Chapter 09: Time Value of Money
Adjust the annual formula for a future value of a single amount at 12 percent
for 10 years to a semiannual compounding formula. What are the interest
) before and after? Why are they different?
The more frequent compounding under the semiannual compounding
assumption increases the future value so that semiannual compounding is worth
.101 more per dollar.
If, as an investor, you had a choice of daily, monthly, or quarterly
compounding, which would you choose? Why?
The greater the number of compounding periods, the larger the future value.
The investor should choose daily compounding over monthly or quarterly.
What is a deferred annuity?
A deferred annuity is an annuity in which the equal payments will begin at
some future point in time.
List five different financial applications of the time value of money.
Different financial applications of the time value of money:
Equipment purchase or new product decision,
Present value of a contract providing future payments,
Future value of an investment,
Regular payment necessary to provide a future sum,
Regular payment necessary to amortize a loan,
Determination of return on an investment,
Determination of the value of a bond.
Future value (LO2)
You invest $2,500 a year for three years at 8 percent.
What is the value of your investment after one year? Multiply $2,500 × 1.08.