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35 Cards in this Set
- Front
- Back
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Time Value of Money
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People prefer to consume things today rather than at some time in the future-A dollar today is worth more than a dollar tomorrow
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Future Value
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what an investment will be worth after earning interest for one or more time periods
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Principal
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amount of money on which interest is paid
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Simple interest
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amount of interest paid. The interest earned each period is paid only on original amount
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Interest on Interest
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interest earned on the reinvestment of previous interest payments
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Compounding
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process by which interest earned on an investment is reinvested so that in future periods, interest earned on interest and principal
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Compound Interest
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consists of both simple interest and interest on interest
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Growth in Future Value
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it is exponential. Growth of invested funds is accelerated by compounding. Higher interest rates accumulate faster.
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The longer the investment period...
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the greater the proportion of total earnings from interest earned on interest.
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Difference in compounding times-Daily vs. continuous...etc.
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The more frequently interest payments are compounded, the larger the future value of $1 for a given time.
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Discounting
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process by which the present value of future cash flows is obtained
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Discount Rate
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the interest rate used in the discounting process to find the present value of future cash flows
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Present Value
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the current value of future cash flows discounted at the appropriate discount rate
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Future Value calculations vs. Present Value calculations
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FV involve compounding an amount to future, PV involve discounting an amount to the present
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Present Value Factors
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The higher the discount rate, the lower the present value for $1. If interest rates are zero, the PV of $1 is $1
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Rule of 72
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Used to determine amount of time it takes to double an investment. TDM(time to double investment)= 72/i
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Which one of the following statements is NOT true?
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A dollar received today is worth less than a dollar received tomorrow
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Future value measures
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what one or more cash flows are worth at the end of a specified period
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The process of converting an amount given at the present time into a future value is called
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compounding
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The process of converting future cash flows to what its present value is
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discounting
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Using higher interest rates will
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increase the future value of any investment
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Ning Gao is planning to buy a house in five years. She is looking to invest $25,000 today in an index mutual fund that will provide her a return of 12 percent annually. How much will she have at the end of five years?
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$44,059
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Brittany Willis is looking to invest for retirement, which she hopes will be in 20 years. She is looking to invest $22,500 today in U.S. Treasury bonds that will earn interest at 6.25 percent annually. How much will she have at the end of 20 years? (Round to the nearest dollar.)
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$75,642
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Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target?
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$16,670
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Derek's friend, Jackson, is asking to borrow today with a promise to repay $7,418.87 in four years. If Derek could earn 5.45 percent annually on the any investment he makes today, how much would he be willing to lend Jackson today?
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$6,000
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You need to have $15,000 in five years to payoff a home equity loan. You can invest in an account that pays 5.75 percent compounded quarterly. How much will you have to invest today to attain your target in five years?
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$11,275
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Marcie Witter is saving for her daughter's college education. She wants to have $50,000 available when her daughter graduates from high school in four years. If the investment she is considering will pay 8.25 percent compounded monthly, how much will she have to invest today to reach her target?
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$35,987
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Your tuition for the coming year is due today. You borrow $8,000 from your uncle and agree to repay in the three years an amount of $9,250. What is the interest rate on this loan? Round to the nearest percent
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5%
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Rachael Steele wants to borrow $6,000 for a period of four years. She has two choices. Her bank is offering to lend her the amount at 7.25 percent compounded annually. She can also borrow from her firm and will have to repay a total of $8,130.93 at the end of four years. Should Rachael go with her bank or the firm, and what is the interest rate if she borrows from her firm?
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Bank: 8%
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Pedro Martinez wants to invest $25,000 in a spa that his sister is starting. He will triple his investment in six years. What is the rate of return that Pedro is being promised?
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20%
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Trojan Traps manufactures an innovative mouse trap. Sales this year are $325,000. The company expects its sales to go up to $500,000 in five years. What is the expected growth rate in sales for this firm?
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9%
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Franklin Foods announced that its sales were $1,233,450 this year. The company forecasts a growth rate of 16 percent for the foreseeable future. How long will it take the firm to produce earnings of $3 million?
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6 years
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Ryan Holmes wants to deposit $4,500 in a bank account that pays 8.25 percent annually. How many years will it take for his investment to grow to $10,000?
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10 years
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Dr. Kilic currently has $300,000 in a stock fund. The fund pays a 10% annual return. If he never makes another deposit into the account, how long will it take for the account to grow to $1 million?
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12.63 years
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You just received a job offer from EG. You're excited because your dad started his career out of college with EG. If the salary offered to you is $30,000 annually, what would have been the salary offered to your dad 25 years ago if the annual inflation rate was 3.8%
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$11,808.30
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