Chapter 5 Test Bank

# Chapter 5 Test Bank - Chapter 4 Introduction to Valuation...

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Chapter 4 Introduction to Valuation: The Time Value of Money I. DEFINITIONS Topic: FUTURE VALUE 1. The amount an investment is worth after one or more periods of time is the ___________. A) future value B) present value C) principal value D) compound interest rate E) simple interest rate Answer: A Topic: COMPOUNDING 2. The process of accumulating interest on an investment over time to earn more interest is called: Topic: INTEREST ON INTEREST 3. Interest earned on the reinvestment of previous interest payments is called _____________ . Topic: COMPOUND INTEREST 4. Interest earned on both the initial principal and the interest reinvested from prior periods is called _______________ .

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5. Interest earned only on the original principal amount invested is called _____________. A) free interest B) annual interest C) simple interest D) interest on interest E) compound interest Answer: C Topic: FUTURE VALUE INTEREST FACTOR 6. The future value interest factor is calculated as: Topic: PRESENT VALUE 7. The current value of future cash flows discounted at the appropriate discount rate is called the: Topic: DISCOUNTING 8. The process of finding the present value of some future amount is often called ______________. Topic: PRESENT VALUE INTEREST FACTOR 9. The present value interest factor is calculated as: A) 1/(1 + r – t) B) 1/(1 + rt) C) 1/(1 + r)(t) D) 1/(1 + r) t

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E) 1 + r + t Answer: D
Topic: DISCOUNT RATE 10. The interest rate used to calculate the present value of future cash flows is called the _________ rate. II CONCEPTS Topic: PRESENT VALUE FACTORS 11. Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is \$1,000 ten years from now, the other \$800 seven years from now. Which of the following is true about the discount factors used in these valuations? to the discount factor for the cash flow that is received seven years from now. of the \$1,000 will always be greater than the present value of the \$800. discount factors. soonest. Topic: SIMPLE VS. COMPOUND INTEREST

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