CHAPTER 4

Question 1

We refer to a series of cash flows lasting several periods as a stream of cash flows.

Answer 1

YES

Question 2

Not every stream of cash flows can be represented on a timeline.

Answer 2

NO

Question 3

Timelines are an important first step in organizing and then solving a financial
problem.

Answer 3

YES

Question 4

A timeline is a linear representation of the timing of the (expected) cash flows.

Answer 4

YES

Question 5

The space between date 0 and date 1 represents the time period between two
specific dates.

Answer 5

YES

Question 6

You will find the timeline most useful in tracking cash flows if you interpret each
point on the timeline as a period or interval of time.

Answer 6

NO

Question 7

Date 0 is the beginning of the first year.

Answer 7

YES

Question 8

Date 1 is the end of the first year.

Answer 8

YES

Question 9

The effect of earning interest on interest is known as compound interest.

Answer 9

YES

Question 10

It is only possible to compare or combine values at the same point in time.

Answer 10

YES

Question 11

The process of moving a value or cash flow forward in time is known as
compounding.

Answer 11

YES

Question 12

A dollar in the future is worth more than a dollar today.

Answer 12

NO

Question 13

FV = C / (1 + r)^N

Answer 13

NO

Question 14

The value of a cash flow that is moved forward in time is known as its future value.

Answer 14

YES

Question 15

The process of moving a value or cash flow backward in time is known as discounting.

Answer 15

YES

Question 16

The process of moving a value or cash flow forward in time is known as compounding.

Answer 16

YES

Question 17

A perpetuity is a stream of equal cash flows that occurs at regular intervals and
lasts forever.

Answer 17

YES

Question 18

PV of a perpetuity = r / C

Answer 18

NO

Question 19

To find the value of a perpetuity one cash flow at a time would take forever.

Answer 19

YES

Question 20

One example of a perpetuity is the British government bond called a consol.

Answer 20

YES

Question 21

PV of a growing perpetuity = C / r-g

Answer 21

YES

Question 22

We assume that r < g for a growing perpetuity.

Answer 22

NO

Question 23

A growing perpetuity is a cash flow stream that occurs at regular intervals and
grows at a constant rate forever.

Answer 23

YES

Question 24

To find the value of a growing perpetuity one cash flow at a time would take
forever.

Answer 24

YES

Question 25

A growing perpetuity is a cash flow stream that occurs at regular intervals and
grows at a constant rate forever.

Answer 25

YES

Question 26

An annuity is a stream of N equal cash flows paid at irregular intervals.

Answer 26

NO

Question 27

Most car loans, mortgages, and some bonds are annuities.

Answer 27

YES

Question 28

The difference between an annuity and a perpetuity is that an annuity ends after
some fixed number of payments.

Answer 28

YES