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MGFB10H3 Study Guide - Midterm Guide: Nominal Yield, Investment, Cash Flow

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sangrialouse770
22 Oct 2013
School
UTSC
Department
Finance
Course
MGFB10H3
Professor
Esther Eiling

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Document Summary

Tvm is a fundamental concept in finance: money can be invested to earn interest or returns, therefore the value changes over time. You are entitled to some reward when you invest your money because you are selling the ability to use that money to someone else. It is also assumed that any cash can be invested in some way because investing is as easy as putting the money in a bank. Future value (fv): the lump-sum value of an amount of cash or a series of cash flows at some time in the future. Present value (pv): the lump-sum value of an amount of cash or a series of cash flows as of now. Simple interest: when interest is not re-invested to the original principal to generate extra interest on top of interest earned. Compound interest: when all interest is re-invested to the original principal so that it helps generate extra interest in the future.

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Related Questions

Time value of money is an important aspect of money management.

Why is it important to know what interest rates, terms of an agreement, and present value are in relationship to future value when making financial decisions?

Theoretically, if you won a $25 million lottery, would you take the lump sum prize of $17 million immediately or the annual annuity of $1 million dollars for the next 25 years? Base you response on what you know about present value and future value as well as include your personal opinion.

QUESTION 1 The time value of money refers to the issue of: A. what the value of the stream of future cash flows is today. B. why a dollar received tomorrow is worth more than a dollar received today. C. what the time required to double an amount of money. D. why people prefer to consume things at some time in the future rather than today.

QUESTION 2 The process of converting an amount given at the present time into a future value is called: A. annualizing. B. discounting. C. compounding. D. capital budgeting. 2 points

QUESTION 3 Juan Vinson is planning to buy a house in five years. He is looking to invest $25,000 today in an index mutual fund that will provide him a return of 12 percent annually. How much will he have at the end of five years? (Round to the nearest dollar.) A. $45,000 B. $28,000 C. $44,059 D. $28,530 2 points

QUESTION 4 Which of the following statements is true with respect to the present value of a future amount? A. The higher the discount rate, the higher the present value of a single sum for a given time period. B. The relation between present value and time is exponential. C. The greater the time period, the higher the present value of a single sum for a given interest rate. D. The lower the discount rate, the lower the present value of a single sum for a given time period. 2 points

QUESTION 5 Which of the following statements is true of the rule of 72? A. It can be used to determine the amount of time it takes to double an investment. B. It is fairly accurate for interest rates between 25 and 50 percent. C. It states that the time to double your money (TDM) approximately equals 72/i, where i represents the years it takes to double your investment. D. It can be used to estimate approximate compound interest earned for a period of 72 days. 2 points

QUESTION 6 The present value of future cash flows are computed by multiplying future value with the: A. discounting factor. B. compound factor. C. interest rate. D. number of periods. 2 points

QUESTION 7 The present value of multiple cash flows is: A. greater than the sum of the cash flows. B. equal to the sum of all the cash flows. C. less than the sum of the cash flows. D. higher or lower than the cash flows depending on the interest rate. 2 points

QUESTION 8 Cash flows associated with annuities are considered to be: A. an uneven cash flow stream. B. a constant cash flow stream. C. a mix of constant and uneven cash flow streams. D. a cash flow stream with decreasing trend. 2 points

QUESTION 9 The annuity transformation method is used to transform: A. a present value annuity to a future value annuity. B. a present value annuity to an annuity due. C. an ordinary annuity to an annuity due. D. a perpetuity to an annuity. 2 points

QUESTION 10 The true cost of borrowing is the: A. annual percentage rate. B. effective annual rate. C. quoted interest rate. D. periodic rate.

question 1:Hazel needs $7000 for her first year tuition at Lake head University when she graduates in 2 years. She plans to make deposits into an account that earns 6.5% per year, compounded bi-weekly. How much should she deposit bi-weekly to meet her target amount.

question2: Edosa borrowed some money at 9.6%/a compounded monthly. Two years later, he paid $2000 toward the principal and the interest. After another, year, he paid another $2000. After another three years, he paid the remainder of the principal and the interest, which totaled $3000. How much money did he original borrow?

question 3: Bernard opens a savings account and invested $3196.88. How many years would Bernard need to keep his money in the savings account if the interest rate is 5.75%/a, compounded semi-annually, if he wants to make $5000?

question4: Filmon is putting his summer earnings into an annuity from which he can draw living expenses while he is at university. He will need to withdraw $900 per month for 8 months. Interest is earned at a rate of 6% compounded monthly. How much does Filmon need to invest at the beginning of the school year to finance the annuity.