Question 1

The ________ Principle states that a dollar today is worth more than a dollar in the future.

Accepted Answer

The statement is referring to the concept of the Time Value of Money, which indicates that the value of money will change over time due to factors such as inflation and the potential return on investment. The other options are related to specific calculations or types of cash flows rather than the general principle being described.

Question 2

The current value in today's dollars of a future sum of money is called

Accepted Answer

The current value in today's dollars of a future sum of money is called present value.

Question 3

Compounding is when the interest you have already earned on an investment earns interest.

Accepted Answer

Compounding is when the interest earned on an investment is added to the principal amount, and then the new total amount earns interest. This results in exponential growth of the investment over time.

Question 4

Allowing the interest that you earn on an investment to stay in the investment and to earn interest on the interest you have already earned is called what?

Accepted Answer

The scenario described in the question is an example of compound interest, where the interest earned on the initial investment is reinvested to earn further interest. This allows the investment to grow exponentially over time, resulting in larger returns.

Question 5

An investment earning 12 percent interest per year should double in value in approximately four years.

Accepted Answer

Using the Rule of 72, which estimates the number of years required to double an investment at a given annual rate of return by dividing 72 by the interest rate, an investment earning 12 percent interest per year would double in approximately 6 years (72 divided by 12 equals 6).

Question 6

A one-time investment of $1,500 at a 10 percent annual rate of return yields $2,196 in two years.The $2,196 is known as the

Accepted Answer

The $2,196 is the amount that the initial investment of $1,500 has grown to after two years, so it is the future value.

Question 7

Your money grows faster as the compounding period becomes longer.

Accepted Answer

Your money grows faster with more frequent compounding periods because interest is calculated and added to the principal more often, leading to exponential growth.

Question 8

The dollar value of an investment at some future point in time is also known as

Accepted Answer

The dollar value of an investment at some future point in time is referred to as its future value. Present value refers to the current worth of a future cash flow, compounded annuity refers to a series of equal payments made at regular intervals, the time value of money refers to the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity, and calculated value is not a commonly used term in finance.

Question 9

The I/Y key on a financial calculator stores the information for the interest rate or the discount rate per period.

Accepted Answer

The I/Y key on a financial calculator stores the information for the interest rate or the discount rate per period.

Question 10

John Madrid put $1,000 into a mutual fund yielding an 18% annual rate of return.Using the Rule of 72,calculate approximately how long it will take for the investment to double in value.

Accepted Answer

The Rule of 72 is a simple way to estimate the number of years required to double the investment at a given annual rate of return. By dividing 72 by the annual rate of return (18% in this case), we get 72 / 18 = 4 years.

Question 11

Time Value of Money calculations can be made much easier through the use of a financial calculator.

Accepted Answer

Financial calculators are designed to perform time value of money calculations quickly and accurately, making them a valuable tool for individuals and businesses alike. They can help calculate present value, future value, annuities, and other important financial metrics. While it is possible to perform these calculations manually, using a financial calculator saves time and reduces the risk of errors or miscalculations.

Question 12

By the Rule of 72,what annual interest rate would be required to turn $100 into $200 in approximately six years?

Accepted Answer

The Rule of 72 is a simple way to estimate how long an investment will take to double at a fixed annual rate of interest. By dividing 72 by the number of years (6), you get an approximate interest rate of 12%.

Question 13

You currently have $11,167 in your savings account.What interest rate do you need to earn in order to have $20,000 in the account in 10 years?

Accepted Answer

To find the required interest rate, we can use the formula for compound interest: A = P(1 + r)^n, where A is the amount of money accumulated after n years, including interest, P is the principal amount (the initial amount of money), r is the annual interest rate (decimal), and n is the time the money is invested for in years. Rearranging the formula to solve for r gives us r = (A/P)^(1/n) - 1. Plugging in the given values: A = $20,000, P = $11,167, and n = 10 years, we can solve for r. This calculation shows that the interest rate needed is approximately 6%.

Question 14

If you set your calculator to the "end" mode your calculator will assume cash flows occur at the end of each time period.

Accepted Answer

"End" mode is commonly used in financial calculations, where cash flows are assumed to occur at the end of each period. In contrast, "begin" mode assumes cash flows occur at the beginning of each time period.

Question 15

You have just placed $500 in a bank account that earns an annual rate of return of 6%.How much will you have in that bank account after 6 years?

Accepted Answer

The future value of an investment is calculated using the formula FV = PV(1 + r)^n, where FV is the future value, PV is the present value or initial investment, r is the annual interest rate (as a decimal), and n is the number of years. Plugging in the given values: FV = $500(1 + 0.06)^6 ≈ $709.26.

Question 16

Suppose that you invested $100 in a bank account that earned an annual rate of return of 10%.How much would you have in that bank account at the end of 10 years?

Accepted Answer

The amount in the bank account at the end of 10 years can be calculated using the formula for compound interest: A = P(1 + r)^n, where A is the amount of money accumulated after n years, including interest, P is the principal amount (the initial amount of money), r is the annual interest rate (decimal), and n is the time the money is invested for in years. Here, P = $100, r = 10% or 0.10, and n = 10 years. Plugging these values into the formula gives A = 100(1 + 0.10)^10 = $259.37.

Question 17

Samantha Jee put $3,000 into a mutual fund yielding a 12 percent annual rate of return.Using the Rule of 72,calculate approximately how long it will take for the investment to double in value.

Accepted Answer

The Rule of 72 is a simple way to estimate the number of years required to double the investment at a given annual rate of return. By dividing 72 by the annual rate of return (12 percent in this case), we get 72 / 12 = 6 years.

Question 18

The present value of a financial asset is what you should be willing to pay today for that financial asset.

Accepted Answer

The present value measures the worth of a financial asset today, based on its expected future cash flows and a discount rate. It represents the maximum amount an investor should be willing to pay for that asset, given its expected return and the time value of money.

Question 19

This helpful investment rule-of-thumb tells you approximately how many years it takes for a sum of money to double in size.

Accepted Answer

The Rule of 72 is a quick and easy way to estimate how long it will take for an investment to double in value based on a given interest rate. To use this rule, you simply divide 72 by the interest rate. For example, if you have an investment with an interest rate of 6%, it will take approximately 12 years (72 divided by 6) for it to double in value. This rule is a helpful approximation and can be used to make quick investment decisions.

Question 20

As a future graduation present,you uncle has just placed $6,000 in a bank account that will earn an annual rate of return of 6%.How much will be in that account when you graduate in four years?

Accepted Answer

The future value of the investment can be calculated using the formula for compound interest: FV = P(1 + r)^n, where P is the principal amount ($6,000), r is the annual interest rate (0.06), and n is the number of years (4). Plugging in the values, FV = 6000(1 + 0.06)^4 = 6000(1.262477) = $7,574.86.

Quiz 3: Understanding and Appreciating the Time Value of Money

The ________ Principle states that a dollar today is worth more than a dollar in the future.

The current value in today's dollars of a future sum of money is called

Compounding is when the interest you have already earned on an investment earns interest.

Allowing the interest that you earn on an investment to stay in the investment and to earn interest on the interest you have already earned is called what?

An investment earning 12 percent interest per year should double in value in approximately four years.

A one-time investment of $1,500 at a 10 percent annual rate of return yields $2,196 in two years.The $2,196 is known as the

Your money grows faster as the compounding period becomes longer.

The dollar value of an investment at some future point in time is also known as

The I/Y key on a financial calculator stores the information for the interest rate or the discount rate per period.

John Madrid put $1,000 into a mutual fund yielding an 18% annual rate of return.Using the Rule of 72,calculate approximately how long it will take for the investment to double in value.

Time Value of Money calculations can be made much easier through the use of a financial calculator.

By the Rule of 72,what annual interest rate would be required to turn $100 into $200 in approximately six years?

You currently have $11,167 in your savings account.What interest rate do you need to earn in order to have $20,000 in the account in 10 years?

If you set your calculator to the "end" mode your calculator will assume cash flows occur at the end of each time period.

You have just placed $500 in a bank account that earns an annual rate of return of 6%.How much will you have in that bank account after 6 years?

Suppose that you invested $100 in a bank account that earned an annual rate of return of 10%.How much would you have in that bank account at the end of 10 years?

Samantha Jee put $3,000 into a mutual fund yielding a 12 percent annual rate of return.Using the Rule of 72,calculate approximately how long it will take for the investment to double in value.

The present value of a financial asset is what you should be willing to pay today for that financial asset.

This helpful investment rule-of-thumb tells you approximately how many years it takes for a sum of money to double in size.

As a future graduation present,you uncle has just placed $6,000 in a bank account that will earn an annual rate of return of 6%.How much will be in that account when you graduate in four years?