# Finance CH 4

 Which one of the following is a correct statement, all else held constant? The future value is directly related to the interest rate. Martha is investing \$5 today at 6 percent interest so she can have \$10 later. The \$10 is referred to as the: Future value The relationship between the present value and the number of periods is best described as: Inverse Lisa has \$1,000 in cash today. Which one of the following investment options is most apt to double her money? 8 percent interest for 9 years Sam wants to invest \$5,000 for 5 years. Which one of the following rates will provide him with the largest future value? 7 percent interest, compounded annually Jamie earned \$180 in interest on her savings account last year. She has decided to leave the \$180 in her account so that she can earn interest on the \$180 this year. The interest Jamie earns this year on this \$180 is referred to as: interest on interest. Computing the present value of a future cash flow to determine what that cash flow is worth today is called: discounted cash flow valuation. Given an interest rate of zero percent, the future value of a lump sum invested today will always: remain constant, regardless of the investment time period. Todd will be receiving a \$10,000 bonus one year from now. The process of determining how much that bonus is worth today is called: Discounting The present value of a lump sum future amount: increases as the interest rate decreases. Jenny needs to borrow \$16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny? 8 percent simple interest Which of the following will increase the future value of a lump sum investment?I. Decreasing the interest rateII. Increasing the interest rateIII. Increasing the time periodIV. Decreasing the amount of the lump sum investment II and III only Which one of the following is the correct formula for the future value of \$500 invested today at 7 percent interest for 8 years? FV = \$500 (1 + 0.07)8 Terry invested \$2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested? Terry could have the same future value and invest less than \$2,000 initially if he could earn more than 6.5 percent interest. Today, Courtney wants to invest less than \$5,000 with the goal of receiving \$5,000 back some time in the future. Which one of the following statements is correct? The period of time she has to wait decreases as the amount she invests today increases. Centre Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have \$1,500 in your account 2 years from today. The amount you must deposit today: will be greater if you invest with Country Bank. Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value.I. Increase in the interest rateII. Decrease in the lump sum amountIII. Increase in the investment time periodIV. Decrease in the investment time period II and IV only Tom earned \$120 in interest on his savings account last year. Tom has decided to leave the \$120 in his account so that he can earn interest on the \$120 this year. This process of earning interest on prior interest earnings is called: Compunding Lester had \$6,270 in his savings account at the beginning of this year. This amount includes both the \$6,000 he originally invested at the beginning of last year plus the \$270 he earned in interest last year. This year, Lester earned a total of \$282.15 in interest even though the interest rate on the account remained constant. This \$282.15 is best described as: Compound Interest Sara is investing \$1,000 today. Which one of the following will increase the future value of that amount? Increasing the interest rate Jeff deposits \$3,000 into an account which pays 2.5 percent interest, compounded annually. At the same time, Kurt deposits \$3,000 into an account paying 5 percent interest, compounded annually. At the end of three years: Kurt will have a larger account value than Jeff will. Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested. Decrease in the interest rate The interest rate used to compute the present value of a future cash flow is called the: Discount rate By definition, a bank that pays simple interest on a savings account will pay interest: Only on the principal amount originally invested Sue needs to invest \$3,626 today in order for her savings account to be worth \$5,000 six years from now. Which one of the following terms refers to the \$3,626? Present Value FV = PV (1+r)^t
Share