CH 4

Question 1

Future Value ()

Answer 1

compounding Process

Question 2

Present value ()

Answer 2

discounting process

Question 3

T/F the time value of money is one of the most important topics in finance

Answer 3

True

Question 4

Why finance is obsessed with time

Answer 4

over time interest can be earned

Question 5

Future value

Answer 5

the amount of money an investment will grow to over some time period while earning a given interest rate

Question 6

Future value interest factor

Answer 6

the future value of one dollar invested at a given interest rate over a specified time period ( exchange rate, transformation rate, conversion rate)

Question 7

Compounding process

Answer 7

the process of accumulating interest on an investment over time to earn more interest

Question 8

Simple interest

Answer 8

earned only on the original principal

Question 9

interest on interest

Answer 9

earned on reinvestment of previous interest payments

Question 10

Total interest (compound)

Answer 10

interest earned on principal (simple) and interest on interest

Question 11

Fv equation

Answer 11

FV=PV+TI=PV+SI+IOI

Question 12

FL rule 1

Answer 12

Know your financial statements

Question 13

FL rule 2

Answer 13

Take advantage of the power of the compounding process by saving and investing

Question 14

FL rule 3

Answer 14

Saving and investing are two different processes

Question 15

Compounding frequency

Answer 15

refers to the frequency with which interest is added to the principal

Question 16

Discrete compounding

Answer 16

interest is added to the account a discrete number of times per year, compounding occurs times per year

Question 17

Continuous compounding

Answer 17

occurs continuously, that is, an infinite number of times per year, where the base of the natural logarithmic unction is

Question 18

Present value

Answer 18

the value in todays dollars of a sum of money to be received in the future or the current value of a future payment ( inverse compounding)

Question 19

Discounting process

Answer 19

Calculating the present value of a future sum of money, reverse of the compounding process (aka discounted cash flow analysis DCF)

Question 20

Discount rate

Answer 20

the rate used to calculate the present value of future cash flows

Question 21

PV interest factor

Answer 21

the present value of one dollar to be received periods later when the discount rate is

Question 22

Discounting frequency

Answer 22

refers to the frequency with which (number of discounting periods in a year) a future cash flow is discounted to find its present value

Question 23

Discrete compounding

Answer 23

interest is added to the account a discrete number of times, times, per year., compounding occurs times per years

Question 24

Effective annual rate (EAR)

Answer 24

the rate effectively earned on an investment, after accounting for the effect of compounding in a given time period

Question 25

The APR assumes that....

Answer 25

the number of compounding periods in a year is 1