TVM- TIME VALUE OF MONEY

Question 1

the concept
that a sum of money is worth more now than the
same sum will be at a future date due to its
earnings potential in the interim

Answer 1

TIME VALUE OF MONEY

Question 2

a core principle of finance

Answer 2

TIME VALUE OF MONEY

Question 3

T/F: A sum of
money in the hand has less value than the
same sum to be paid in the future.

Answer 3

FALSE; A sum of
money in the hand has greater value than the
same sum to be paid in the future.

Question 4

The time
value of money is also referred to as the

Answer 4

present
discounted value.

Question 5

is a financial concept that
measures the value of money over time. It takes
into account the fact that money today is worth
more than the same amount of money in the
future because of its earning potential.

Answer 5

TIME VALUE ANALYSIS

Question 6

examples of time value analysis

Answer 6

1. calculation of interest on a savings account.
2. calculation of the present value of future cash
   flows

Question 7

ToF: The number of compounding periods has no effect on the TVM calculations

Answer 7

FALSE; The number of compounding periods has a
dramatic effect on the TVM calculations

Question 8

is key to the concept of the
time value of money. Money can grow only if it
is invested over time and earns a positive return.
Money that is not invested loses value over time.
Therefore, a sum of money that is expected to be
paid in the future, no matter how confidently it
is expected, is losing value in the meantime.

Answer 8

OPPORTUNITY COST

Question 9

is one
of the most popular and influential methods for
valuing investment opportunities. It is also an
integral part of financial planning and risk
management activities. Pension fund managers,
for instance, consider the time value of money to
ensure that their account holders will receive
adequate funds in retirement.

Answer 9

DISCOUNTED CASH FLOW ANALYSIS

Question 10

assets such as bonds
provide a series of cash inflows over time, and
obligations such as auto loans, student loans,
and mortgages call for a series of payments. If
the payments are equal and are made at fixed
intervals, then we have an

Answer 10

ANNUITY

Question 11

If payments occur at the end of each period, then
we have an ___

Answer 11

ordinary (or deferred) annuity

Question 12

If the payments are made at the beginning of
each period, then we have an ___

Answer 12

ANNUITY DUE

Question 13

EXAMPLES OF ORDINARY ANNUITY

Answer 13

Payments on mortgages, car loans, and student
loans are generally made at the ends of the
periods and thus are ordinary annuities.

Question 14

EXAMPLES OF ANNUITY DUE

Answer 14

Rental lease payments, life insurance premiums,
and lottery payoffs (if you are lucky enough to
win one!) are examples of annuities due.

Question 15

Keep in mind that
annuities must have ___ and a
___. If these conditions
don’t hold, then the series is not an annuity.

Answer 15

Keep in mind that
annuities must have constant payments and a
fixed number of periods. If these conditions
don’t hold, then the series is not an annuity.

Question 16

represents the
total amount of money that will be accrued by
making consistent investments over a set period,
with compound interest

Answer 16

The future value of an annuity

Question 17

the current
value of all the income that will be generated by
that investment in the future. In more practical
terms, it is the amount of money that would
need to be invested today to generate a specific
income down the road.

Answer 17

present value of an annuity