Chap005

# Chap005 - Chapter 05 - Introduction to Valuation: The Time...

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Chapter 05 - Introduction to Valuation: The Time Value of Money Chapter 05 Introduction to Valuation: The Time Value of Money Multiple Choice Questions 1. You are investing \$100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now? A. future value B. present value C. principal amounts D. discounted value E. invested principal 2. Tracy invested \$1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following? A. simplifying B. compounding C. aggregation D. accumulation E. discounting 3. Steve invested \$100 two years ago at 10 percent interest. The first year, he earned \$10 interest on his \$100 investment. He reinvested the \$10. The second year, he earned \$11 interest on his \$110 investment. The extra \$1 he earned in interest the second year is referred to as: A. free interest. B. bonus income. C. simple interest. D. interest on interest. E. present value interest. 5-1

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Chapter 05 - Introduction to Valuation: The Time Value of Money 4. Interest earned on both the initial principal and the interest reinvested from prior periods is called: A. free interest. B. dual interest. C. simple interest. D. interest on interest. E. compound interest. 5. Sara invested \$500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial \$500 investment. Which type of interest is Sara earning? A. free interest B. complex interest C. simple interest D. interest on interest E. compound interest 6. Shelley won a lottery and will receive \$1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following? A. single amount B. future value C. present value D. simple amount E. compounded value 7. Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: A. growth analysis. B. discounting. C. accumulating. D. compounding. E. reducing. 5-2
Chapter 05 - Introduction to Valuation: The Time Value of Money 8. Steve just computed the present value of a \$10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following? A. current yield B. effective rate C. compound rate D. simple rate E. discount rate 9. The process of determining the present value of future cash flows in order to know their worth today is called which one of the following? A. compound interest valuation B. interest on interest computation C. discounted cash flow valuation D. present value interest factoring E. complex factoring 10. Andy deposited \$3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited \$3,000 this morning into an account that pays 5

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## This note was uploaded on 04/05/2012 for the course MGT 4322 taught by Professor Kluemper,d during the Spring '08 term at LSU.

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Chap005 - Chapter 05 - Introduction to Valuation: The Time...

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