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Quiz

Chap005 Test Bank

65 Pages
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Department
Finance
Course Code
FIN 3715
Professor
All

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Chapter 05Introduction to Valuation The Time Value of MoneyChapter 05Introduction to Valuation The Time Value of MoneyMultiple Choice Questions 1 You are investing 100 today in a savings account at your local bank Which one of the following terms refers to the value of this investment one year from now A future valueB present valueC principal amountsD discounted valueE invested principal 2 Tracy invested 1000 five years ago and earns 4 percent interest on her investment By leaving her interest earnings in her account she increases the amount of interest she earns each year The way she is handling her interest income is referred to as which one of the following A simplifyingB compoundingC aggregationD accumulationE discounting 3 Steve invested 100 two years ago at 10 percent interest The first year he earned 10 interest on his 100 investment He reinvested the 10 The second year he earned 11 interest on his 110 investment The extra 1 he earned in interest the second year is referred to as A free interestB bonus incomeC simple interestD interest on interestE present value interest 51Chapter 05Introduction to Valuation The Time Value of Money4 Interest earned on both the initial principal and the interest reinvested from prior periods is called A free interestB dual interestC simple interestD interest on interestE compound interest 5 Sara invested 500 six years ago at 5 percent interest She spends her earnings as soon as she earns any interest so she only receives interest on her initial 500 investment Which type of interest is Sara earning A free interestB complex interestC simple interestD interest on interestE compound interest 6 Shelley won a lottery and will receive 1000 a year for the next ten years The value of her winnings today discounted at her discount rate is called which one of the following A single amountB future valueC present valueD simple amountE compounded value 7 Terry is calculating the present value of a bonus he will receive next year The process he is using is called A growth analysisB discountingC accumulatingD compoundingE reducing 52Chapter 05Introduction to Valuation The Time Value of Money8 Steve just computed the present value of a 10000 bonus he will receive in the future The interest rate he used in this process is referred to as which one of the following A current yieldB effective rateC compound rateD simple rateE discount rate 9 The process of determining the present value of future cash flows in order to know their worth today is called which one of the following A compound interest valuationB interest on interest computationC discounted cash flow valuationD present value interest factoringE complex factoring 10 Andy deposited 3000 this morning into an account that pays 5 percent interest compounded annually Barb also deposited 3000 this morning into an account that pays 5 percent interest compounded annually Andy will withdraw his interest earnings and spend it as soon as possible Barb will reinvest her interest earnings into her account Given this which one of the following statements is true A Barb will earn more interest the first year than Andy willB Andy will earn more interest in year three than Barb willC Barb will earn interest on interestD After five years Andy and Barb will both have earned the same amount of interestE Andy will earn compound interest 11 Sue and Neal are twins Sue invests 5000 at 7 percent when she is 25 years old Neal invests 5000 at 7 percent when he is 30 years old Both investments compound interest annually Both Sue and Neal retire at age 60 Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts A Sue will have less money when she retires than NealB Neal will earn more interest on interest than SueC Neal will earn more compound interest than SueD If both Sue and Neal wait to age 70 to retire then they will have equal amounts of savingsE Sue will have more money than Neal as long as they retire at the same time 53
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