Time Value Of Money Flashcards by Karie Whitehead

In time value of money, analysis, what is the nominal discount rate, r, equal to?
A. Real risk free rate x risk premium
B. Real risk free rate + inflation + risk premium
C. Discount rate - inflation
D. Discount rate x payments /number of periods

B. Real risk-free rate + inflation + risk premium

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Which three ferry wheels does time value of money analysis bring together?
A. Source of cash flow, amount of cash flow, rate of return.
B. Risk, return, cost of capital
C. Amount of cash flows, timing of cash flow flows, discount rate.
D. Inflation, market volatility, interest rate.

C. Amount of cash flow, timing of cash flow, discount rate.

The time value of money brings together the amount of the cash flow flows, the timing of each cash flow, and the rate of which the value of each cash flow changes due to the passage of time to understand the standardized value of cash flow

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What is the time value of money?
A. The idea that a dollar today is worth less than a dollar in the future due to inflation.
B. The concept that a dollar today is worth more than a dollar in the future.
C. The process of deciding exactly when to invest to receive the highest returns.
D. The measures enacted by central banks to regulate the value of a dollar.

B. The concept that a dollar is worth more than a dollar in the future.

The time value of money is the idea that money that is available at the present time is worth more than the same amount in the future. It does not have to do with investors, deciding exactly when to invest, nor does it have to do with regulation. Further, when there was inflation, the purchasing power of consumers decreases in the future relative to today with the same dollar amount

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What effect does inflation have on the time value of money?
A. Inflation has a little effect on the time value of money.
B. Inflation reduces the uncertainty involved in investing
C. Inflation causes the purchasing power of a dollar to decrease.
D. Inflation boost the purchasing power of a dollar in the future.

C. Inflation causes the purchasing power of a dollar to decrease.

Inflation is a term describes a rise and prices of goods, which could be translated as the decrease of purchasing power overtime. Inflation does not boost purchasing power – rather, dimension the purchasing of a dollar in the future. Inflation does not affect the uncertainty involved in making investment decisions. Finally, inflation is one of the three variables that affect the value of money.

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Why should you consider opportunity in the time value you have money?
A. If you expect cash in the future, you have a chance of not getting it.
B. If you have cash today, you can buy more than you could with the same dollar amount in the future.
C. If you expect cash in the future, you have the chance to use it for any purpose you wish.
D. If you have cash today, you can use it for different purposes.

D. If you have cash today, you can use it for different purposes.

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Which relationship is a key principle in financial decision-making?
A. Risk.
B. The time value of money.
C. Inflation rate.
D. Opportunity cost.

B the value of money

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Suppose you are 30 years old today and desire a retirement income of $10,000 per month into today’s dollars. If you believe in inflation will average 3% over the next 40 years, how much income will you need in 40 years to have the same purchasing power as $10,000 today? How much would you need in your savings account today to find one month of retirement income 40 years from now? Assume you can order 9% on all invested funds.

If you invest $1038.55 at 9% it will grow to $32,620.38 in 40 years

Step one - income in 40 years: FV = 10,000 (1.03)^40 =$32,620.38
If inflation is 3% per year, you will need $32,620.38 in four years to have the same purchasing power at $10,000 today

Step two - current savings: PV = 32,629.38/(1.09)^40=1,038.841
If you invest $1038.55 at 9% it will grow to $32,620.38 40 years.

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Suppose you anticipate receiving $150 in eight years. What is the present value if we discount at 7%?

$87.30

PV= FV / (1+r)^n
PV= 150 / (1.07)^8

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Consider a single cash flow flow of $1000 at time 6 (6 years from today). Assuming the discount rate is 12%, find the time adjusted value at times zero, time three, times six, and time 20.

Time 0- discount for 6 years: PV = $1000 / (1.12)^6 =$506.63

Time 3- discount for 3 years: PV = $1000 / (1.12)^3 =$711.78

Time 6- discount for 0 years: PV = $1000 / (1.12)^0 =$1,000.00

Time 20- compound for 14 years: PV = $1000 / (1.12)^14 =$204.62 $4,887.11

If you put $506.63 in an account running 12%, it will grow to $711.78 in three years, $1000 and six years, and $4,877.11 in 20 years

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Which type of cash flow is one payment of $100 made in one year from today?
A. Present sum
B. Single sum
C. Annuity
D. Perpetuity

B. Single sum

Cash flow is a single sum, which is an amount of money that is paid at one time. A perpetuity is a fixed amount of money paid every fixed interval indefinitely. Present is not a term used in finance. An annuity is a fixed amount of money paid every fixed interval for definite duration.

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What does a present value calculation accomplish?
A. It takes a um today and finds a time adjusted equivalent value at a closer point in time
B. It takes a sum in the future and finds a time adjusted equivalent value at a closer point at time.
C. It takes us today and finds a time adjusted equivalent value at a further point in time.
D. It takes a sum in the future and find a time adjusted equivalent value at a further point in time.

B. It takes a sum in the future and finds a time adjusted equivalent value at a closer point in time.

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Imagine that an individual invested $2000 today in an account that pays 10% interest and wants to figure out how much money will be in the account in 10 years. What type of calculation would be used to solve this problem?
A. Present value (PV)
B. Future value (FV)
C. Payment (PMT)
D. Interest (RATE)

B. Future value (FV)

Given today’s value of $2000, do we want to figure out how much money will be in the account in 10 years. This is the definition of the future value calculation. Present value calculation, on the other hand, takes us in the future and find a time adjusted equivalent value at a closer point in time. The interest rate is given in the problem, and there is no annuity payment to be considered.

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Today, a house has a market value of $500,000. If the average growth rate of real estate prices in the area has been 3% for the last 20 years, the same house 20 years ago had a market value of $276,838 which term describes the market value of the $276,837?

A. Future value.
B. Inflation.
C. Present value.
D. Risk premium.

C. Present value.

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Which term describes how much spending power money has at a point in the future given a past value?

A. Time value of money.
B. Present value.
C. Future value.
D. Nominal discount rate.

C. Future value.

Future value tells us, given a past value, how much spending power money has at a relative point in the future

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Suppose you have $20,000 in an account today from a one time investment you made 18 years ago. You earned the average annual interest rate of 6% in this account. What are you looking for if you were to solve for the original investment amount?

A. Payment.
B. Interest rate.
C. Present value.
D. Future value.

C. Present value.

Since you were looking for the value of $20,000.18 years ago, you were looking for a present value

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Which excel function is used to calculate the interest rate per period?

A. NPV
B. PMT
C. NPER
D. RATE

D. RATE

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What is the rate that a lender will normally quote you when you finance a car?

A annual percentage rate
B required rate
C coupon rate
D effective annual rate

A annual percentage rate

The annual percentage rate is a measure of the interest rate without compounding effect. Often times, lenders such as car loans, advertise interest rates in terms of APR.

The effective annual rate is a measure of the interest rate with compounding effect. Interest rates may be advertised in terms of EAP to attract customers to save or invest not to take out loans. The coupon rate is the rate used to calculate periodic cash disbursement for bondholders. Required rate refers to the rate of return required by investors.

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Suppose that you want to know the future value of a single sum of $10,000 that is invested at 7% for 15 years. If you use the FV function in Excel, what is the input for NPER?

A 1
B 7
C 10000
D 15

D 15

Since the MP ER is a number of input for the FV function, 15 is the correct answer. Either 7% or .07 is the input for rate in the FV function, 10,000 is the input for the PV and one is irrelevant in this problem.

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Using the annualized rate with non-annual payments creates, which type of problem?

A compounding problem
B equity problem
C inflation problem
D agency problem

A compounding problem

A compounding problem is a situation where the periods payments and interest must be adjusted for a non-annual time value of money problem. An agency problem, by contrast, is a conflict of interest between owners of management, motivated by self interest of managers. Inflation and equity do not relate to problems with non-annual payments in time value of money calculations

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What should the NPER input be in Excel if you are looking for the present value of a single sum?

A the future value of the single sum
B the number of years between the present value and the future value
C the number of payments made in each year between the present value and the future value
D the discount rate

C the number of payments made in each year between the present value and the future value

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Suppose that you purchased a car on a loan. The total cost of the car is $50,000. The loan term is six years with a 3% APR. You will make monthly payments. What is the value for the rate input in excel?

A. 0.0025
B. 3
C. 36
D. 72

A 0.0025

Since the payment is made monthly, you divide the APR by 12 which yields 0.0025 or 0.25%

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Why is finding the future value of a single sum using an equation called a” 3 find 4” game?

A. You use three non-variables to find the fourth.
B. You use four variables to find three unknown variables.
C. You use three equations to find the fourth equation.
D. You use three variables to find four more variables.

A. You use three known variables to find the fourth.

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What is the set of necessary input variables to find the future value of a single sum in Excel?

A. RATE, PV, NPER, PMT.
B. RATE, NPER, PV
C. NPER, PMT, PV
D. NPER, RATE, FV

B. Rate, nper, pv

To find future value of a single sum, we need the present value, the interest rate, and the number of periods. The PMT input is not necessary for a single son problem. The FV variable is not an input, but an output for this problem.

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Suppose that 25 years ago you invested $5000 the account gave you a 5% annual interest rate. Do you want to calculate how much you have today in the account. Which excel function should you use?

A. FV.
B. Rate.
C. PV.
D. NPER

A. FV

Since the question is asking for the forward-looking amount of a single sum that was invested 25 years ago, the FV function should be used. Even though the question is asking how much the amount is worth a day, the cash flows are from further in the past, then the value of the interest, so PV is not the right function to use. The right function yield the interest rate instead of a dollar value of the investment. The NP ER function yields how many years to invest instead of how much the $5000 is worth in 25 years

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Supposedly that you purchased a piece of property 30 years ago for $5000. The value of the property has grown at an annual rate of 3%. You want to estimate the value of this property today with the FV function in Excel. What value do you input for the variable NPER? A. 0.03 B. -5000 C. 30 D. 5000

C. 30 The NPER input is the number of periods for the investment to grow, which is 30 years in this problem. The PV input is 5000 or -5000 and the rate input is 0.03.

Today you decide to send $1000 aside for your newborn baby. You invest the lump sum in an account that will earn a 5% interest rate in the next 18 years. You wanted to determine how much you will have an 18 years so that you can use the fund to support your child’s college education. What value do you input for the PV variable? A. - 1000 B. 0.05 C. 18 D. 2407

A. -1000 The present value for the problem is 1000, and it should be negative since it is a cash outflow from your pocket to an account

Suppose that you invested $10,000 today at an interest rate of 5%. How much would you have in two years? A. Equal to $10,000. B. Less than $11,000. C. Equal to $11,000. D. More than $11,000.

D. More than $11,000. This is because of the compounding on interest in the second year. The results should be more than $11,000.

15 years ago, you invested a single thumb into an account with an interest rate of 6%. Today, you have 50,000 in the account. Which excel function would you use to calculate the amount you invested 15 years ago? A. IRR B. PV C. NPV D. FV

B. PV Since the value you are looking for is in the past in relation to the $50,000 amount today, you use the PV function. The MPV function is useful when there are uneven annual cash flow flows, well this is a single problem. The IRR function returns the rate of return of the investment, while you are looking for the dollar value 15 years ago.

You have just won a $10 million lottery. However, this lottery will pay out 30 years from today. Suppose that you can earn an annual interest rate of 7%. What is the future value input in Excel to find the value of $10 million received in 30 years? A. 7 B. 30 C. 1000000 D. 0.07

C. 1000000

What is a set of necessary input variables to find the present value of a single sum in excel? A. FV, PMT, rate. B. Rate, PV, NPER, FV. C. FV, NPER, PMT, rate. D. Rate, NPER, FV.

D. Rate, NPER, FV. In order to use the PV function in Excel for single some problems, you need the rate, NPER, and FV inputs. Since this is a single problem, the PMT input is not needed. PV is not an input, but an output.

Do you want to have $10,000 and 18 years to help your youngest child pay for college. Do you want to know how much you need to put aside today if you can earn 6% annual interest. Which input variable is $10,000 when you use the PV function to find out how much to put aside? A. NPER B. PV C. FV D. Rate

C. FV Given $10000 in the future, you’re looking for the amount you need today, which is the relative present, so 10,000 is an FV input variable

20 years ago, your parents bought a house for $200,000. After an average inflation rate of 2%, they just sold the house for $297,189. What is the output value of the PV function if you input the other three variables correctly? A. -$200,000. B. 0.02 C. 20 D. $297,189

A. -$200,000 The present value in this problem is $200,000, so if the PV function is used correctly with the other three variables, you should get -$200,000 as an output

For a present value of a single sum problem, which value should you input for PMT? A. -1 B. 0 C. 1 D. The same as the NPER input.

B. 0 The PMT input for a single sum problem should be set to zero

What is an annuity?

An equally space series of cash flows all of the same magnitude. Ie: equally spaced payments of the same dollar amount

How do you calculate the future value of an annuity?

Payment * ((1+rate)^number payments) -1) / rate Ex: 100 ((1*0.13)^3 -1 / 0.13 = $340.69

How do you calculate the present value of an annuity?

Payment (1 - (1/((1+r)^n)) / r 100(1-(1/(1.13)^3)/0.13=$236.12

We calculate the future value of an annuity FVA at the time of the last payment and calculate the present value of an annuity PVA one Before the first payment.

Remember this fact

what is the definition of an annuity? A. A series of equal equally cash flow flows of the same magnitude. B. A growing series of cash flow flows paid into a trust. C. A series of equal cash flow is paid on a flexible schedule. D. A growing series of cash flow flows paid at regular intervals.

A. A series of equally space cash flow flows of the same magnitude.

Which of the following is a characteristic of an annuity? A. Payments are a varying amount. B. The stream of payments does not end. C. Payments are equally spaced. D. The stream of payments must start at time zero.

C. The payments are equally spaced.

The future value of an ordinary annuity is stated when? A. At the time of the last payment. B. One period Before the last payment. C. One period Before the first payment. D. At the time of the first payment.

A. At the time of the last payment. An ordinary annuity has the first payment starting a period after the present, and the last payment comes on the future date as specified in NPER

Which of the following is an example of an annuity? A. Monthly auto loan payments of $250 for six years. B. Monthly income of $6000 that gross at a monthly rate of 0.5% for 40 years. C. Monthly contributions to a charity of 5% of your income, which varies each month. D. Monthly mortgage payments of $3000 for 30 years with extra payments of $1000 in April every year.

A. Monthly auto loan payments of $250 for six years. A monthly auto loan payment of $250 for six years is an example of an annuity, as a stream of fixed equal monthly payments. The other options do not describe equal, evenly spaced payments.

What does NPER input represent for an annuity problem in Excel? A. Compounding rate. B. Interest rate. C. Number of years. D. Number of payments.

C. Number of years.

Suppose that you are finding a future value of a $500 annuity that continues for 10 years. The discount rate is 5%. The payment of $500 starts today rather than one year from today. Which of the following actions is necessary to calculate the future value in Excel? A. Set both the input variables, PV and PMT to 500. B. Set the input variables NPER equal to 9 C. Set the input variable type to 0 D. Set the input variable type to 1

D. Set the input variable type to 1 For an annuity problem, the type input in excel function should be one. Setting type zero would indicate an ordinary annuity.

You are calculating the present value of an ordinary annuity of $10,000 a year for seven years. The discount rate is 8%. What should the NPER input variable be in the PV function? A. 10,000. B. 1 C. 0.08 D. 7

D. 7

You are calculating the sum of money needed now in order to withdraw $5000 a year over the next 10 years from an account that earns a 4% interest rate. Which excel function should you use? A. PV function B. NPER function C. Rate function D. FV function

D. FV function This question asks for the value of a lump sum for future withdrawals. Therefore, the PV function should be used. The rate function is used to find the interest rate, which is already given in the problem. NPER function is used to solve for the number of an annuity payment.

What is a perpetuity annuity?

An unending series of equally spaced, equal size payments. Perpetuities are frequently associated with charitable giving.

How do you calculate perpetuity?

Using a formula rather than an excel function. Present value = PMT/interest rate

What is the definition of a perpetuity? A. A finite series of equally spaced cash flow flows of varying magnitude. B. A single payment made at one point in time C. A single, large payment that is never withdrawn. D. An unending series of equally spaced, equal size payments.

D. An unending series of equally spaced, equal size payments

What makes perpetuities different from annuities? A. Perpetuities do not have equal dollar amount payments. B. Perpetuities do not have equally spaced cash flows. C. Perpetuities pay an infinite number of payments. D. Perpetuities pay at the beginning of each period

C. Perpetuities paying infinite number of payments

How was the present value of a perpetuity calculated? A. Use the IRR function and excel. B. Find the sum of all the cash flow flows. C. Divide the payment by the rate. D. Treated as a future value using the FB function in excel

C. Divide the payment by the rate.

Which excel function is used to calculate monthly mortgage payments? A. NPER B. PV. C. FV. D. PMT.

D. Pmt The PMT function is used to find an annuity, which is what monthly mortgage payments are. In contrast, the PV function could be used to find the original principle of the mortgage, the NPER function could be used to find the term of the mortgage, and the FV function is irrelevant.

Which excel function is used to calculate the annual rate of return of real estate that was purchased 30 years ago for $50,000 and sold today for $400,000? A. FV B. Rate C. NPER D. PV

B. Rate

Which excel function is used to find how long it will take to save $1 million if you contribute $400 a month at an interest rate of 4.5%? A. Rate. B. Type. C. NPER. D. FV.

C. NPER.

Suppose you were planning to put aside $500 each month for 25 years to save up 1.5 million. You use the right function in excel to figure out the interest rate that you need on the account. The function returns 0.01 to 1 or 1.21%. Given this information, what is the annual interest rate you need to earn to meet the goal? A. -500%. B. 1.21%. C. 14.58%. D. 30.37%.

C. 14.58%. The value returned from the Wright function is a monthly rate, so you need to multiply it by the number of payments each year, which is 12. This shields the APR of 0.1458 or 14.58%.

Suppose that you want to figure out how many monthly payments of $1000 are needed to save up to $3 million. Suppose at the annual interest rate is 5% how could you solve this problem? Using an Excel function? A. Use the IRR function. B. Use the MPER function. C. Use the NPER function and then divide by 12. D. Use the NPER function and then multiplied by 12.

B. Use the NPER function.

You currently have a $100,000 student loan. The annual interest rate on the loan is 6%. You’re planning to make an $800 payment each month. This will take around 197 months, or 16.4 years to payback. Which value above should be returned with the NPER function? A. -800. B. 0.06. C. 16.4. D. 197.

D. 197

Suppose you were planning to contribute to a retirement account every month. Your goal is to have $3 million in 30 years. You expect to earn a 6% return annually. He will start your monthly contributions in a month from today. Which statement correctly describes how to find the annuity using an excel function? A. Use the PMT function with the following inputs: FV 3 million, NPER 360, rate 0.005, 0, type 0. B. Use the PMT function with the following inputs: FV 3 million, NPER 30, rate 0.06, PV 0, type 1 after finding the PMT, divide the result by 12 C. Use the PMT function with the following inputs.: FV 3 million, NPER 30, rate 0.06, PV 0, type 0. After finding the PMT, divide the result by 12. D. Use the PMT function with the following inputs: FV 3 million, NPER 360, rate 0.005, PV 0, type 1.

A. Use the PMT function with the following inputs: FV 3 million, NPER 360, rate 0.005, 0, type 0. Adjust in PER and rate for the compounding problem. So the contributions are made monthly, the NPER and rate inputs need to be adjusted to reflect monthly amounts. Since the payment starts a month from today, type is zero.

Suppose you open a retirement account today. You’re going to put $10,000 in today and then make monthly contribution starting a month from today for 40 years. Your goal is 2.5 million when you retire. You believe that you can earn a 7.2% annual interest rate. Which statement correctly describes how to find the amount of your monthly contribution in Excel? A. Use the PV function. The input variables are NPER 40, rate 0.006, PMT -10,000, FV 2.5 million, type zero. B. Use the PMT function. The input variables are PV -2,.5 million, NPER 40, rate 0.072, FV $10,000, type zero. C. Use the PMT function. The input variables are PV -10,000, NPER 480, rate 0.006, FV 2.5 million, type zero. D. Use the FV function. The input variables are PV 2.5 million, PMT -10,000, NPER 480, rate 0.072, type zero.

C. Use the PMT function. The input variables are PV -10,000, NPER 480, rate 0.006, FV 2.5 million, type zero.

Which of the following is an example of mixed stream cash flow flows? A. Amount of money is contributed to a Children’s Hospital each month forever. B. A freelance writer’s income vary significantly from month-to-month. C. A risky investment yields a high annual return. D. An investor by shares of stock in a foreign currency.

B. A freelance writers income very significantly for month the month.

Which excel function can be used to calculate the present value of uneven cash flows ? A. NPER B. NPV C. Rate D. Pmt

B. NPV

Which excel function can be used to calculate the rate of return of uneven cash flows? A. Rate B. PMT. C. NPV. D. IRR

D. IRR

In the MPV function, the first value is the cash flow in incurred one period from the present day. Suppose that you want to find the MPV of uneven cash flows that starts today at the discount rate of 5%. Cash flows are $3000 in your zero, $5000 in year one, $3500 a year too, and $2000 a year. Which statement describes how to find the present value of these uneven cash flow flows? A. Add the first two values together then use the MPV function with the inputs 8000 for value one, 3500 for value two, and 2000 for value three. B. Use the MPV function with the inputs 3000 for value one 5000 for value to 3500 for value three and 2000 for value four. C. Use the MPV function with the inputs 5000 for value one, 3500 for value too, and 2000 for value three, then add 3000 to the output of the nPV function D. At all the cash flows together. (13,500), then use the MPV function with the input 13,500 for value one

C. Use the NPV function with the inputs 5000 for value one 3500 for value two, and $2000 for value three, then add 3000 to the output of the NPV function.

You want to find the present value of the following stream of cash flow: $10,000 a year one, $5000 a year too, and $7800 in year three. The discount rate is 4%. Why do you need to use the MPV function instead of the PV function to find the present value? A. The annual cash flows are all present values B. The annual cash flow flows are not an annuity. C. The NPV returns the rate of return for the investment while the PV returns the present value. D. The annual cash flow flows are in annuity.

B. The annual cash flows are not an annuity.

Which of the following streams of cash flow flows has the highest NPV? The sum of each stream is $15,000, and the discount rate is 10%. A. Year 1= $5000; year 2 = $4000; year 3 = $3000; year 4 = $2000; year 5 = $1,000 B. Year 1= $1000; year 2 = $2000; year 3 = $3000; year 4 = $4000; year 5 = $5000 C. Year 1= $0; year 2 = $0; year 3 = $5000; year 4 = $5000; year 5 = $1,000 D. Year 1= $3000; year 2 = $3000; year 3 = $3000; year 4 = $3000; year 5 = $3,000

A. Year 1= $5000; year 2 = $4000; year 3 = $3000; year 4 = $2000; year 5 = $1,000