Chapter Five
Time Value of Money
Chapter 5
Time Value of Money
TRUEFALSE QUESTIONS
T
1. Money has a time value so long as interest is earned by saving or investing money.
T
2. As the interest rate increases, present value decreases.
F
3. Simple interest is interest earned on the investment’s principal and interest.
T
4. Compound interest is interest earned on interest in addition to interest earned on
the principal.
F
5. As the number of periods increases, present value increases.
T
6. If the compound inflation rate were greater than the compound interest rate, the
purchasing power would fall.
T
7. Discounting is an arithmetic process whereby a future value decreases at a
compound interest rate over time to reach a present value.
T
8. The Rule of 72 is an estimate of how long it would take to double a sum of money
at a given interest rate.
T
9. At a zero interest rate, the present value of $1 remains at $1 and is not affected by
time.
T
10. An annuity is a series of equal payments that occur over a number of time periods.
F
11. An ordinary annuity exists when the equal payments occur at the beginning of each
time period.
F
12. An annuity due may also be referred to as a deferred annuity.
F
13. For a given discount rate, an ordinary annuity and an annuity due have the same
present value.
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Test Bank
T
14. An amortized loan is repaid in equal payments over a specified time period.
T
15. A fixedrate mortgage is an example of an annuity.
F
16. The effective annual rate is determined by multiplying the interest rate charged per
period by the number of periods in a year.
F
17. The annual percentage rate is the true opportunity cost measure of the interest
rate.
T
18. The method of calculating the annual percentage rate (APR) is set by law.
T
19. When the annual interest rate stays the same, more frequent interest compounding
helps savers earn more interest over the course of the year.
T
20. For the same annual percentage rate, more frequent compounding increases the
future value of an investor’s funds more quickly.
F
21. Because interest compounds, the annual percentage rate formula will overstate the
true interest cost.
F
22. Discounting means that interest earned each year, plus the principal, will be
reinvested at the stated rate.
F
23. The values of stocks and bonds are not affected by time value of money concepts.
F
24. In actual practice, most corporate bonds pay interest four times a year.
F
25. Level cash flow amounts that occur at the end of each period, beginning at the end
of the first period, form an annuity due.
T
26. The effective annual rate (EAR) is sometimes called the annual effective yield.
T
27. The effective annual rate (EAR) is the true opportunity cost measure of the interest
rate.
F
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 Spring '11
 MinLiu
 Accounting, Time Value Of Money, Interest, Three Test Bank

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