Finance2 – Flashcards
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Which of the following is not true when developing a time line?
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Cash outflows are designated with a positive number
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People borrow money because they expect...
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their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on them
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A payment that your bank credits to your account in one year is known as a:
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Future Value
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How are future values affected by changes in interest rates?
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The higher the interest rate, the largger the future value will be.
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How are present values affected by changes in interest rates?
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The lower the interest rate, the larger the present value will be.
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We call the process of earning interest on both the original deposit and on the earlier interest payments:
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compounding
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Interest earned on the original deposit is called:
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simple interest
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The process of figuring out how much an amount that you expect to receive in the future is worth today is called:
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discounting
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The interest rate, i, which we use to calculate present value, is often referred to as the:
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discount rate
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Who is credited with popularizing the Rule of 72?
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Albert Einstein
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The Rule of 72 is a simple math approximation for:
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The number of years required to double an investment.
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With regard to money deposited in a bank, future values are:
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larger than present values
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Earnings just one percent more in interest rate every year results in much higher future values over time, and:
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time has the same effect on future values over time
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A dollar paid (or received) in the future is:
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not worth as much as a dollar today
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Because we compute interest rates using beginning-period value of an investment, investments that feature gains and losses
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may become asymmetric between gains and losses
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When computing the rate of return from selling an investment, the number of years between the present and future cash flows is an important factor in determining
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the annual rate earned
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When calculating the number of years needed to grow an investment to a specific amount of money:
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the higher the interest rate the shorter the time period needed to achieve the growth
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Moving cash flows from one point in time to another requires us to use
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both present and future value equations
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All TVM equations that you will encounter only require figuring out what is unknown in the situation and:
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solving for that one unknown factor
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The longer the money can earn interest,
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the greater the compounding effect
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When saving for future expenditures, we add the ______________ of contributions over time to see what the total will be worth at some point in time>
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Future value
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When moving from the left to the right of a time line, we are using:
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compound interest to calculate future values
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Level sets of frequent, consistent cash flows are called
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annuities
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The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?
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interest rate for compounding
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In order to discount multiple as flows to the present, one would use
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the appropriate discount rate
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Your credit rating and current economic conditions will determine the
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interest rate that a lender will offer
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When interest rates are lower, borrowers can
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borrow more money
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The present value of annuity payments made far into the future are
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worth very little today
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While the future value will increase as computing frequency increases, the size of each increase in the future value:
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diminishes as compounding frequencies increase
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Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value
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grows
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The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a
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more accurate measure of the interest rate paid for monthly compounding.
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You can more easily evaluate investment opportunities for both businesses and individual applications if you can compute
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the implied rate of return in a series of cash flows
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People refinance their home mortgages
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when rates fall
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Loan amortization schedules show
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both the principal balance and interest paid per year
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When you take out a loan for a car or home mortgage, you will usually find
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monthly payments at today's interest rates more relevant for your budget
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When you get you credit card bill, it will offer a minimum payment, which
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usually only pays the accrued interest and a small amount of principal
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When you get your credit card bill, if you make a payment larger than the minimum payment
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you will reduce the payoff time
