# ch05 - Chapter Five Time Value of Money Chapter 5 Time...

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Chapter Five Time Value of Money Chapter 5 Time Value of Money TRUE-FALSE 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. 203

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Test Bank T 14. An amortized loan is repaid in equal payments over a specified time period. T 15. A fixed-rate 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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ch05 - Chapter Five Time Value of Money Chapter 5 Time...

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