ch04_sm - CHAPTER4 INTRODUCTIONTOVALUATION:THE...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 9

ch04_sm - CHAPTER4 INTRODUCTIONTOVALUATION:THE...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online