12 Questions
Which of the following statements is true about the value of money?
The value of money decreases over time.
What is the primary concept applied in time value of money analysis?
Compound interest
How is the periodic interest rate computed?
By multiplying the nominal interest rate by the compounding period
What does the term 'compounding' refer to in the context of interest?
The interest earned in multiple periods
What is the definition of an annuity?
A series of investments made at equal intervals of time
How is the future value of an amount determined?
By multiplying the present value by the future value factor
The present value of an investment is the same as its compound amount.
False
The time value of money analysis always applies the concept of compound interest.
False
The interest is computed every month in a simple interest computation.
False
The nominal rate of interest is expressed on an annual basis.
False
The compounding period can be daily.
False
An annuity implies a series of investments made at equal intervals of time, regardless of the amount involved.
True
Study Notes
Time Value of Money
- The worth of ₱100 today is not equal to the worth of ₱100 after a year due to inflation and interest rates.
Interest Computation
- Time value of money analysis does not always apply the concept of simple interest; compound interest is also used.
- Simple interest computation does not necessarily compute interest once every year; it depends on the compounding period.
Compounding Interest
- Compounding interest means interest earns interest in subsequent periods.
Nominal Rate
- Nominal rate is the interest rate expressed per year, but can be converted to other compounding periods like semi-annual, quarterly, or monthly.
Compounding Period
- Compounding period can be annual, semi-annual, quarterly, or monthly.
- Periodic interest rate is calculated by multiplying the nominal interest rate by the number of compounding periods per year.
Future Value
- Future value of an amount is determined by multiplying the present value by the future value factor.
Annuity
- Annuity implies a series of equal investments made at equal intervals of time, regardless of the amount involved.
Test your understanding of time value of money and interest concepts with this true or false quiz. Covers simple interest, compounding interest, and more.
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