Lecture 3: Time Value
FIN 370
Instructor Anton Miglo
Lecture 3 Time Value of Money
Handouts
Part 1
1. The value of an investment after one or more time periods is called the:
a.true value.
b.future value.
c.present value.
d.discounted value.
e.complex value.
2.The current value of future cash flows discounted at the appropriate discount rate is called the:
a.simple value.
b.future value.
c.present value.
d.complex value.
e.principal value.
3.Which one of the following will increase the future value of a lump sum invested today?
a.decreasing the amount of the lump sum
b.increasing the interest rate
c.paying simple interest rather than compound interest
d.paying interest only at the end of the investment period
e.shortening the investment time period
4.Given an interest rate of zero percent, the future value of a lump sum invested today will always:
a.remain constant, regardless of the investment time period.
b.decrease if the investment time period is shortened.
c.decrease if the investment time period is lengthened.
d.be equal to $0.
e.be greater than the initial investment amount.
5.The relationship between the present value and the interest rate is best described as:
a.direct.
b.inverse.
c.unrelated.
d.uncorrelated.
e.vertical.
6.Payments of $100 a month for 24 months is an example of:
a.perpetuity.
b.annuity.
c.consol.
d.ordinary cash flow.
e.discounted cash flow.
7.A series of unending cash flows of equal amount that occur at equal intervals of time is called a(n):
a.ordinary annuity.
b.annuity due.
c.absolute annuity.
d.perpetuity.
e.perpetuity due.
8.Which one of the following statements is correct?
a.The future value of an annuity increases when the interest rate decreases.
b.The present value of an annuity increases when the interest rate increases.
c.The present value of an annuity is unaffected by the number of the annuity payments.
d.The future value of an annuity is unaffected by the amount of each annuity payment.
e.The present value of an annuity increases when the interest rate decreases.
9.The present value of an annuity will decrease when either the:
a.interest rate increases or the number of periods increases.
b.interest rate increases or the amount of the annuity payment increases.
c.interest rate declines or the amount of the annuity payment increases.
d.number of periods increases or the interest rate decreases.
e.amount of the annuity payment decreases or the interest rate increases.
Part 2
1. You have just deposited $1000 at your savings account. The interest rate is 2%.
How much will you have at the end of 1 year, 2 years,…, 9 years?
Build a graph showing the value of your account over time.
2. You are comparing two cash flows—$10 million at the end of 5 years and $21 million at the end of 10 years.With an 8 percent interest rate, which cash flow has the higher present value?
3.Find the value of a zero coupon bond with an initial maturity of 4 years (interest rate is 1%).
4. Find the value of a coupon bond with following features. Face value is $1000, coupon rate is 10%, the maturity is 10 years, The market interest rate is 8%.
5. Find the value of preferred shares if the dividend is $2 and it’s expected to stay at this level indefinitely. The discount rate is 5%.
Part 3
What is the difference between an annuity and a perpetuity?