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1. Compound interest pays interest for each time period on the original investment plus the
accumulated interest.
2. When money is invested at compound interest, the growth rate is the interest rate.
3. For a given amount, the lower the discount rate, the less the present value.
4. Comparing the values of undiscounted cash flows is analogous to comparing apples to
oranges.
5. The present value of an annuity due equals the present value of an ordinary annuity times
the discount rate.
6. A perpetuity is a special form of an annuity.
7. An annuity factor represents the future value of $1 that is deposited today.
8. Accrued interest declines with each payment on an amortizing loan.
9. Converting an annuity to an annuity due decreases the present value.
10. In 2013, the U.S. inflation rate was below 2% and a few countries were even experiencing
deflation.
11. The term "constant dollars" refers to equal payments for amortizing a loan.
12. Nominal dollars refer to the amount of purchasing power.
13. The appropriate manner of adjusting for inflationary effects is to discount nominal cash
flows with real interest rates.
14. An effective annual rate must be greater than an annual percentage rate.
15. The more frequent the compounding, the higher the future value, other things equal.
16. An annual percentage rate (APR) is determined by annualizing the rate using compound
interest.
17. A dollar tomorrow is worth more than a dollar today.
18. To calculate present value, we discount the future value by some interest rate
r
, the
discount rate.
19. The discount factor is used to calculate the present value of $1 received in year
t
.
20. You should never compare cash flows occurring at different times without first discounting
them to a common date.
21. The Excel function for future value is FV (rate, nper, pmt, PV).
22. The Excel function for present value is PV (rate, nper, pmt, FV).
23. As long as the interest rate is positive, the future value will always be larger than the
present value given any period of time.
24. An annuity due must have a present value at least as large as an equivalent ordinary
annuity.
25. Any sequence of equally spaced, level cash flows is called an annuity. An annuity is also
known as a perpetuity.
26. A mortgage loan is an example of an amortizing loan. "Amortizing" means that part of the
monthly payment is used to pay interest on the loan and part is used to reduce the amount of the
loan.
27. What is the future value of $10,000 on deposit for 5 years at 6% simple interest?
28. Under which of the following conditions will a future value calculated with simple interest
exceed a future value calculated with compound interest at the same rate?
29. How much interest is earned in just the third year on a $1,000 deposit that earns 7%
interest compounded annually?
30. How much interest will be earned in the next year on an investment paying 12%
compounded annually if $100 was just credited to the account for interest?
31. The concept of compound interest refers to:
32. When an investment pays only simple interest, this means:
33. Assume the total expense for your current year in college equals $20,000. How much
would your parents have needed to invest 21 years ago in an account paying 8% compounded
annually to cover this amount?
34. How long must one wait (to the nearest year) for an initial investment of $1,000 to triple
in value if the investment earns 8% compounded annually?
35. How much will accumulate in an account with an initial deposit of $100, and which earns
10% interest compounded quarterly for 3 years?
36. How much must be deposited today in an account earning 6% annually to accumulate a
20% down payment to use in purchasing a car one year from now, assuming that the car's current
price is $20,000, and inflation will be 4%?
37. In calculating the present value of $1,000 to be received 5 years from today, the discount
factor has been calculated to be .7008. What is the apparent interest rate?
38. Given a set future value, which of the following will contribute to a
lower
present value?
39. Cash flows occurring in different periods should not be compared unless:
40. What will be the approximate population of the United States, if its current population of
300 million grows at a compound rate of 2% annually for 25 years?
