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Finance > Chapter 5 SmartBook > Flashcards

Chapter 5 SmartBook Flashcards

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1
Q

Why is a dollar received today worth more than a dollar received in the future?

A

Today’s dollar can be reinvested, yielding a greater amount in the future.

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2
Q

Future value is the ______ value of an investment at some time in the future.

A

Cash

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3
Q

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.

A

(1 + r)

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4
Q

If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____.

A

$121.00
FV = $100 x 1.10^2 = $121

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5
Q

The idea behind ______ is that interest is earned on interest.

A

Compounding

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6
Q

A dollar received one year from today has _____ value than a dollar received today.

A

Less

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7
Q
  1. ______ value is the cash value of an investment at some time in the 2. ______
A
  1. Future
  2. future
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8
Q

In general, if you invest for one period at an interest rate of r, your investment will grow to 1 (minus/plus) r.

A

Plus

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9
Q

You invest $500 at 10 percent interest. At the end of 2 years with simple interest, you will have ____, and with compound interest you will have ____.

A

$600; $605

With simple interest, you will earn $500 X 0.10 = $50 each year. Your total will be $500+100=$600. With compound interest, you will have $500(1.10)2 = $605 at the end of the two years. Given the same rate of interest, the FV will always be higher with compound interest.

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10
Q

If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?

A

$133.10

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11
Q

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

A

Compounding

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12
Q

Interest earned on the original amount invested is called _______.

A

simple interest

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13
Q

The multi-period formula for future value using compounding is FV = (1 + r)t.

A

False

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14
Q

The greater the number of time periods, the ________
(smaller/greater) the impact of compounding.

A

Greater

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15
Q

Given the same rate of interest, more money can be earned with compound interest than with simple interest.

True or False

A

True

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16
Q

The ______ (smaller/greater) the interest rate changes, the greater the impact to the future value of an amount invested.

A

Greater

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17
Q

The correct future value interest factor in a time value of money table for $1 in 10 years at 10 percent per year is 2.5937.

A

True

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18
Q

Which of the following is the correct mathematical formula for the calculation of the future value of $100 invested today for 3 years at 10% per year?

A

FV= $100 x (1.10)^3

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19
Q

Which of the following investments would result in a higher future value? Investment A - 12% APR for 10 years investment B - 12% APR for 12 years

A

Investment B

20
Q

When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.

True
False

A

False

21
Q

Small changes in the interest rate affect the future value of a small-term investment more than they would affect the value of a long-term investment.

True
False

A

False

22
Q

When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.

A

The same

23
Q

Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?

A

1.21

24
Q

If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.

A

Present

25
Q

Discounting is the opposite of ________

A

Compounding

26
Q

The multi-period formula for future value using compounding is FV = (1 + r)t.

True
False

A

False

27
Q

Which of the following methods can be used to calculate present value?

A. An algebraic formula

B. A financial calculator

C. A time value of money table

D. Random number generation

A

A, B and C

28
Q

What is the future value of $1,000 invested for 8 years at 6%?

A

$1,593.85

29
Q

Which formula below represents a present value factor?

A

1/(1+r)^t

30
Q

Which of the following can be determined using the future value approach to compound growth developed in this chapter?

A. Dividend growth

B. Erratic growth

C. Sales growth

A

A and C

31
Q

Calculating the present value of a future cash flow to determine its value today is called _____.

A

Discounted cash flow valuation

32
Q

The _______ value is the current value of future cash flows discounted at the appropriate discount rate.

A

Present

33
Q

All else equal, the longer time period you have before you will need the money, the _______ (less/more) you will need to deposit today to have the same amount in the future.

A

Less

34
Q

The equation that results in the Blank______ value interest factor for a single deposit is as follows:

1(1+r)t

A

Present

35
Q

If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.

A

Present value factor

36
Q

The basic present value equation underlies many of the _____.

A

Most important ideas in corporate finance

37
Q

The discount rate is also called the rate of _____

A

Return

38
Q

The _____ rate is the rate used to calculate the present value of the future cash flows.

A

Discount

39
Q

Which of the following are correct spreadsheet functions?

A

Future value = FV (rate, nper, pmt, pv)

Present value = PV (rate, nper, pmt, fv)

Discount rate = RATE (nper, pmt, pv, fv)

40
Q

Assuming the interest rate offered for a 10-year investment plan is same as for a 4-year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?

A

10-year investment

41
Q

The equation that results in the Blank______ value interest factor for a single deposit is as follows:

(1 + r)t

A

Future

42
Q

The basic present value equation is:

PV = FVt(1+r)t

PV × FVt = (1 + r)t

FV = PVt(1+r)t

A

A

43
Q

Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?

A

r = (1000/100)^(1/10)-1

44
Q

Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually?

=NPER(0.0653,0,−40,240)

=N(40,0.0653,−240)

=N(0.0653,0,−40,240)

=NPER(0,0.0653,−40,240)

A

A

45
Q
A

Finance (7 decks)

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