Question 1

The present value factor (PVF)and the future value factor (FVF)are related:

Accepted Answer

The present value factor and the future value factor are reciprocals of each other. This means that if the present value factor is multiplied by the future value factor, the result will always be 1. Therefore, they are inversely proportional to each other.

Question 2

If an investor is indifferent between $1.00 today and $1.33 in three years:

Accepted Answer

All options are correct. A) and B) are two ways of stating the same fact, from the perspective of present value and future value respectively. C) is implied because for an investor to be indifferent, the future amount must be greater than the present amount, indicating a positive interest rate.

Question 3

Opportunity cost is the:

Accepted Answer

Opportunity cost is the benefit that would have been available from the next best use of money.

Question 4

If an investor prefers the present value of an investment to its future value:

Accepted Answer

This is because the present value of an investment is influenced by the interest rate. If the investor prefers the present value over the future value, it means that they value the money now more than they would value it in the future. This suggests that the interest rate used to discount future cash flows was too low, resulting in a present value that is lower than the investor's valuation of the investment. Hence, they would prefer present cash flows over future cash flows. Therefore, the investor has selected an interest rate that is too low.

Question 5

Holding all other variables constant, an increase in the interest rate will cause ____ to decrease.

Accepted Answer

An increase in the interest rate will decrease present values because it means that future cash flows are worth less in today’s dollars.

Question 6

The principle behind time value of money is based on the fact that:

Accepted Answer

The principle of time value of money is based on the idea that a specific amount of money is worth more today than the same amount in the future due to its potential earning capacity. This core principle is reflected in both choices A and C, which are essentially stating the same concept from different perspectives.

Question 7

The payment or receipt of equal amounts, at the end of a series of equal periods, for a specified amount of time is called a(n):

Accepted Answer

The definition given perfectly matches the definition of an ordinary annuity. An annuity due is similar, but payments are made at the beginning of each period rather than at the end. A perpetuity is a series of equal payments that continues forever. Simple interest is not related to the payment or receipt of equal amounts at a series of equal periods.

Question 8

The present value of an annuity:

Accepted Answer

The answer of The present value of an annuity:
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Question 9

Finding the discounted value of $1,000 to be received at the end of each of the next five years requires calculating the:

Accepted Answer

To find the discounted value of $1,000 to be received at the end of each of the next five years, we need to calculate the present value of an annuity. This involves using a present value formula that takes into account the time value of money (i.e. the fact that money is worth more in the present than in the future due to inflation, interest rates, etc.). Therefore, the correct choice is C, which stands for present value of an annuity.

Question 10

The present value of a future amount is:

Accepted Answer

All three options are correct statements about the present value of a future amount. Option A explains that the present value is the amount that needs to be deposited today to grow into the future amount. Option B defines present value as the discounted value of the future amount, which means the future amount is reduced by the interest rate or discount rate. Option C correctly states that the present value is always smaller than the future amount, assuming a positive interest rate as money today is worth more than the same amount in the future.

Question 11

If the present value of a given sum is equal to its future value, then:

Accepted Answer

If the present value is equal to the future value, then the discount rate must be zero because there is no discounting or compounding factor involved. This assumes that there is no inflation or any other factors that would affect the value of the money over time.

Question 12

The process of finding present values is frequently called:

Accepted Answer

The process of finding present values involves discounting future cash flows back to their present value. Therefore, discounting is the most appropriate choice. Annualizing refers to converting a rate or value to an annual basis, compounding involves calculating the future value of an investment, and leasing refers to renting an asset for a period of time.

Question 13

Effective annual rates decrease as ____ decrease:

Accepted Answer

The effective annual rate (EAR) decreases as the annual percentage rate (APR), number of compounding periods, and quoted rates decrease because all these factors influence the amount of interest accumulated over a year, with fewer compounding periods or lower rates leading to lower effective annual rates.

Question 14

Which of the following statements about time lines is false?

Accepted Answer

Time is typically portrayed along a horizontal line, not a vertical line.

Question 15

If the interest rate is 0%:

Accepted Answer

When the interest rate is 0%, the present value of future amounts is equal to the sum of those amounts. This is because there is no discounting of future amounts, so they are worth their full face value in the present. Option A is incorrect because future amounts still have some value in the present, even if the interest rate is 0%. Option B is incorrect because while the present value of future amounts may be higher at a 0% interest rate, it is not infinite. Option D is incorrect because the future value of an investment may be equal to or greater than the sum of its cash flows, depending on the interest rate and other factors.

Question 16

Which of the following would increase the future value of an amount?

Accepted Answer

All of the factors listed - an increase in the interest rate, an increase in the amount, and an increase in the time until the future value is to be received - would increase the future value of an amount. Higher interest rates lead to more interest earned, a larger initial amount results in a larger base to apply the interest rate to, and a longer time period allows for more interest compounding periods.

Question 17

Holding all other variables constant, an increase in the ____ will increase the future value of an annuity.

Accepted Answer

An increase in the annuity payment, rate of interest, or number of periods will all increase the future value of an annuity, as each factor directly contributes to the growth of the annuity's value over time.

Question 18

The present value of the cash flows expected to come from owning a share of stock:

Accepted Answer

The present value of the cash flows expected from owning a share of stock represents the true value of the stock. As such, an investor should be willing to pay a maximum price equal to the present value of those cash flows, meaning that option A is correct. Option B is incorrect because it suggests that an investor should be willing to pay less than the true value, while option C is incorrect because the present value of cash flows is directly related to the price an investor should pay for the stock.

Question 19

You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would increase the present value of your cash flows?

Accepted Answer

Assuming a longer stream of cash flows of the same amount (A) would increase the present value because you're adding more cash flows to be discounted back to the present. Decreasing the discount rate (C) increases the present value because it reduces the rate at which future cash flows are discounted, making them more valuable in today's terms.

Question 20

The higher the rate of interest:

Accepted Answer

The higher the rate of interest, the smaller the present value of a future sum of money, because a higher discount rate is used to calculate present value, reducing its amount.

Quiz 6: Time Value of Money

The present value factor (PVF) and the future value factor (FVF) are related: