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CHAPTER 4
INTRODUCTION TO VALUATION: THE
TIME VALUE OF MONEY
Answers to Concepts Review and Critical Thinking Questions
1.
The four parts are the present value (PV), the future value (FV), the discount rate (
r
), and the life of
the investment (
t
).
2.
Compounding refers to the growth of a dollar amount through time via reinvestment of interest
earned. It is also the process of determining the future value of an investment. Discounting is the
process of determining the value today of an amount to be received in the future.
3.
Future values grow (assuming a positive rate of return); present values shrink.
4.
The future value rises (assuming a positive rate of return); the present value falls.
5.
It would appear to be both deceptive and unethical to run such an ad without a disclaimer or
explanation.
6.
It’s a reflection of the time value of money. GMAC gets to use the $500 immediately. If GMAC uses
it wisely, it will be worth more than $10,000 in thirty years.
7.
Oddly enough, it actually makes it more desirable since GMAC only has the right to pay the full
$10,000 before it is due. This is an example of a “call” feature. Such features are discussed in a later
chapter.
8.
The key considerations would be: (1) Is the rate of return implicit in the offer attractive relative to
other, similar risk investments? and (2) How risky is the investment; i.e., how certain are we that we
will actually get the $10,000? Thus, our answer does depend on who is making the promise to repay.
9.
The Treasury security would have a somewhat higher price because the Treasury is the strongest of
all borrowers, therefore has a lower rate of return.
10.
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This note was uploaded on 05/01/2009 for the course FINC 106 taught by Professor Dr.nehale during the Spring '09 term at Baptist College of Health Sciences.
 Spring '09
 Dr.Nehale
 Future Value, Valuation

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