CHAPTER 5

Financial managers rely primarily on future value technique

 True

Future value relies on discounting cash flows to measure future amounts

 False

Future value is the value at a given future date of an amount placed on deposit today and earning

 True

Compute for a present value of a single amount pam valentin wishes to find the present

 918.46

Discounting cash flows is the process of finding present value

 True

The present value of a future amount is the amount of money today that is equivalent to the given

 True

A loan can be amortized into equal periodic

 True

Present value is the inverse of future value

 True

Compound interest is the amount of money on which interest is paid

 False

The cash flow of a firm can be described by its two pattern

 False

Interest can be compounded at intervals ranging from annually to daily

 True

A mixed stream of cash flows is a stream of equal periodic cash flows

 False

Compute for a future value of a single amount: jane farber places 800

 1,170.58

The future or present value of an ordinary annuity can be found by using algebraic

 True
Financial managers and investors use time value of money techniques when assessing

 True

The more often interest is compounded, the larger the future amount that will be accumulated

 True

 timeline

a horizontal line on which time zero appears at the leftmost end and future periods are marked left to
right; can be used to depict investment cash flows

 future value

the value of some future date of money that you invest today

 compound interest

interest that is earned on a given deposit and has become part of the principal at the end of a specified
period

 principal

the amount of money on which interest is paid

 simple interest

interest that is earned only on an investment's original principal and not on interest that accumulates
over time

 present value

the value in today's dollars of some future cash flow

 discounting cash flows

the process of finding present values; the inverse of compounding interest

  annuity

a stream of equal periodic cash flows over a specified time period. These cash flows can be inflows or
outflows of funds.

 ordinary annuity

an annuity for which the cash flow occurs at the end of each period

 annuity due

an annuity for which the cash flows occur at the beginning of the period

 perpetuity

an annuity with an infinite life, providing continual annual cash flow

 mixed stream

a stream of unequal periodic cash flows that reflect no particular pattern

 semiannual compounding

compounding of interest over two periods within the year

 quarterly compounding

compounding of interest over four periods within the year

 continuous compounding

Compounding interest literally all the time. Equivalent to compounding interest an infinite number of
times per year.

 nominal (stated) annual rate

contractual annual rate of interest charged by a lender or promised by a borrower

  effective (true) annual rate (EAR)

the annual rate of interest actually paid or earned

 Annual Percentage Rate (APR)

The nominal annual rate of interest, found by multiplying the periodic rate by the number of periods in
one year, that must be disclosed to consumers on credit cards and loans as a result of "truth-in-lending
laws."

 annual percentage yield (APY)

The effective annual rate of interest that must be disclosed to consumers by banks on their savings
products as a result of "truth-in-savings laws."

 loan amortization

the determination of the equal periodic loan payments necessary to provide a lender with a specified
interest return and to repay the loan principal over a specified period

 loan amortization schedule

A schedule of equal payments to repay a loan. It shows the allocation of each loan payment to interest
and principal.