Time Value of Money

Time value of money indicates that

• A unit of money obtained today is worth less than a unit of money obtained in future

• A unit of money obtained today is worth more than a unit of money obtained in future

• There is no difference in the value of money obtained today and tomorrow

• None of the above

Select the false statement

• Annuity due is the series of equal cash flows that occur at the end of the period

• Ordinary annuity is the series of equal cash flows that occur at the end of the period

• Perpetuity is the annuity that lasts forever

• The reverse of compounding is discounting

Time value of money is important in finance because it’s analysis is used to: (Select all that apply)

• value the stocks, bonds and capital budgeting projects

• plan for retirements

• set up loan payment schedules

• make more informed decisions about an investor’s money

Finding the FV of cash flows is:

• Exponenting

• Compounding

• Discounting

• Incrementing

 What is perpetuity in finance?

• Annuity that last forever

• Debt that lasts forever

• Debts paid by perpetrators

• None of the above

Effective annual interest rate is the

• The annual rate of interest that ignores compounding effects

• The annual rate of interest actually being earned, accounting for compounding.

• Amount of interest charged each period

• None of the above

Relationship between annual nominal rate of interest and annual effective rate of interest, if frequency of compounding is greater than one:

•  Effective rate = Nominal rate

•  Effective rate = Nominal rate

• Effective rate > Nominal rate

• None of the above

What is the FV of $150 after 4 years under 8% quarterly compounding? 

• 150(1.08)^(4x4)

• 4 x (150(1.08)^4)

• 150(1.02)^4

• 150(1.02)^(4x4)