Module 4 - Time Value of Money

Question 1

what is the TVM concept?

Answer 1

it is better to receive money sooner than later. You can invest the money that you have today, producing more money tomorrow.

Question 2

what is a timeline

Answer 2

it depicts the cash flows associated with a given investment

Question 3

what is the lender’s pov?

Answer 3

the compensation for lending funds

Question 4

what is the borrower’s pov?

Answer 4

the cost of borrowing funds

Question 5

In the lender’s pov, what is interest?

Answer 5

interest is the lender’s compensation for lending funds. it is recorded as interest income

Question 6

in the borrower’s pov, what is interest?

Answer 6

interest is the cost of borrowing funds which will be recorded as interest expense

Question 7

what is simple interest?

Answer 7

you don’t earn interest on interest

Question 8

what is compound interest?

Answer 8

a depositor earns interest on interest

Question 9

how do you compute compound interest

Answer 9

the interest in he first compounding period is added on the principal, which will then be the basis for the interest to be computed for the next period

Question 10

three basic patterns of cash flow

Answer 10

1. single amount
2. annuities
3. mixed stream

Question 11

this refers to the lump sum amount that you currently hold, or you expect to receive in the future

Answer 11

Single Amount

Question 12

interest is also known as

Answer 12

time value of money

Question 13

this is the mount you have to invest today if you want to have a certain amount of cash flow in the future

Answer 13

Present Value

Question 14

the amount to which an investment will grow after earning interest

Answer 14

Future Value

Question 15

the future value is computed by ___________ while the present value is computed by ___________

Answer 15

compounding; discounting

Question 16

the future value technique uses _________ to find the future value of each cash flow at the end of the investment’s life and then sums these values to find the investment’s total future value

Answer 16

compounding

Question 17

the present value technique uses ___________ to find the present value of each cash flow at time zero and then sums these values to find the investment’s total value today

Answer 17

discounting

Question 18

what do investors use in practice? compounding or discounting?

Answer 18

when making investment decisions, investors usually adopt the discounting or the present value approach. they are ore concerned with possible cash lows today because they have to decide today

Question 19

what do you use to estimate how many years it will take to double your money?

Answer 19

by using the Power of 72 r (or i) is expressed as a whole number

Question 20

it is a stream of equal periodic cash flows over a specified time period

Answer 20

annuities

Question 21

what are the two basic types of annuities?

Answer 21

Ordinary annuity and Annuity due

Question 22

payments or receipts occur at the end of each period

Answer 22

Ordinary Annuity

Question 23

Annuity Due

Answer 23

Payments or receipts occur at the beginning of each period

Question 24

which annuity is cash flow received sooner?

Answer 24

Ordinary Annuity

Question 25

this annuity would have a higher future value than the ordinary annuity because of each of its five annual cash flows can earn interest for 1 year more than each of the ordinary annuity’s cash flows

Answer 25

annuity due

Question 26

True or False: the value (present or future) of an annuity due is always greater than the value of an otherwise identical ordinary annuity

Answer 26

True

Question 27

It is an annuity with an infinite life, providing continual annual cash flow;

Answer 27

Perpetuity

Question 28

with this, the periodic annuity or cash flow stream continues forever

Answer 28

Perpetuity

Question 29

with this, the periodic annuity or cash flow stream continues forever

Answer 29

Perpetuity

Question 30

it is the unequal periodic cash flows that reflect no particular pattern

Answer 30

Mixed Stream

Question 31

the opposite of annuity

Answer 31

Mixed Stream

Question 32

True or False: the effective interest rate is greater than the nominal (annual) interest rate. and the effective rate of interest will increase the more frequently interest is compounded

Answer 32

True

Question 33

one-half of the stated rate is paid twice a year

Answer 33

Semiannual compounding

Question 34

one-half of the stated rate is paid twice a year

Answer 34

Semiannual compounding

Question 35

one-fourth of the stated interest rate is paid four times a year

Answer 35

Quarterly compounding

Question 36

True or False: The more frequently interest is compounded does not necessarily mean the greater the amount of money is accumulated

Answer 36

False

Question 37

it is the contractual annual rate of interest charged by a lender or promised by a borrower

Answer 37

Nominal (stated) annual rate

Question 38

it is the annual rate of interest actually paid or earned

Answer 38

Effective (true) annual rate