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FIN 701 Test 2 Exam Questions with Verified Answers
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Value of a business deal involves these two things: - Answer-1. The AMOUNT (receive more pay less) 2. The TIMING (receive sooner pay later) The value of a business deal involves a tradeoff between amount of payment and timing The Simple Rule of 72 - Answer-is an approximation of how long it...

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  • August 23, 2024
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  • 2024/2025
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  • fin 701 test 2 exam questions with verified answer
  • value of a business deal involves these two things

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FIN 701 Test 2 Exam Questions with
Verified Answers
Value of a business deal involves these two things: - Answer-1. The AMOUNT (receive
more pay less)
2. The TIMING (receive sooner pay later)

The value of a business deal involves
a tradeoff between amount of payment and timing

The Simple Rule of 72 - Answer-is an approximation of how long it takes for any amount
of money to double with compound interest.

Take 72 and divide by the percentage interest rate. Consider a 5% interest rate, 72/5 =
14.4 years. Yet, if the interest rate were only 2%, it would take 36 years.

Time Lines - Answer-are an excellent way to visualize the cash flows in a particular
problem by using tick marks.

Tick marks occur at the end of periods, so Time 0 is today; Time 1 is the end of the first
period (year, month, etc.) or the beginning of the second period

Compounding - Answer-Finding the FV of a cash flow or series of cash flows is called

Future Value (FV) - Answer-The value of an asset at a specific date. This measures the
nominal future sum of money that a given sum of money is "worth" at a specified time in
the future.

The Four Fundamental Calculations - Answer-• Finding future value (FV)

• Finding present value (PV)

• Finding a time period (n)

• Finding an interest rate (i)

To calculate the PV or FV of a "package" of cash flows - Answer-1. Calculate the PV or
FV of each flow
2. Add the individual PVs or FVs to get the total value

Annuity - Answer-This is a type of investment in which regular payments are made over
the course of multiple periods; a set of equal cash flows

- Equal amounts; Equal direction of flow; Equal spacing in time

, A specified income payable at stated intervals for a fixed or a contingent period, often
for the recipient's life, in consideration of a stipulated premium paid either in prior
installment payments or in a single payment. For example, a retirement annuity paid to
a public officer following his or her retirement.

Annuities due - Answer-these types of payments/dues are made (or received) at the
beginning of the period

Ex: Rent, this is due at the beginning of the month

Perpetuity - Answer-An annuity that continues forever; A constant cash stream with zero
growth; The cash flows never grow, but remain at the original amount.

Time value of money - Answer-integral in making the best use of a financial player's
limited funds

interest rate - Answer-The percentage of an amount of money charged for its use per
some period of time. It can also be thought of as the cost of not having money for one
period, or the amount paid on an investment per year.

discounting - Answer-The process of determining how much money paid/received in the
future is worth today. You discount future values of cash back to the present using the
discount rate.

Also another common name for finding present value**

Single-period investment - Answer-An investment that takes place over one period,
usually one year.

number of periods - Answer-The amount of time between the present and future is
called

multi-period investment - Answer-any investment for more than one year

Accrue - Answer-to add or to grow

principal - Answer-The money originally invested or loaned, on which basis interest and
returns are calculated

simple interest - Answer-Simple interest means that you earn interest only on the
principal. Your total balance will go up each period, because you earn interest each
period, but the interest is paid only on the amount you originally borrowed/deposited

earn interest on the initial deposit only

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