# Chap005[1] - Chapter 05 - Introduction to Valuation: The...

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Chapter 05 - Introduction to Valuation: The Time Value of Money Chapter 05 Introduction to Valuation: The Time Value of Money Answer Key Multiple 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 value B. present value C. principal amounts D. discounted value E. invested principal Refer to section 5.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 5-1 Section: 5.1 Topic: Future value 2. Tracy invested \$1,000 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. simplifying B. compounding C. aggregation D. accumulation E. discounting Refer to section 5.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 5-1 Section: 5.1 Topic: Compounding 5-1

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Chapter 05 - Introduction to Valuation: The Time Value of Money 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 interest. B. bonus income. C. simple interest. D. interest on interest. E. present value interest. Refer to section 5.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 5-1 Section: 5.1 Topic: Interest on interest 4. Interest earned on both the initial principal and the interest reinvested from prior periods is called: A. free interest. B. dual interest. C. simple interest. D. interest on interest. E. compound interest. Refer to section 5.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 5-1 Section: 5.1 Topic: Compound interest 5-2
Chapter 05 - Introduction to Valuation: The Time Value of Money 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 interest B. complex interest C. simple interest D. interest on interest E. compound interest Refer to section 5.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 5-1 Section: 5.1 Topic: Simple interest 6. Shelley won a lottery and will receive \$1,000 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 amount B. future value C. present value D. simple amount E. compounded value Refer to section 5.2 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 5-2 Section: 5.2 Topic: Present value 5-3

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Chapter 05 - Introduction to Valuation: The Time Value of Money 7. Terry is calculating the present value of a bonus he will receive next year. The process he is
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## This note was uploaded on 08/19/2010 for the course FIN 533 taught by Professor Smith during the Fall '08 term at Franklin W. Olin College of Engineering.

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Chap005[1] - Chapter 05 - Introduction to Valuation: The...

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