Question 1

Ordinary annuity investments provide multiple receipts of an unequal amount at fixed year-end intervals over the investment's duration.

Accepted Answer

An ordinary annuity provides multiple receipts of the same fixed amount at fixed year-end intervals over the investment's duration. The amounts are typically equal and paid out annually, quarterly, or monthly.

Question 2

Most business decision makers solve present-value problems with Excel because the present-value tables are limited to the interest rates in the columns and the number of periods in the rows.

Accepted Answer

Present-value tables are limited in the sense that they only provide values for a fixed set of interest rates and periods. This means that businesses often turn to Excel for more flexibility in solving present-value problems.

Question 3

The interest paid on a bond is NOT an annuity because it occurs periodically.

Accepted Answer

An annuity is a series of equal payments or receipts that occur at regular intervals, typically monthly, quarterly, or annually, over a specified period. The interest paid on a bond is a fixed periodic payment, but it does not necessarily occur at equal intervals, so it does not qualify as an annuity.

Question 4

The present value of a bond-its market price-is the present value of the future principal amount at maturity plus the present value of the future stated interest payments.

Accepted Answer

The statement accurately describes how the present value of a bond is calculated, so it is true.

Question 5

The term future value means the sum of money that an investment will be "worth" at a specified time in the future,assuming a certain interest rate.

Accepted Answer

The definition of future value is correct.

Question 6

The difference between the future value of an investment and the original investment is the amount of interest revenue that will be earned.

Accepted Answer

This statement is true. The future value of an investment includes both the original investment amount and the interest earned on that amount over time. The difference between the future value and the original investment is the amount of interest revenue that has been earned.

Question 7

Interest,the cost of using money,is recorded as interest revenue by the borrower.

Accepted Answer

Interest revenue is recorded by the lender, not the borrower. The borrower would record interest expense.

Question 8

When the market interest rate is equal to the face interest rate on bonds,the present value of the bonds will be less than the bond's face value at the date of sale of the bonds.

Accepted Answer

When the market interest rate is equal to the face interest rate on bonds, the present value of the bonds will be equal to the bond's face value at the date of sale of the bonds.

Question 9

The process of determining the present value of a sum of money is called discounting because the present value of a sum of money is more than the future value of a sum of money.

Accepted Answer

The process of determining the present value of a sum of money is called discounting because the present value of a sum of money is less than the future value of a sum of money.

Question 10

Compound interest is only the interest you earn on your principal amount.

Accepted Answer

Compound interest is the interest earned not only on the principal amount, but also on the accumulated interest of previous periods.

Question 11

The present value of a single amount in the future can be determined using a present value of $1 table.

Accepted Answer

This is true. A present value of $1 table is a tool used to determine the present value of a single amount to be received in the future. It helps to calculate how much would need to be invested now at a certain interest rate in order to have a certain amount in the future.

Question 12

The term time value of money refers to the fact that money earns interest over time.

Accepted Answer

The time value of money is the concept that states that money has a greater value today than it will in the future due to its potential earning capacity over time through the application of interest rates or investment returns.

Question 13

Interest is the cost of using money.

Accepted Answer

Interest is the amount charged by a lender to a borrower for the use of money or an asset. It is basically the cost of borrowing money. So, the statement "Interest is the cost of using money" is true.

Question 14

Whether making investments or borrowing money,we don't need to recognize the interest
we receive or pay.

Accepted Answer

Interest is a financial cost or benefit that should be recognized and accounted for in financial statements. The interest received or paid can have a significant impact on the profitability and financial position of an entity. Therefore, it is essential to recognize interest in financial reporting.

Question 15

An ordinary annuity is an investment that provides multiple receipts of an equal amount at fixed year-end intervals over the investment's duration.

Accepted Answer

An ordinary annuity is indeed an investment that provides multiple receipts of an equal amount at fixed year-end intervals over the investment's duration. This is different from an annuity due, which begins payments at the beginning of each period instead of at the end.

Question 16

The time value of money plays a key role in measuring the value of certain long-term investments as well as long-term debt.

Accepted Answer

The time value of money takes into consideration the concept that money today is worth more than the same amount of money in the future due to its earning potential through interest and other investments. This concept is important in analyzing the value of long-term investments and debt.

Question 17

Most businesses ignore compound interest when calculating interest on debt or investments.

Accepted Answer

Most businesses carefully consider compound interest when calculating interest on debt or investments because it significantly affects the total amount of interest paid or earned over time.

Question 18

The term present value means today's value of a future payment or a series of future payments,assuming that those payments include interest at the current market rate.

Accepted Answer

Present value refers to the value of a future payment or a series of future payments if they were paid today, including any interest that would be earned at the current market rate.

Question 19

All of the following are necessary to compute the future value of a single amount EXCEPT the:
A)interest rate.
B)length of time between investment and future payment or receipt.
C)amount of initial payment or receipt.
D)maturity value.

Accepted Answer

The maturity value is actually what you're trying to find when computing the future value of a single amount, not an input into the calculation. The interest rate, length of time, and amount of initial payment are the necessary inputs to compute the future value.

Question 20

The principal,when investing in a bond,is a single amount to be received by the investor and paid by the debtor at maturity.

Accepted Answer

The principal is the amount borrowed by the debtor and to be repaid to the investor at the maturity of the bond. Therefore, the principal is a single amount to be received by the investor.

Quiz 14: Time Value of Money