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 ...
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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