Question 1

To decrease the amount required today to fund a $10,000 debt due two years from now, you could _____ on your savings.

Accepted Answer

Increasing the rate of interest earned on your savings would decrease the amount required today to fund a future debt because the money would grow faster over time, reducing the initial investment needed to reach the $10,000 target in two years.

Question 2

Calculating the present value of a future cash flow to determine its value today is called:

Accepted Answer

Discounted cash flow valuation is the method used to calculate the present value of a future cash flow to determine its worth in today's dollars. It involves discounting future cash flows back to the present value using a discount rate.

Question 3

The rate of return used when computing a present value is referred to as the ______ rate while the rate used when computing a future value is referred to as the _____ rate.

Accepted Answer

The rate of return used when computing a present value is referred to as the discount rate, as it discounts future cash flows back to their present value. When computing a future value, the rate used is referred to as the compound rate, as it compounds the value of current funds over time.

Question 4

The interest rate used to calculate the present value of future cash flows is called the ____________ rate.

Accepted Answer

The interest rate used to calculate the present value of future cash flows is called the discount rate. It reflects the time value of money and is used to determine the current worth of cash to be received in the future.

Question 5

Mary plans on saving $1,000 a year for ten years. She would like to know the value of these savings today. Mary should solve for the:

Accepted Answer

The present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Mary wants to know the value of her future savings in today's dollars, which requires calculating the present value.

Question 6

The term interest-on-interest refers to:

Accepted Answer

Interest-on-interest refers to the interest earned on previously earned interest that has been reinvested, leading to compound growth.

Question 7

The future value of C invested at r% for t periods is:

Accepted Answer

The correct formula for the future value of an investment is FV = C(1 + r)^t, where C is the initial investment, r is the annual interest rate, and t is the number of periods. This matches option C.

Question 8

Sun Lee has $500 today. Which one of the following statements is correct if she invests this money at a positive rate of interest for five years?

Accepted Answer

The correct answer is D because the amount of money Sun Lee will have at the end of five years increases with the interest rate. Therefore, investing at a 7% interest rate will yield more money than investing at a 5% rate, assuming all other factors remain constant.

Question 9

You are choosing between investments offered by two different banks. One promises 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:

Accepted Answer

Compound interest generates interest on both the initial principal and the accumulated interest from previous periods, leading to a higher return than simple interest, which only generates interest on the principal.

Question 10

The discounted value of money is called the:

Accepted Answer

The discounted value of money refers to its value in the present, taking into account the time value of money. This is known as the present value, which is the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Question 11

An account was opened with $1,000 three years ago. Today, the account balance is $1,157.63. If the account earns simple interest, how long will it take until the account has earned a total of $225 in interest?

Accepted Answer

The account has earned $157.63 in three years. To earn an additional $67.37 ($225 - $157.63) at the same rate, it will take less than one year since $67.37 is less than $157.63, which was earned in three years. Therefore, it will take between one and two more years to reach a total of $225 in interest.

Question 12

Monika has $6,000 in her investment account. She wants to withdraw her funds when her account reaches $10,000. A decrease in the rate of return she earns will:

Accepted Answer

A decrease in the rate of return will slow the growth of her investment, meaning it will take longer for the account to reach her target of $10,000, thus delaying her ability to withdraw the funds.

Question 13

The term to convert a future value amount into its present value is:

Accepted Answer

The term "discount" refers to the process of determining the present value of a future amount by applying a discount rate. This process is essential in finance for comparing the value of money at different points in time.

Question 14

As long as the interest rate is greater than zero, the present value of a single sum will always:

Accepted Answer

The present value of a single sum is always less than its future value when the interest rate is greater than zero, because the future value includes interest earned over time, while the present value represents the current worth of that future sum, discounted by the interest rate over the period until it is received.

Question 15

On a financial calculator, the symbol "N" represents the:

Accepted Answer

"N" on a financial calculator stands for the number of time periods, which could be years, months, weeks, or any other unit of time over which investments or loans are calculated.

Question 16

The interest rate used to calculate the present value of future cash flows is called the _____ rate.

Accepted Answer

The interest rate used to calculate the present value of future cash flows is called the discount rate. It reflects the time value of money and is used to determine the current worth of cash to be received in the future.

Question 17

The rate used to find the present value of a future payment is called the:

Accepted Answer

The discount rate is the interest rate used to determine the present value of future cash flows. It reflects the time value of money, showing how much current money is worth in the future or vice versa.

Question 18

The concept that a dollar received today is worth more than a dollar received tomorrow is referred to as the:

Accepted Answer

The concept that a dollar received today is worth more than a dollar received tomorrow is referred to as the Time value of money. This principle highlights the preference for receiving money now rather than later, due to potential earning capacity.

Question 19

To create the same future value given a stated discount rate, you can:

Accepted Answer

The answer of To create the same future value given...

Question 20

As the discount rate increases, the present value of $500 to be received six years from now:

Accepted Answer

The present value of a future amount decreases as the discount rate increases, because a higher discount rate means future cash flows are discounted more heavily, reducing their present value.

Quiz 5: Introduction to Valuation: the Time Value of Money