Chapter 4
Introduction to Valuation: The Time Value of Money I. DEFINITIONS
Topic: FUTURE VALUE
1. The amount an investment is worth after one or more periods of time is the ___________.
A) future value
B) prent value
C) principal value
D) compound interest rate
E) simple interest rate
Answer: A
Topic: COMPOUNDING
2. The process of accumulating interest on an investment over time to earn more interest is called:
A) Growth.
B) Compounding.
C) Aggregation.
D) Accumulation.
Answer: B
Topic: INTEREST ON INTEREST
3. Interest earned on the reinvestment of previous interest payments is called _____________ .
A) free interest
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B) annual interest
C) simple interest
D) interest on interest
E) compound interest
Answer: D
Topic: COMPOUND INTEREST
4. Interest earned on both the initial principal and the interest reinvested from prior periods is called
_______________ .
A) free interest
B) annual interest
C) simple interest
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D) interest on interest
E) compound interest
Answer: E
Topic: SIMPLE INTEREST
5. Interest earned only on the original principal amount invested is called _____________.
A) free interest
B) annual interest
C) simple interest
D) interest on interest
E) compound interest
Answer: C
Topic: FUTURE VALUE INTEREST FACTOR
6. The future value interest factor is calculated as:
A) (1 + r)t
B) (1 + rt)
C) (1 + r)(t)
D) 1 + r – t
E) None of the above are correct
Answer: A
Topic: PRESENT VALUE
7. The current value of future cash flows discounted at the appropriate discount rate is called the:
A) Principal value.
B) Future value.
C) Prent value.
D) Simple interest rate.
E) Compound interest rate.
Answer: C
Topic: DISCOUNTING
8. The process of finding the prent value of some future amount is often called ______________.
A) growth
B) discounting
C) accumulation
D) compounding
E) reduction
Answer: B
Topic: PRESENT VALUE INTEREST FACTOR
9. The prent value interest factor is calculated as:
A) 1/(1 + r – t)
B) 1/(1 + rt)
C) 1/(1 + r)(t)
D) 1/(1 + r)t
E) 1 + r + t
Answer: D
Topic: DISCOUNT RATE
10. The interest rate ud to calculate the prent value of future cash flows is called the _________
rate.
A) free interest
B) annual interest
C) compound interest
D) simple interest
E) discount
Answer: E
II CONCEPTS
Topic: PRESENT VALUE FACTORS
11. Suppo you are trying to find the prent value of two different cash flows using the same interest
rate for each. One cash flow is $1,000 ten years from now, the other $800 ven years from now.
Which of the following is true about the discount factors ud in the valuations?
A) The discount factor for the cash flow ten years away is always less than or equal to the discount
factor for the cash flow that is received ven years from now.
B) Both discount factors are greater than one.
C) Regardless of the interest rate, the discount factors are such that the prent value of the $1,000
will always be greater than the prent value of the $800.
D) Since the payments are different, no statement can be made regarding the discount factors.
E) You should factor in the time differential and choo the payment that arrives the soonest.
Answer: A
Topic: SIMPLE VS. COMPOUND INTEREST
12. You are choosing between investments offered by two different banks. One promis a return of
10% for three years using simple interest while the other offers a return of 10% for three years using compound interest. You should:
A) Choo the simple interest option becau both have the same basic interest rate.
路上的风景B) Choo the compound interest option becau it provides a higher return.
C) Choo the compound interest option only if the compounding is for monthly periods.
D) Choo the simple interest option only if compounding occurs more than once a year.
E) Choo the compound interest option only if you are investing less than $5,000.
Answer: B
Topic: TIME VALUE FACTORS
13. Given r and t greater than zero and assuming a lump sum payment:
I. Prent value interest factors are less than one.
II. Future value interest factors are greater than one.
III. Prent value interest factors are greater than future value interest factors.
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关于冬天的文章IV. Prent value interest factors grow as t grows, provided r is held constant.
A) I only
B) I and II only
C) I and IV only
D) II and III only
E) II and IV only
Answer: B
Topic: PRESENT VALUE
14. Which of the following statements is/are FALSE, all el the same?
I. Prent values increa as the discount rate increas.
II. Prent values increa the further away in time the future value.
III. Prent values are smaller than future values when both r and t are positive.
A) I only
B) I and II only
C) II only
D) III only
E) II and III only
Answer: B
III. PROBLEMS
Topic: PRESENT VALUE LUMP SUM
15. Fresh out of college, you are negotiating with your prospective new employer. They offer you a
signing bonus of $1,000,000 today or a lump sum payment of $1,250,000 three years from now. If you can earn 7% on your invested funds, which of the following is true?
A) Take the signing bonus becau it has the lower prent value.
B) Take the signing bonus becau it has the higher future value.
C) Take the lump sum becau it has the higher prent value.
D) Take the lump sum becau it has the lower future value.
E) Bad on the numbers, you are indifferent between the two.
Answer: C
Respon:
FV of bonus = $1,000,000(1.07)3 = $1,225,043;
PV of lump sum = $1,250,00 / (1.07)3 = $1,020,372
Topic: FUTURE VALUE LUMP SUM
16. You received a $1 savings account earning 6% on your 1st birthday. How much will you have in
the account on your 30th birthday if you don't withdraw any money before then?
A) $3.56
B) $4.90
C) $5.42
D) $5.90
E) $6.13
Answer: C
Respon: FV = $1(1.06)29 = $5.42
Topic: FUTURE VALUE LUMP SUM
17. What is the future value of $15,000 received today if it is invested at 7.5% compounded annually
for five years?
A) $15,133.35
B) $17,476.42
C) $21,534.44
D) $24,521.75
E) $28,374.89
Answer: C
Respon: FV = $15,000(1.075)5 = $21,534.44
Topic: PRESENT VALUE LUMP SUM
18. How much would you have to invest today at 9% compounded annually to have $35,000 available
for the purcha of a car five years from now?
A) $20,267.26
B) $22,747.60
场地租赁合同C) $24,147.25
D) $26,370.10
E) $28,149.57
Answer: B
Respon: PV = $35,000 / (1.09)5 = $22,747.60
Topic: PRESENT VALUE LUMP SUM
19. You will receive a $250,000 inheritance in 25 years. You can invest that money today at 8%
compounded annually. What is the prent value of your inheritance?
A) $ 17,491.53
出生日期计算年龄公式B) $ 29,767.15
C) $ 36,504.48
D) $ 65,492.34
E) $100,000.00
Answer: C
汽车精洗Respon: PV = $250,000 / (1.08)25 = $36,504.48
