Week 1 - Time Value of Money

Question 1

What is the rule of 72?

Answer 1

Used to calculate either time needed to double your money or interest rate needed to double your money

Question 2

What rate would you need to double in four years?

Answer 2

72 / 4 years = 18%

Question 3

How many years would it take to double your money on an 8% rate of return?

Answer 3

72 / 8% = 9 years

Question 4

What is annuity?

Answer 4

Fixed cash flow payments each period for a fixed length of time

Question 5

What is the formula for the present value of annuity

Answer 5

FV / (1+r)^T OR (c / r) * [1 - 1 / (1+r)^T]

Question 6

What is more valuable: $1000 today or $1000 tomorrow?

Answer 6

$1000 today

Question 7

(T/F) Compound interest is interest paid on the principal and not on accrued interest.

Answer 7

False

Question 8

If you deposit $100 in a savings account that pays 10% annual interest how much money will you have in the account after two years? (Assume that this is the only money deposited in the account, that you do not make withdrawals, and that the bank pays interest annually.)

Answer 8

$121

Question 9

If the annual interest rate is 10%, what is the present value of receiving $110 one year from now?

Answer 9

$100

Question 10

(T/F) Stock investors earn, on average, lower returns BUT face more frequent and larger losses

Answer 10

False; stock investors earn, on average, HIGHER returns but face more frequent and larger losses

Question 11

What is the unit of periods in annuity?

Answer 11

Years

Question 12

If using months for PV, what intermediary step must you perform?

Answer 12

Must divide rate by 12