Chapter 4 slides/hw

Question 1

The amount an investment is worth after one or more periods. This is also known as a compound value

Answer 1

Future Value (FV)

Question 2

What term refers to the amount of money an investment will grow over some period of time at some given interest?

Answer 2

Future Value (FV)

Question 3

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest is called

List definition after slide11

Answer 3

Compounding

Question 4

The process of accumulating interest in an investment over time to earn more interest is known as

Answer 4

Compounding

Question 5

Interest earned on the reinvestment of previous interest payments is known as

Answer 5

Interest on Interest

Question 6

The interest earned on both the initial principal and the interest reinvested from prior periods is known as

Answer 6

Compound Interest

Question 7

Interest earned only on the original principal amount invested is known as

Answer 7

Simple Interest

Question 8

T/F- Future values depend critically on the assumed interest rate, particularly for long-lived investments

Answer 8

True

Question 9

What is the formula for future value?

Answer 9

PV(1 + r) t^

Question 10

Suppose you invest $100 for one year at 10% per year.
What is the future value in one year?

Answer 10

• Interest = 100(.10)= 10
• Value in one year is
  100+10 = 110
  FV= 110

Question 11

Suppose you invest $100 at 10% per year and decide to leave the money in for two years?
How much will you have two years from now?

Answer 11

FV= 100(1=0.10) ^2 (squared)

FV=121

Question 12

Copy slides 3-8 in notebook

Question 13

Suppose you invest $100 at 10% per year and decide to leave the money in for two years?
What is the future value in two years with simple interest?

Answer 13

100 *(.10) = 10

FV= 100+ 10+ 10
=120

Question 14

Suppose you invest $100 at 10% per year and decide to leave the money in for two years?
What is the future value in two years with compound interest?

Answer 14

FV = 100(1+.10) ^2

= 121

Question 15

Why does the compound interest accumulate;ate an extra dollar compared to the simple interest?

Answer 15

The extra 1.00 comes from the interest of .10(10) = 1.00 earned on the first interest payment

Question 16

T/F- The PMT will always equal 0 for this chapter only

Answer 16

True

Question 17

T/F- The interest must be entered on the calculate as a whole number not the percent. For example, 5% will be entered in as 5 NOT 0.05

Answer 17

True

Question 18

T/F- When calculating future values on the calculator, you must put a POSITIVE number when the future value is negative on the calc

Answer 18

True

Question 19

T/F- For a given interest rate, the longer the time period
the higher the future value

Answer 19

True

Question 20

The fact that a dollar in hand today is worth more than a dollar promised at sometime in the future is referred to as

Answer 20

Time Value of Money

Question 21

The current value of future cash flows discounted at the appropriate discount rate is known as

Answer 21

Present Value (PV)

Question 22

Why is the present value worth less than the face value?

Answer 22

Due to: Opportunity costs
Risks and uncertainty
Discount Rates

Question 23

Finding the present value of one or more future amounts is known as

Answer 23

Discounting

Question 24

The calculation of the present value of some future amount is known as a

Answer 24

Discount

Question 25

T/F- Finding Present Values is discounting, and its the REVERSE of compounding

Answer 25

True

Question 26

The rate used to calculate the present value of future cash flows is known as

Answer 26

Discount Rate

Question 27

What is the formula for the interest rate?

Answer 27

( FV / PV) ^ 1/t. - 1

Question 28

The process of valuing an investment by discounting its future cash flows is known as

Answer 28

Discounted Cash Flow Valuation (DCF)

Question 29

Calculating the present value of a future cash flow to determine its value today is known as

Answer 29

Discounted Cash Flow Valuation (DCF)

Question 30

What is the present value equation?

Answer 30

Future Value DIVIDED BY (1+r) t^

Question 31

add in slide 34 and 35 +other examples

Question 32

Put slide 33 first
T/F- For a given interest rate, the longer the lime period
the LOWER the present value

Answer 32

True

Question 33

For a given interest rate, what is the formula for present value?

Answer 33

PV = FV / (1=r) t^

As t increases, PV decreases

Question 34

Interest Rates can also be defined as

Answer 34

Discount rates
Cost of capital
Opportunity cost of capital
Required Return

Question 35

slide 38

Question 36

T/F- For a given time period, the higher the interest rate, the smaller the present value

Answer 36

True

Question 37

T/F- for a given time period, as r increases, PV decreases

Answer 37

True

Question 38

What do the tick marks represent in the time line of cash flows?

Answer 38

Are listed at the end of periods
EX: Time 0 is today
Time 1 is the end of Period 1

Question 39

What is the formula to find the number of periods?

Answer 39

N = Ln( FV/PV) DIVIDED BY Ln(1+r)