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Practice Questions for Exam III (Time Value of Money and Valuation and
Rates of Return)
Chapter 9 – Time Value of Money
1. An amount of money to be received in the future is worth less today than the stated
amount.
TRUE
2. Discounting refers to the growth process that turns $1 today into a greater value several
periods in the future.
FALSE
3. Compounding refers to the growth process that turns $1 today into a greater value several
periods in the future.
TRUE
4. The interest factor for the future value of a single sum is equal to (1 + n)
i
.
FALSE
5. The time value of money concept is fundamental to the analysis of cash inflow and
outflow decisions covering periods of over one year.
TRUE
6. The future value is the same concept as the way money grows in a bank account.
TRUE
7. The present value of a positive future inflow can become negative as discount rates
become higher and higher.
FALSE
8. The formula PV = FV(1 + n)
i
will determine the present value of $1.
FALSE
9. The interest factor for the present value of a single amount is the inverse of the future
value interest factor.
TRUE
10. Higher interest rates (discount rates) reduce the present value of amounts to be received in
the future.
TRUE
1
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View Full Document 11. In determining the future value of an annuity, the final payment is not compounded at all.
TRUE
12. The future value of an annuity assumes that the payments are received at the end of the
year and that the last payment does not compound.
TRUE
13. The amount of annual payments necessary to accumulate a desired total can be found by
reference to the present value of an annuity table.
FALSE
14. If an individual's cost of capital were 10%, he/she would prefer to receive $107 at the end
of one year rather than $100 right now.
FALSE
15. Using semiannual compounding rather than annual compounding will increase the future
value of an annuity.
TRUE
16. In paying off a mortgage loan, the amount of the periodic payment that goes toward the
reduction of principal increases over the life of the mortgage.
TRUE
17. The time value of money concept becomes less critical as the prime rate increases.
FALSE
18. Discounted at 6%, $1000 received three years from now is worth less than $800 received
today.
FALSE
19. Discounted at 6%, $1000 received at the end of each year for three years is worth less than
$2,700 received today.
TRUE
20. Under what conditions must a distinction be made between money to be received today
and money to be received in the future?
A.
A period of recession.
B.
When idle money can earn a positive return.
C.
When there is no risk of nonpayment in the future.
D.
When current interest rates are different from expected future rates.
2
21. As the compounding rate becomes lower and lower, the future value of inflows
approaches
A.
0
B.
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This note was uploaded on 09/22/2010 for the course FIN FIN310 taught by Professor Allen during the Spring '10 term at NC Wesleyan.
 Spring '10
 Allen
 Finance, Time Value Of Money, Valuation

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