Chapter 17

Question 1

A series of equal amounts, received one at the end of each period, for a specified number of periods

Answer 1

Annuity

Question 2

Uncertainty arising from changing economic conditions that affect an investment’s ability to generate returns

Answer 2

Business Risk

Question 3

The process of converting present amounts into future amounts

Answer 3

Compounding

Question 4

Interest earned on a principal amount plus any interest previously earned

Answer 4

Compound Interest

Question 5

The process of converting future amounts into present amounts

Answer 5

Discounting

Question 6

Uncertainty associated with the possibility of defaulting on borrowed funds used to finance an investment

Answer 6

Financial Risk

Question 7

The discount rate that sets net present value exactly equal to zero

Answer 7

Internal Rate of Return

Question 8

Possibility of loss resulting from not being able to convert an asset into cash quickly should the need arise

Answer 8

Liquidity Risk

Question 9

Present value of inflows minus present value of outflows

Answer 9

Net Present Value

Question 10

If the net present value is greater than or equal to zero, accept the investment

Answer 10

NPV Decision Rule

Question 11

Uncertainty associated with the possibility that the amount of goods and services that can be acquired with a given amount of money will decline

Answer 11

Purchasing Power Risk

Question 12

The percentage return from a property

Answer 12

Rate of Return

Question 13

The chance of loss; also, the uncertainty about the actual rate of return an investment will provide over the holding period

Answer 13

Risk

Question 14

A dollar in hand is worth more than a dollar to be received in the future because it can either be consumed immediately or put to work to earn a return

Answer 14

Time Value of Money Principle