TVM

The future or present value of an amount depends upon:

• the interest rate.

• the number of periods.

• number of times per year compounding occurs.

• all of the above.

In which case will an investor receive the most interest:

• 10%, compounded annually.

• 10%, compounded monthly.

• 10%, compounded continuously.

• 10%, compounded daily.

Annuities:

• are a stream of equal payments at unequal time intervals.

• are a stream of equal payments at equal time intervals.

• are a stream of equal payments that continue forever.

• none of the above.

The basic rule of the time value of money is:

• investments will always be worth more tomorrow than they are today

• it’s always wiser to save a dollar for tomorrow than to spend it today

• a dollar in hand today is worth more than a dollar promised at some time in the future

• all of the above express an aspect of the basic rule of time value of money

When comparing an annuity due with an ordinary annuity with the same payment and duration, the annuity due will always have a _______ present value and will always have a _______ future value.

• higher; higher

• higher; lower

• lower, higher

• lower, lower

A perpetuity:

• has infinite value because the payments continue forever

• can be valued (PV) if the payment amount and interest rate are known

• don’t exist in the financial world

• none of the above are true

The present value of a future amount will be higher with a higher interest rate.

• True

• False

Lenders prefer less frequent compounding; borrowers prefer more frequent compounding.

• True

• False

A perpetuity may be thought of as an annuity that continues forever.

• True

• False

The future value of a perpetuity makes no sense because the payments never end.

• True

• False