1.
What is Future Value?
Correct Answer
B. Cash value of the investment at some point in the future
Explanation
Future value refers to the cash value that an investment will have at a specific point in the future. It takes into account the accumulated interest over time, allowing investors to estimate the potential growth of their investment. By considering the future value, individuals can make informed decisions about their investments and plan for their financial goals accordingly.
2.
What is compounding?
Correct Answer
A. Process of accumulated interest
Explanation
Compounding refers to the process of accumulated interest. It involves earning interest on both the initial amount of money invested and any previously earned interest. This results in the exponential growth of the investment over time. As the interest is added to the principal, the investment grows at an increasing rate. Compounding can occur at different intervals, such as annually, semi-annually, quarterly, or even daily, depending on the terms of the investment.
3.
What is present value of money?
Correct Answer
D. Current value of future cash flows discounted at the appropriate discount rate
Explanation
The present value of money refers to the current value of future cash flows, which is determined by discounting those cash flows at an appropriate discount rate. This means that the value of money decreases over time, and the present value takes into account the time value of money. By discounting future cash flows, we can determine the current value of an investment or a stream of income.
4.
What is periodic compounding?
Correct Answer
C. Interest compounded more often than once a year
Explanation
Periodic compounding refers to the process of calculating interest on an investment more frequently than once a year. In this method, the interest is added to the principal and then further interest is calculated based on the new total. This compounding frequency can be monthly, quarterly, or any other interval. By compounding more often, the investment grows at a faster rate, resulting in higher returns compared to simple interest calculations.
5.
The discount rate is also called the ______________.
Correct Answer
D. Rate of return
Explanation
The discount rate is also called the rate of return because it represents the rate at which future cash flows are discounted to their present value. It is used to calculate the present value of an investment or project by factoring in the time value of money. The higher the discount rate, the lower the present value of future cash flows, and vice versa. Therefore, the rate of return is an appropriate term to describe the discount rate as it reflects the return an investor expects to receive on their investment.
6.
What is the special case of annuity with cash flows that continue forever.....?
Correct Answer
A. Perpetuities
Explanation
Perpetuities are a special case of annuity with cash flows that continue forever. Unlike regular annuities which have a fixed number of cash flows, perpetuities have an infinite number of cash flows that occur at regular intervals. This means that the payments continue indefinitely, making perpetuities a unique type of financial instrument.
7.
What is the name of the annuitites that usually have payments that grow over time?
Correct Answer
C. Growing annuities
Explanation
Growing annuities are a type of annuity that have payments that increase over time. This means that the amount of money received from the annuity payments will gradually grow as time goes on. This can be beneficial for individuals who want their annuity payments to keep up with inflation or other rising costs. Preferred annuities, multiplied annuities, and perpetuities are not specifically defined as having growing payments, making them incorrect choices for this question.