Part 2. Time Value of Money and Related Concepts

Question 1

Why does someone want more than $1,000 to wait for the money?
The passage of xxx, during which that person has no use of the money.
The xxx of not receiving the money in a year.
xxx, or the erosion in the purchasing power of the money.

Answer 1

time
risk
Inflation

Question 2

What does the Cash Flow Graph tell us that the Cash Flow Table also
tells us?

Answer 2

1. How much money was lent.
2. How much was paid back.

Question 3

What does the Cash Flow Graph tell us that the Cash Flow table doesn’t?

Answer 3

1. The direction that the money flows.
2. How much time elapses between loan and payback.

Question 4

2.7 Problem:
You invest $1,000 at 6% for one year.
1. If it compounds annually, how much will your investment be worth
after one year?
2. What kind of interest rate is 6%—periodic, nominal, and/or effective annual?
3. If the investment compounds quarterly and 6% is the nominal rate, what is the periodic rate and what will your investment be worth after one year?
4. What is the effective annual rate for quarterly compounding?

Answer 4

1. 1,060.00
2. All three
3. Since the nominal rate equals the periodic rate multiplied by z, the number of compounding periods per year, the periodic rate is the nominal rate divided by z.
   0.06 ÷ 4 = 0.015, or 1.5% per quarter
   Answer: 1,061.36
   HP: 4n
   1.5 i
   1,000 CHS PV
   0 PMT
   FV ?
4. HP
   4n
   1.5 i
   1 CHS PV
   O PMT
   FV ?
   Answer: 1.06136
   When done this way, 1 must be subtracted from 1.06136 to get the interest; remember that the answer is shown not as a percent but as a decimal.

Question 5

Fill in the table for a $1,000 loan at 6% nominal interest.

Answer 5

Question 6

2.12 Problem
How much will $1,000 deposited in an account paying 6% per year
clients and others.
be worth in 25 years?

Answer 6

25n
6i
1,000 CHS PV
O PMT
? FV
Answer: 4,291.87