Time Value of Money Tools

Question 1

Define an “annuity due (also called an annuity in advance)”.

Answer 1

Series of equal amounts received or paid at the beginning of each equal period.

Question 2

Define the “future value” of $1.

Answer 2

Value at some future date of a single amount invested now.

Amount that will accumulate as a result of compounding of interest on the single amount invested at the present.

Question 3

Define the “present value” of an ordinary annuity.

Answer 3

Value now of a series of equal amounts to be received at the end of equal intervals over some future period

Equal amounts to be received at the end of a number of equal periods are discounted using an interest rate to get the present value of those amounts.

Question 4

Define an “ordinary annuity (also called an annuity in arrears)”.

Answer 4

Series of equal amounts received or paid at the end of each equal period.

Question 5

Define “future value” of an ordinary annuity.

Answer 5

Value at some future date of a series of equal amounts to be invested at the end of equal intervals over some period of time.

Amount that will accumulate as a result of the amounts invested at the end of each period and the compounding of interest on those amounts.

Question 6

Define the “present value” of $1.

Answer 6

Value now (at present) of a single amount to be received in the future.

Amount to be received in the future is discounted using an interest rate to get the present value of that amount.

Question 7

Define the “future value” of an annuity.

Answer 7

Value at some future date of a series of equal amounts to be invested at the beginning of equal intervals over some period of time.

Amount that will accumulate as a result of the amounts invested at the beginning of each period and the compounding of interest on those amounts.

Question 8

The present value of an amount is ___ than the future value of that amount.

Answer 8

LESS

Question 9

Money currently held is ___ ___ than the same amount to be received in the future.

Answer 9

MORE VALUABLE

Question 10

In computing future value, how is the interest earned on an annuity due vs. an ordinary annuity?

Answer 10

annuity due earns one more period of interest compared to an ordinary annuity

Question 11

In computing the present value of an annuity due that has 10 payments, how many payments must be discounted?

Answer 11

only 9

Question 12

An annuity due will result in a ___ present value than an ordinary annuity of the same amount.

Answer 12

higher

Question 13

An annuity due will result in a ___ future value than an ordinary annuity of the same amount.

Answer 13

higher

Question 14

The present value of an annuity will be ___ than the sum of the series of payments.

Answer 14

less

Question 15

An ___ is a series of EQUAL AMOUNTS paid or received at equal intervals.

Answer 15

annuity

Question 16

___ ___ ___ involves earning of interest on interest already earned.

Answer 16

compounding of interest

Question 17

In computing present value for a given number of periods, the ___ the discount rate the higher the discount factor.

Answer 17

lower

Question 18

The interest rate used to determine the present value of a future amount is called the ___ ___.

Answer 18

discount rate

Question 19

Present value is also equal to ____.

Answer 19

cost

Question 20

When comparing annuities of the same amount, the ___ the annuity, the higher the present value.

Answer 20

longer

Question 21

The present value of a single amount has to be ___ than the present value of equal amounts due within the same or less time.

Answer 21

less