Chapter 6 TF Flashcards
An individual who elects to receive a given sum of money later than it is due incurs an opportunity cost.
True
A sum of money invested at 9 percent simple interest per year will grow to a larger amount by the end of 5 years than if it had been invested at 9 percent compound interest.
False. A sum of money invested at 9 percent compound interest will grow to a larger amount by the end of 5 years than if it had been invested at 9 percent simple interest.
Discounting is another word for compounding.
False. Compounding refers to the calculation of the increase in a single sum from the present into the future. Discounting is the reverse of compounding and refers to the calculation of the present value of a future sum.
All other things being equal, the higher the interest rate, the greater the difference between the present value and the future value of a given sum of money.
True
All other things being equal, the fewer the number of periods, the greater the difference between the present value and the future value of a given sum of money.
False. All other things being equal, the fewer the number of periods, the smaller the difference between the present value and the future value of a given sum of money.
In basic time-value-of-money problems there are four values, two of which must be known in order to solve for the third and fourth
False. In time-value problems, three of the four values must be known in order to solve for the fourth.
All other things being equal, the greater the frequency with which compounding occurs within a year, the greater the difference between the present value and the future value of a given sum of money.
True
The basic formula for calculating the future value of a single sum is FVSS = PVSS × (1 + i)n.
True
In the expression 1.096, the interest rate being used is 6 percent.
False. In the expression 1.096, the interest rate being used is 9 percent.
Two hundred dollars deposited in an account that earns 14 percent compound annual interest will accumulate to $963.58 by the end of 12 years.
True
The FVSS factor for 8 percent for 10 years is smaller than the FVSS factor for 9 percent for 10 years.
True
The future value of a single sum is greater for 8 percent for 10 years than for 8 percent for 9 years.
True
According to the Rule of 72, a sum of money invested at 5 percent compound annual interest will double in value approximately every 3.6 years
False. According to the Rule of 72, a sum invested at 5 percent compound annual interest will double in value approximately every 14.4 years (72 ÷ 5 = 14.4).
The basic formula for calculating the present value of a single sum is [6-3]
PVSS=(1+i)^n/FVSS
False. The basic formula for finding the PVSS is:
PVSS=FVSS*(1/(1+i)^N)
All other things being equal, the higher the interest rate, the larger the present value of a single sum.
False. All other things being equal, the higher the interest rate, the smaller the present value of a single sum.
The present value of $100 due one year from now is over $90 if a 10 percent interest assumption is used
True
An annuity due is a series of payments of equal amounts made at the end of each of a number of periods
False. An annuity due is a series of payments of equal amounts made at the beginning of each of a number of periods.
If $100 is to be deposited in a 6 percent compound interest savings account at the end of each of the next 3 years and no withdrawals are made, the account balance at the end of the third year will be $318.36.
True
If the number of periods (years) during which compounding occurs exceeds the number of periods (years) during which annuity payments are made, the future value of the annuity as of the end of the final compounding year cannot be computed.
False. The future value of the annuity as of the end of the period (year) during which payments are made is calculated first. Then this value is accumulated as a single sum from that point to the end of the period (year) during which compounding occurs.
A sinking fund problem is one in which the amount of the periodic deposits is known and you want to find their future value.
False. A sinking fund problem is one in which we know the future value and wish to solve for the amount of the periodic deposits to reach that future value.
The use of an HP-10BII is a less efficient way to solve a sinking fund problem than the use of a formula.
False. The use of an HP-10BII is a much more efficient way to solve a sinking fund problem than the use of a formula
The present value of a $1,000-per-year 6-year annuity using a 7 percent discount rate is $5,582.38.
False. The present value of the annuity is $4,766.54. The present value would have been $5,582.38 if n and i had been reversed.
The present value of the first payment under a $1,000-per-year annuity due using an 8 percent interest assumption is $925.93.
False. Since the problem involves an annuity due, the present value of the first $1,000 payment is $1,000.
In a loan amortization schedule, the portion of each payment used to cover interest increases over time, and the portion applied against principal declines
False. In a loan amortization schedule, the portion of each payment used to cover interest decreases over time and the portion applied against principal increases
