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COB 300 Finance Ch 5 Exam Questions Correct Verified Answers (A+ Pass)
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COB 300 Finance Ch 5 Exam Questions Correct Verified Answers (A+ Pass) Money has a time value: the basic idea behind the time value of money is that $1 today, - Answers - is worth more than $1 promised next year. Factors that have impact on the time value of money: - Answers - 1. Size of the ...

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  • November 25, 2024
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  • 2024/2025
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COB 300 Finance Ch 5 Exam
Questions Correct Verified
Answers (A+ Pass)
Money has a time value: the basic idea behind the time value of money is that $1 today,
- Answers -✔✔ is worth more than $1 promised next year.

Factors that have impact on the time value of money: - Answers -✔✔ 1. Size of the
cash flows
2. Time between the cash flows
3. Rate of return
- Opportunity cost
- interest rate
- required rate of return
- Discount rate

Compound interest and future value - Answers -✔✔ timeline of cash flows:

With i= 10%
at year 0: cash flow is -100; today & beginning of period 1

at year 2: cash flow is 20; end of period 2 & beginning of period 3

at year 4: cash flow is 50; end of period 4 & beginning of period 5

Organizing cash flows: A helpful tool for analysis of cash flows is the - Answers -✔✔
time line; which shows the magnitude of cash flows at different points in time

Cash we receive is called a what? and is represented by what kind of number? -
Answers -✔✔ inflow; positive number

Cash that leaves us is called a what? and is represented by what kind of number? -
Answers -✔✔ outflow; negative number

Simple Interest - Answers -✔✔ - interest is earned only on principal
- Ex: Compute simple interest on $100 invested at 6% per year for three years

1st year: interest is $6.00
2nd year: interest is $6.00
3rd year: interest is $6.00
Total interest earned: $18.00

, The concept of compound interest - Answers -✔✔ - compounding is when interest paid
on an investment during the first period is added to the principal

- then, during the second period, interest is earned on the new sum ( that includes the
principal and interest earned so far)

Example of compound interest - Answers -✔✔ Compute compound interest on $100
invested at 6% for three years with annual compounding

1st year interest is $6.00; Principal is now $106.00

2nd year interest is is $6.36; Principal is now $112.36

3rd year interest is $6.74; Principal now is $119.10

Total interest earned: $19.10

Single- Period Future value Example - Answers -✔✔ - you invest $100 today in an
account earning 5% per year. Compute the future value in one year;

Value in one year= Today's cash flow + interest earned

=$100 + ($100 x 0.05)
= $100 x (1 +0.05)
= $105

Future value formula - Answers -✔✔ FV= PV x (1 + i) ^ N

Future value is the amount - Answers -✔✔ a sum will grow to in a certain number of
years when compounded at a specific rate

- FVn = PV (1+ i) ^n

1. FVn= the future of the investment at the end of "n" years

2. i= the annual interest (or discount rate)

3. n= number of years

4. PV= the present value, or original amount invested at the beginning of the first year

Compounding interest and time; what does this equation really mean (1 + i ) ^ n ?? -
Answers -✔✔ future value interest factor- the engine behind the time value of money

Future value example - Answers -✔✔ Ex: what will be the FV of $100 in 2 years at
interest rate of 6%?

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