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| 1. The value that an amount today will be worth at a certain point in the future. |
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| 2. Interest earned only on the original amount investment |
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| 3. Interest earned on the original amount invested plus previously earned interest. |
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| 4. The quoted annual rate of interest that does not take account of the frequency of compounding |
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| 5. Effective Annual Interest Rate |
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| 5. The rate of interest that reflects the effect of compounding more than once a year |
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| 6. The current value of an amount that will be received in the future. |
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| 7. The process of calculating the present value of a future amount |
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| 8. In the context of the time value of money the rate used to calculate the present value of a future amount. |
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1. Id the info needed to calculate an investment's future value for the following periods:
(a) any single period
(b) Multiple periods |
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Definition
1. The info needed to calculate an investment's future value for the following periods:
(a) Single period:
amt of money deposited, applicable rate interest, length of time the money is left in the account
(b) Multiple periods:
Amt of money deposited, Applicable interest rate, Length of time the money is left in the account, Method of interest calculation (whether based on principal or principal plus earned interest) |
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| 2. List the types of rates typically used to calculate the future value of money |
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Definition
| 2. Rates typically used to calculate the future value of money might include interest rates, inflaton rtes, or capital rates of return |
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| 3. Explain how compound interest differs from simple interest. |
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| 3. Compound interest earns interest on the original amt invested plus previously earned interest, whereas simple interest earns interest only on the original amt invested |
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| 4. Explain why compound interest pd more than once a eyar produces a higher return than compound interest pd annually. |
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| 4. Compound interest pd more than once a eyar produces a higher return than compound interest pd annually because the interest is earned more often. The more often interest is erned, the more quickly the principal on which the interst is calculated increases. |
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| 5. Id the info needed to calculate an investment's present value |
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Definition
5. The following info is needed to calculate an investment's present value:
(1) Future Value
(2) Rate of growth (and whether compounded or not)
(3) Number of periods for which the amt can be invested. |
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| 6.Explain how the calculation for discounting differs from that for compounding. |
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| 6. Discounting is the process of calculating the present value of a future amt. It is the opposite of compounding. |
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| 7. Describe methods used to determine present value calculations |
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Definition
7. The following methods are used to determine present value of a future amount:
Calculate using the following formula:
PV=FVn/(1+r)n
Multiply the future value by the present value factor found in the present value table, which shows the present value factors for several combinations of r(interest rate) and (time period) |
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| 8. Id the four steps used when interpolating a future value factor. |
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Definition
8.The following four steps used when interpolating a future value factor:
(1) In the row for the appropriate number of perids, find the two interest rates, and the future value factors for those rates, between which the calculated future value factor falls. Calculate the difference between the two factors frm the future value table and the difference between the lower table factor and the calculated factor
(2) Calculate the percentage of the difference between the factors for the interest rates selected in Step 1 by dividing the difference between the table factor and the calculated factor by the difference between the two table factors.
(3) Multiply the difference between the interest rates selected in step 1by the percentage calculated in step 2
(4) Add the amt calculated in Step 3 to the lower dicount rate selected in Step 1 to arrive at the discount rate. |
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9. Describe the usefulness of each of the following methods of caclulating the time value of money:
(a) Financial Calculators
(b) Computer Spreadsheets
(c) Rule of 72 |
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Definition
9. The following methods are useful in calculating the time value of money:
(a) Financial Calculators: useful for performin a limited number of time value of money calculations. The user enters three of the four elements of the present value or future value formula and then calculates the present value
(b) Computer Spreadsheets: Useful when significant numbers of calculations are required.
(c) Rule of 72: Useful for quick estimations fo the time value of money |
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| 10. List the financial calculator keys helpful in performing time value of money calculations |
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Definition
10. Financial calculator keys helpful in performing time value of money calculations include:
(1) N (number of periods)
(2) %i (interest rate, rate of return, or discount rate per period
(3) PV (present value)
(4) FV (future value)
(5) PMT (payment)
(6) CPT (compute) |
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| 11. Explain how to estimate the time value of money using the Rule of 72. |
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| 11. The Rule of 72 sttes that the number of yrs required for money to double, at a given interest rate and compounded annually, is equal to 72 divided by the interest or dicount rate. It is reasonably accurate with interest rates lower than 20 percent. |
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