Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

BSA 35P > Chapter 5 TB > Flashcards

Chapter 5 TB Flashcards

1
Q

The main idea behind the time value of money is that a dollar today is worth more than a dollar in the future because ________.

A) inflation erodes the value of money over time
B) investors can earn a return on money they have today and thereby have more money in the future
C) the future is more uncertain than the present
D) investors are impatient

A

B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

You invest a certain amount of money today. The process of determining how much money that investment will produce in the future is called ________.

A) discounting
B) compounding
C) present value
D) annuitizing the cash flow

A

B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

The process of taking cash flow that is received or paid in the future and stating that cash flow in present value terms is called discounting.

T or F?

A

TRUE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

A certain investment that costs $10,000 today promises to pay you $10,500 in five years. This investment ________.

A) is unambiguously a good investment
B) is unambiguously a bad investment
C) may be a good investment if the rate of return you can earn an alternative investments is very low
D) may be a good investment if the rate of return you can earn on alternative investments is very high

A

C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Since individuals generally have opportunities to earn positive rates of return on their funds, the timing of cash flows does not have any significant economic consequences.

T or F?

A

FALSE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

The time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

T or F?

A

FALSE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

For any positive interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value.

T or F?

A

TRUE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Future value is the value of a future amount at the present time, found by applying compound interest over a specified period of time.

T or F?

A

FALSE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

The greater the interest rate and the longer the period of time, the higher the present value.

T or F?

A

FALSE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Everything else being equal, the higher the interest rate, the higher the future value.

T or F?

A

TRUE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Future value increases with increases in the interest rate or the period of time funds are left on deposit.

T or F?

A

TRUE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Everything else being equal, the higher the discount rate, the higher the present value

T or F?

A

FALSE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Everything else being equal, the longer the period of time, the lower the present value.

T or F?

A

TRUE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

________ is the amount earned on a deposit that has become the part of the principal at the end of a specified time period.

A) Discount interest
B) Compound interest
C) Primary interest
D) Future value

A

B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called ________.

A) future value
B) present value
C) future value of an annuity
D) compounded value

A

B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

The future value of a dollar ________ as the interest rate increases and ________ the longer the money remains invested.

A) decreases; decreases
B) decreases; increases
C) increases; increases
D) increases; decreases

A

C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

The annual rate of return is referred to as the ________.

A) discount rate
B) marginal rate
C) risk-free rate
D) marginal cost

A

A

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

An annuity due is a stream of equal cash flows with each cash flow arriving at the beginning of each period

T or F?

A

TRUE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

An ordinary annuity is an annuity in which cash flows occur at the beginning of each period.

T or F?

A

FALSE

An annuity due is an annuity in which cash flows occur at the beginning of each period.

20
Q

The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity for interest rates greater than zero.

T or F?

A

TRUE

21
Q

Which of the following is true of annuities?

A) An ordinary annuity is an equal payment paid or received at the beginning of each period.
B) An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period.
C) An annuity due is an equal stream of cash flows that is paid or received at the beginning of each period.
D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.

A

C

22
Q

An annuity with an infinite life is called a(n) ________.

A) perpetuity
B) primia
C) option
D) deep discount

A

A

23
Q

A(n) ________ is an annuity with an infinite life making continual annual payments.

A) amortized loan
B) principal
C) perpetuity
D) APR

A

C

24
Q

In comparing an ordinary annuity and an annuity due, which of the following is true?

A) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
B) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.
C) The present value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due.
D) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.

A

A

25
Q

The present value of a perpetual income stream increases when the discount rate ________.

A) increases
B) decreases
C) changing unpredictably
D) increasing proportionally

A

B

26
Q

The nominal (stated) annual rate is the rate of interest actually paid or earned.

T or F?

A

FALSE

The effective annual rate is the rate of interest actually paid or earned.

27
Q

The nominal and effective rates are equivalent for annual compounding.

T or F?

A

TRUE

28
Q

The effective annual rate increases with increasing compounding frequency.

T or F?

A

TRUE

29
Q

The annual percentage rate (APR) is the nominal rate of interest, found by multiplying the periodic rate by the number of periods in one year.

T or F?

A

TRUE

30
Q

The annual percentage yield (APY) is the effective rate of interest that must be disclosed to customers by banks on their savings products as a result of “truth in savings laws.”

T or F?

A

TRUE

31
Q

The effective rate of interest is the contractual rate of interest charged by a lender or promised by a borrower.

T or F?

A

FALSE

The nominal rate of interest is the contractual rate of interest charged by a lender or promised by a borrower.

32
Q

The effective rate of interest differs from the nominal rate of interest in that it reflects the impact of compounding frequency.

T or F?

A

TRUE

33
Q

For any interest rate and for any period of time, the more frequently interest is compounded, the greater the amount of money that has to be invested today in order to accumulate a given future amount.

T or F?

A

FALSE

34
Q

The effective rate of interest and compounding frequency are inversely related.

T or F?

A

FALSE

35
Q

The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.

A) effective
B) nominal
C) discounted
D) continuous

A

B

36
Q

The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ________ interest rate.

A) effective
B) nominal
C) discounted
D) continuous

A

A

37
Q

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion of each payment declines over the life of the loan.

T or F?

A

TRUE

38
Q

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment declines over the life of the loan, and the interest portion of each payment grows over the life of the loan.

T or F?

A

FALSE

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan and the interest portion of each payment declines over the life of the loan.

39
Q

In general, with an amortized loan, the payment amount remains constant over the life of the loan, both the principal portion of and the interest portion declines over the life of the loan.

T or F?

A

FALSE

40
Q

In general, with an amortized loan, the payment amount grows over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion declines over the life of the loan.

T or F?

A

FALSE

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan and the interest portion of each payment declines over the life of the loan.

41
Q

When computing an interest or growth rate, the rate will increase with an increase in future value, holding present value and the number of periods constant.

T or F?

A

TRUE

42
Q

When computing an interest or growth rate, the rate will decrease with an increase in future value, holding present value and the number of periods constant.

T or F?

A

FALSE

43
Q

When computing an interest or growth rate, the rate will increase with a decrease in future value, holding present value and the number of periods constant.

T or F?

A

FALSE

44
Q

When computing the number of deposits needed to accumulate to a future sum, it will take longer if the interest rate decreases, holding the future value and deposit size constant.

T or F?

A

TRUE

45
Q

When computing the number of deposits needed to accumulate a future sum, it will take longer if the interest rates are higher, holding the future value and deposit size constant.

T or F?

A

FALSE

46
Q

The time value concept/calculation used in amortizing a loan is ________.

A) future value of a dollar
B) future value of an annuity
C) present value of a dollar
D) present value of an annuity

A

D

BSA 35P (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions