# Finance2

 Which of the following is not true when developing a time line? Cash outflows are designated with a positive number People borrow money because they expect… their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on them A payment that your bank credits to your account in one year is known as a: Future Value How are future values affected by changes in interest rates? The higher the interest rate, the largger the future value will be. How are present values affected by changes in interest rates? The lower the interest rate, the larger the present value will be. We call the process of earning interest on both the original deposit and on the earlier interest payments: compounding Interest earned on the original deposit is called: simple interest The process of figuring out how much an amount that you expect to receive in the future is worth today is called: discounting The interest rate, i, which we use to calculate present value, is often referred to as the: discount rate Who is credited with popularizing the Rule of 72? Albert Einstein The Rule of 72 is a simple math approximation for: The number of years required to double an investment. With regard to money deposited in a bank, future values are: larger than present values Earnings just one percent more in interest rate every year results in much higher future values over time, and: time has the same effect on future values over time A dollar paid (or received) in the future is: not worth as much as a dollar today Because we compute interest rates using beginning-period value of an investment, investments that feature gains and losses may become asymmetric between gains and losses When computing the rate of return from selling an investment, the number of years between the present and future cash flows is an important factor in determining the annual rate earned When calculating the number of years needed to grow an investment to a specific amount of money: the higher the interest rate the shorter the time period needed to achieve the growth Moving cash flows from one point in time to another requires us to use both present and future value equations All TVM equations that you will encounter only require figuring out what is unknown in the situation and: solving for that one unknown factor The longer the money can earn interest, the greater the compounding effect When saving for future expenditures, we add the ______________ of contributions over time to see what the total will be worth at some point in time> Future value When moving from the left to the right of a time line, we are using: compound interest to calculate future values Level sets of frequent, consistent cash flows are called annuities The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect? interest rate for compounding In order to discount multiple as flows to the present, one would use the appropriate discount rate Your credit rating and current economic conditions will determine the interest rate that a lender will offer When interest rates are lower, borrowers can borrow more money The present value of annuity payments made far into the future are worth very little today While the future value will increase as computing frequency increases, the size of each increase in the future value: diminishes as compounding frequencies increase Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value grows The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a more accurate measure of the interest rate paid for monthly compounding. You can more easily evaluate investment opportunities for both businesses and individual applications if you can compute the implied rate of return in a series of cash flows People refinance their home mortgages when rates fall Loan amortization schedules show both the principal balance and interest paid per year When you take out a loan for a car or home mortgage, you will usually find monthly payments at today’s interest rates more relevant for your budget When you get you credit card bill, it will offer a minimum payment, which usually only pays the accrued interest and a small amount of principal When you get your credit card bill, if you make a payment larger than the minimum payment you will reduce the payoff time
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