Chapter 09 Test Bank – Static Key
1. An amount of money to be received in the future is worth less today than the stated present value
amount.
2. Discounting refers to devaluing the item from the higher future value amount to the present value amount
through the consideration of interest.
3. Compounding refers to the growth process that turns $1 today into a greater value several periods in the
future.
4. The interest factor for the future value of a single sum is equal to (1 + n)i.
5. The time value of money is not a useful concept in determining the value of a bond or in capital
investment decisions.
6. If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could
be determined by reference to a “future value of $1” table.
7. The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions
covering multiple periods of time.
8. The future value is the same concept as the way money grows in a bank account.
9. Time value of money considers many changes to the value of the dollar such as interest, inflation,
deflation, etc.
10. A major disadvantage to time value of money is that is only considers one item that changes the value
of the dollar such as interest.
11. Cash flow decisions that ignore time value of money will probably not be as accurate as those
decisions that do consider time value of money.
12. The present value of a positive future inflow can become negative as discount rates become higher and
higher.
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13. The interest factor for a future value (FVIF) is equal to (1 + i)n
14. The formula PV = FV(1 + n)i will determine the present value of $1.
15. To determine the current worth of four annual payments of $1,000 at 4% annual interest, one would
refer to a time value of money table for the present value of $1.
16. As the interest rate increases, the interest factor (IF) for the present value of $1 increases.
17. The interest factor for the present value of a single amount is the reciprocal of the future value interest
factor.
18. The interest factor for the present value of a single sum is equal to (1 + i)/i..
19. Higher interest rates reduce the present value amount.
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20. In determining the future value of an ordinary annuity, the final payment is not compounded at all.
21. The future value of an ordinary annuity assumes that the payments are received at the end of the year
and that the last payment does not compound.
22. Time value of money can be calculated in a few different ways such as time value of money tables,
calculator, and/or equation, which all come up with a very similar answer.
23. The future value of an annuity table provides a “shortcut” for calculating the future value of a steady
stream of payments, denoted as A. The same value can be calculated directly from the following equation:
24. The present value of an annuity table provides a “shortcut” for calculating the future value of a steady
stream of payments, denoted as A. The same value can be calculated directly from the following equation:
25. The amount of annual payments necessary to accumulate a desired future total can be found by
reference to the present value of an annuity table.
26. If an individual’s cost of capital were 6%, the person would prefer to receive $110 at the end of one
year rather than $100 right now.
27. In evaluating capital investment projects, current outlays must be judged against the current value of
future benefits.
28. The farther into the future any given amount is received, the larger its present value.
29. The interest factor for the future value of an annuity is simply the sum of the interest factors for the
future value using the same number of periods.
30. An annuity is a series of consecutive payments of equal amount.
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31. Using semi-annual compounding rather than annual compounding will increase the future value of an
annuity.
32. Compounding more than once a year (semi-annually, quarterly, or monthly) will increase the interest
rate and number of periods used in the calculations.
33. When the inflation rate is zero, the present value of $1 is identical to the future value of $1.
34. The amount of annual payments necessary to repay a mortgage loan can be found by reference to the
present value of an annuity table.
35. In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of
principal increases over the life of the mortgage.
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36. The time value of money concept becomes less critical as the prime rate of lending increases.
37. Discounted at 6%, $1,000 received three years from now is worth less than $800 received today.
38. Discounted at 10%, $1,000 received at the end of each year for three years is worth less than $2,700
received today.
39. When adjusting for semi-annual compounding of an annuity, the adjustments include multiplying the
periods and annuity payment amount by 2.
40. Calculation of the yield of an investment provides the total return over multiple years.
41. To calculate “Future or Present Values of an “Annuity Due,” we must assume that payments happen
twice as often.
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42. Under what conditions must a distinction be made between money to be received today and money to
be received in the future?
43. As the compounding rate becomes lower and lower, the future value of inflows approaches
44. Time value of money considers which of the following item(s) that change the value of money?
45. If you invest $10,000 today at 10% interest, how much will you have in 10 years?
46. In determining the future value of a single amount, one must consider
47. The concept of time value of money is important to financial decision making because
48. As the discount rate becomes higher and higher, the present value of inflows approaches
49. How much must you invest today at 8% interest in order to see your investment grow to $8,000 in 10
years?
50. An annuity may best be defined as
51. You are to receive $12,000 at the end of five years. The available yield on investments is 6%. Which
table would you use to determine the value of that sum today?
52. You are to receive $12,000 at the end of each of five years. The available yield on investments is 6%.
Which table would you use to determine the value of that sum today?
53. As the interest rate increases, the present value
54. As the time period until receipt increases, the present value
55. A company wants to find the yield on an investment that requires a certain amount today in which then
returns a single amount some time in the future. Which time value of money table would the company use?
56. If a father and mother set aside a certain amount each year for their daughter ’s college fund, which
table would be used to determine the amount necessary to be put away each year in order to reach a
certain goal once the daughter attends college?
57. Shah sets aside $2,000 each year for five years. After five years, he then withdraws the funds on an
equal annual basis for the next four years. If Shah wishes to determine the amount of the annuity to be
withdrawn in years 6 through 9, he should use the following two tables in this order:
58. To save for her newborn son ’s college education, Lea Wilson will invest $1,000 at the end of each year
for the next 20 years. The interest rate is 10%. What is the future value?
59. If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would
you use to find the ending balance in your account?
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60. If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, how much would
you have as an ending balance in your account?
61. The interest factor (IF) for the future value of an ordinary annuity is 4.641 at 10% for four years. If we
wish to accumulate $8,000 by the end of four years, how much should the annual payments be?
62. Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the
next 5 years starting one year from now and expects to earn a 6% annual rate of return. How much money
will his daughter have when she starts college?
63. Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of
8% compounded for four years. How much total return will his investment earn during this time period?