Principles of Finance

Question 1

What does the time value of money (TVM) concept state?

Answer 1

A dollar today is worth more than a dollar in the future due to its potential earning capacity.

Question 2

What is the formula for calculating Future Value (FV)?

Answer 2

FV = PV * (1 + r)^n

Question 3

What does ‘PV’ stand for in the time value of money formulas?

Answer 3

Present Value

Question 4

True or False: The future value increases as the interest rate increases.

Answer 4

True

Question 5

Fill in the blank: The present value formula is PV = FV / (1 + r)^n.

Answer 5

PV = FV / (1 + r)^n

Question 6

What does ‘r’ represent in the formulas for present and future value?

Answer 6

The interest rate per period

Question 7

How does the number of periods ‘n’ affect the future value?

Answer 7

The future value increases with more periods due to compounding.

Question 8

What is the primary purpose of using the present value formula?

Answer 8

To determine the current worth of a future sum of money.

Question 9

What is the effect of inflation on the time value of money?

Answer 9

Inflation decreases the future purchasing power of money.

Question 10

Multiple Choice: Which of the following is NOT a component of the future value formula? A) Present Value B) Interest Rate C) Time Period D) Future Value

Answer 10

D) Future Value

Question 11

True or False: The present value of a future cash flow will always be less than the future cash flow itself.

Answer 11

True

Question 12

What happens to present value if the interest rate decreases?

Answer 12

The present value increases.

Question 13

Fill in the blank: The future value of an investment can be calculated using the formula FV = ___ * (1 + r)^n.

Answer 13

PV

Question 14

What is the term for the process of determining present value from future cash flows?

Answer 14

Discounting

Question 15

Multiple Choice: Which of the following is true about the time value of money? A) Money loses value over time B) Money gains value over time C) Money’s value remains constant

Answer 15

B) Money gains value over time

Question 16

How do you calculate the present value of multiple future cash flows?

Answer 16

You calculate the present value of each cash flow separately and then sum them.

Question 17

True or False: The present value formula can only be used for single cash flows.

Answer 17

False

Question 18

What is the impact of compounding frequency on future value?

Answer 18

More frequent compounding results in a higher future value.

Question 19

What does ‘n’ represent in the future value and present value formulas?

Answer 19

The number of compounding periods

Question 20

Multiple Choice: What is the effect of increasing the time period ‘n’ in the present value formula? A) Increases PV B) Decreases PV C) No effect

Answer 20

B) Decreases PV

Question 21

Fill in the blank: To find the future value of an investment, you multiply the present value by (1 + r) raised to the power of ___.

Answer 21

n

Question 22

What is a key assumption in the time value of money calculations?

Answer 22

The interest rate remains constant over the time period considered.

Question 23

True or False: The future value of an investment is always higher than its present value.

Answer 23

True

Question 24

What financial concept does the time value of money primarily relate to?

Answer 24

Investment and finance

Question 25

How do you adjust the present value formula for continuous compounding?

Answer 25

Use the formula PV = FV * e^(-rt) where e is the base of the natural logarithm.

Question 26

What is the relationship between present value and future value?

Answer 26

Present value is the discounted value of future cash flows.