An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year. Her cash flow at time period 0 is
A) $1,000
B) -$1,000
C) $-990
D) $1,010
Financial managers use the time value of money to
A) make business decisions.
B) compare cash flows of different projects.
C) determine the price of common stock.
D) both A and B.
E) all of the above.
The time value of money is created by
A) the existence of profitable investment alternatives and interest rates.
B) the fact that the passing of time increases the value of money.
C) the elimination of the opportunity cost as a consideration.
D) the fact that the value of saving money for tomorrow could be more or less than spending it today.
Which of the following statements is FALSE?
A) A dollar received one year from now will be worth more than a dollar received today.
B) On monthly compounding loans, the annual percentage yield will be less than the nominal or quoted rate of interest.
C) Compounding essentially means earning interest on interest on an initial balance.
D) Perpetuities pay an equal payment forever.
An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year. Her cash at time period 10 is
A) $10
B) $1,000
C) $-990
D) $1,010
Answer: D
Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12 years?
A) $100,000 now
B) $10,000 at the end of each of the next 12 years
C) The answer depends on the time value of money.
D) Either alternative is equally valuable.
Money has a greater time value time value
A) when rates of return are higher.
B) when rates of return are lower.
C) when the future is uncertain.
D) when investors are willing to assume greater risks.
A diagram for visualizing future cash flows is known as
A) a future value vector.
B) a cash flow chart.
C) an FV/PV plot.
D) a timeline.
Answer: D
On timeline, the present is represented as
A) time sub n
B) time zero
C) time sub i
D) time 1
A timeline typically represents cash flows as an exponential growth curve.
Answer: FALSE
A timeline is a linear representation of the timing of cash flows.
Answer: TRUE
A timeline represents the value of a sum invested now at the end of a series of time periods.
Answer: FALSE
The end of one time period and the beginning of the next occupy the same place on a timeline.
Answer: TRUE
Timelines are always expressed in years.
Answer: FALSE
Timelines used to visualize cash flows normally represent present values on the left and future values on the right.
Answer: TRUE
The last amount shown on a timeline represents the future value of all amounts invested up to that point.
Answer: FALSE
The first amount on a timeline represent the present value of all the future amounts at a given interest rate.
Answer: TRUE
Sketch a timeline that represents an immediate investment of $20,000 with $25,000 to be received at the end of 4 years.
Answer:
_0__________1__________2_________3__________4
-$20,000 $25,000
