Review Questions for Test 2 Chapter 5 Time Value of Money 1. What is the process

Question

Review Questions for Test 2 Chapter 5 Time Value of Money 1. What is the process called when a present value amount grows to a future value amount? 2. What is the process of taking an expected future value and determining the present value? 3. Explain the Rule of 72 4. What is an annuity? 5. Explain the difference between an ordinary annuity and an annuity due 6. How do you handle an annuity due on a financial calculator? 7. What is a perpetuity? 8. If a series of cash flows with quarterly payments has an effective annual rate of 6.42, what does this mean? Chapter 6 Interest Rates What is the expected relationship between an increase in inflation and the expected increase in the interest rate? 1.

Explanation / Answer

1.

The process when present value amount grow to future value amount is called compounding.

2.

the process of taking future value amount and determine present value using future vale amount is called discounting

3.

Rule of 72 states that if mutiplication of number of year and interest rate is 72 then it take the number of year to double amount at given interest rate. Suppose interest rate is 12% then in 6 year (72 / 12) any amount will be double.

4.

annuity is defined as a series of payment for limited period of time. example. Saving $500 per month for next 20 year.

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