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Summary COB 300 Finance Chp 5 Questions and Answers 2024
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COB 300 Finance Chp 5 Questions and Answers 2024Time value analysis **** 1st step is to set up a timeline
time line **** an important tool used in time value analysis, it is a graphical
representation used to show the timing of cash flows. Time periods such as years or
months, time 0 is today.
Time 1 is one period from today. Both the end of period 1 and the start of period 2.
Each tick mark corresponds to the end of one period and the beginning of the next one.
Do time lines only deal with years or can other time periods be used? **** other time
periods can be used
Difference between money and fruit **** money can work for you over time, earning
interest
You cannot mix fruits and finance **** every time you see money spread out over time,
it must be the same type.
Also, money changes value over time.
Get money now or later? **** now is better because you can earn interest
Set up a time line to illustrate the following situation: you currently have 2,000 in a 3-
year certificate of deposit (CD) that pays a guaranteed 4% annually. ****
Compounding **** the process of going to future value from present value. The
arithmatic process of determining the final value of a cash flow or a series of cash flows
withing compound interest is applied.
future value **** fv, the amount to which a cash flow or series of cash flows will grow
over a given period of time when compounded at a given interest rate. Ending amount.
When calculating future value, if present value is an outflow- meaning it leaves our
wallet- then it is -. If an inflow, then +. Typically speaking if you put money into
something and are gaining interest it means that you had an outflow to an investment so
in most cases this number will be - when calculating the face value given the present
,value. This number will be positive when someone gives you money and is charging
you interest- giving you a negative future value.
FVn=PV(1+I)^N
Future value with simple interest **** FV=PV+PV(I)(N)
I **** interest rate earned per year
INT **** dollars of interest earned during the year
N or n **** number of periods involved
Compound interest **** occurs when interest is earned on prior periods interest
Simple interest **** occurs when interest is not earned on interest
Interest that is paid only on the principal amount.
Interest= Rate * principal amount of loan.
Compounding Interest **** the interest rate is a growth rate. This can be applied to
anything that grows: sales, population, earnings per share, future salary, etc...
Pay interest on an amount that changes over time.
Interest = Rate * (Principal + Accumulated interest)
Frequency of compounding **** if interest is compounded more than once per year, we
need to make an adjustment in our calculation. The state rate or nominal rate of interest
is the annual percentage rate (APR).
The rate per period depends on the frequency of compounding.
At the beginning of your freshman year, your favorite family member deposits 10,000
into a 4 year bank certificate of deposit (CD) that pays 5% annual interest. You will
receive the money in the account (including interest) if you graduate with honors in 4
years. How much will be there in the account after 4 years? **** Beginning
PV= -10,000
N= 4 years
I= 5
FV?
PV is negative because cash is being put into your account (leaving you!/ your family!).
FV= 12,155.06
, A dollar in hand today is worth more than a dollar to be received next year, why? ****
Because of compounding interest.
Simple vs. Compound interest **** Simple interest: Take the beginning number and add
that for each year, not on the amount per year.
Compound: Earning interest on interest.
Compound interest is always higher.
What is the effects/benefits on compounding **** interest on interest = Compounded
FV- Simple FV
What is compounding? What's the difference between simple interest and compound
interest? What would the future value of $100 be after 5 years at 10% compound
interest? at 10% simple interest? **** after 5 years implies END instead of beginning.
Compound interest:
N=5
I=10
PV= -100
FV=? 161.05
Simple interest= 100 * .10= 10$ per year. 10*5= 50 dollars. So the simply interest would
be 150$ (100 + 50)
Amount invest (1 + interest rate)^ number of years
Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit
(CD) that pays 4% interest compounded annually. How much will you have when the
CD Matures? How would your answer change if the interest rate were 5% or 6% or
20%? **** On 4% compounded interest=
N=3
I=4
PV= -2,000
FV? = 2,249.7
5% ?:
N=3
I=5
PV= -2,000
FV? = 2315.25
or 6% ?:
N=3
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