Chapter 4Time Value of Money
Chapter 4Time Value of Money
Student: ___________________________________________________________________________
1. Cash flow time lines are used primarily for decisions involving paying off debt or investing in financial
securities. They cannot be used when making decisions about investments in physical assets.
True False
2. One of the potential benefits of investing early for retirement is that an investor can receive greater benefits
from the compounding of interest.
True False
3. Of all the techniques used in finance, the least important is the concept of the time value of money.
True False
4. Compounding is the process of converting today's values, which are termed present value, to future value.
True False
5. The coupon rate is the rate of return you could earn on alternative investments of similar risk.
True False
6. A perpetuity is an annuity with perpetual payments.
True False
7. An amortized loan is a loan that requires equal payments over its life; its payments include both interest and
repayment of the debt.
True False
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invested initially, and the greater the present value of a given lump sum to be received at maturity.
True False
9. Suppose an investor can earn a steady 5% annually with investment A, while investment B will yield a
constant 12% annually. Within 11 years time, the compounded value of investment B will be more than twice
the compounded value of investment A (ignore risk).
True False
10. Solving for the interest rate associated with a stream of uneven cash flows, without the use of a calculator,
usually involves a trial and error process.
True False
11. When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early
years of the loan such that the accumulated interest can be spread out over the life of the loan.
True False
12. The effective annual rate is always greater than the simple rate as a result of compounding effects.
True False
13. Because we usually assume positive interest rates in time value analyses, the present value of a threeyear
annuity will always be less than the future value of a single lump sum, if the annuity payment equals the
original lump sum investment.
True False
14. All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the
sooner the dollar is received the more quickly it can be invested to earn a positive return.
True False
15. An annuity is a series of equal payments made at fixed equallength intervals for a specified number of
periods.
True False
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 Spring '10
 Patterson
 Time Value Of Money, Debt, Investing

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