtracting the present value from the future value factor.
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An annuity requires a series of equal amounts invested at equal intervals of time.
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Study Notes
Time Value of Money
- The value of one hundred pesos today is not equal to the value of one hundred pesos after a year due to the effect of time on money.
Interest Computation
- Time value of money analysis typically applies the concept of compound interest, not simple interest.
Simple Interest
- Simple interest computation indicates that interest is computed only on the initial principal amount.
Compounding Interest
- Compounding interest entails that the interest earned in the previous period is added to the principal, and then interest is computed on the new principal balance in the next period.
Compound Amount
- The compound amount of an investment refers to its future value, not its present value.
Nominal Interest Rate
- The nominal interest rate is usually expressed on an annual basis, not semi-annual basis.
Compounding Period
- The compounding period can be annual, semi-annual, quarterly, or monthly.
Periodic Interest Rate
- The periodic interest rate is computed by dividing the nominal interest rate by the number of compounding periods per year, not by multiplying.
Future Value
- The future value of an amount is determined by multiplying the present value by the future value factor, which is a function of the interest rate and time.
Annuity
- An annuity implies a series of equal amounts invested at equal intervals of time, not a series of investments made at equal intervals of time regardless of the amount involved.
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Description
Test your understanding of time value of money concepts with this true or false quiz. Covers topics such as simple interest, compound interest, and the value of money over time.
