1 The principal of the time value of money is probably the single most important concept in financial management One of the most frequently encountered applications involves the calculation of a future value (Compound interest OR simple interest) occurs when interest is not earned on prior periods interest 2 Which of the following is not one of these variables A The present value (PV) of the amount invested B The interest rate (r) that could be earned by invested funds C The inflation rate indicating the change in average prices D The duration of the investment (n) 3 Line A corresponds to (17 , 0, or 8 ) , while Line B is consistent with (17 , 0, or 8 ) Line C corresponds to (17 , 0, or 8 ) 4 Investments and loans base their interest calculations on one of two possible methods the (simple or complex) interest and the (uncomplicated or compound) interest methods Both methods apply three variablesthe amount of principal, the interest rate, and the investment or deposit periodto the amount deposited or invested in order to compute the amount of interest However, the two methods differ in their relationship between the variables 5 Assume that the variables r, n, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively Which equation best represents the calculation of a future value (FV) using simple interest A FV PV (PVrn) B FV PV (PVrn) C FV PV (PVrn) D FV PV 1rn Which equation best represents the calculation of a future value (FV) using compound interest A FV PV (PVrn) B FV (1 r n) $30,000 00 C FV PV (1 r n) D FV PV (1 r) n 6 Identify whether the following statements about the simple and compound interest methods are true or false True False The process of earning simple interest does not allow a depositor or investor to earn interest on any previously earned interest All other factors being equal, when interest is paid annually, both the simple interest and the compound interest methods will generate different amounts of earned interest by the end of the first year The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods 7 Paolo is willing to invest $30,000 00 for nine years, and is an economically rational investor He has identified three investment alternatives (A, B, and C) that vary in their method of calculating interest and in the annual interest rate offered Since he can only make one investment during the nine year investment period, complete the following table and indicate whether Paolo should invest in each of the investments Note When calculating each investments future value, assume that all interest is compounded annually The final value should be rounded to the nearest whole dollar Investment Interest rate and Method Expected future value Make this investment A 10 simple interest $105,536, $57,000 or $65,157 NO or YES B 6 compound interest $105,536, $57,000 or $65,157 NO or YES C 7 compound interest $105,536, $57,000 or $65,157 NO or YES All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest earned during the deposit or investment period Each line on the following graph corresponds to an interest rate 096, 896, or 11 Identify the interest rate that corresponds with each line 20000 15000 10000 5000 0 1 23 45 6 7 8 910 TIME (periods)

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1. The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered

1. The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications involves the calculation of a future value.

(Compound interest OR simple interest) occurs when interest is not earned on prior periods interest.

2. Which of the following is not one of these variables?

A. The present value (PV) of the amount invested

B. The interest rate (r) that could be earned by invested funds

C. The inflation rate indicating the change in average prices

D. The duration of the investment (n)

image text in transcribed

3. Line A corresponds to (17%, %0, or 8%), while Line B is consistent with (17%, %0, or 8%). Line C corresponds to (17%, %0, or 8%).

4. Investments and loans base their interest calculations on one of two possible methods: the (simple or complex) interest and the (uncomplicated or compound) interest methods. Both methods apply three variablesthe amount of principal, the interest rate, and the investment or deposit periodto the amount deposited or invested in order to compute the amount of interest. However, the two methods differ in their relationship between the variables.

5. Assume that the variables r, n, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively.

Which equation best represents the calculation of a future value (FV) using simple interest?

A. FV=PV (PVrn)

B. FV=PV + (PVrn)

C. FV=PV (PVrn)

D. FV=PV / 1rn

Which equation best represents the calculation of a future value (FV) using compound interest?

A. FV=PV + (PVrn)

B. FV=(1+r^n) / $30,000.00

C. FV=PV / (1 + r^n)

D. FV=PV (1 + r)^n

6. Identify whether the following statements about the simple and compound interest methods are true or false.

	True	False
The process of earning simple interest does not allow a depositor or investor to earn interest on any previously earned interest.
All other factors being equal, when interest is paid annually, both the simple interest and the compound interest methods will generate different amounts of earned interest by the end of the first year.
The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods.

7. Paolo is willing to invest $30,000.00 for nine years, and is an economically rational investor. He has identified three investment alternatives (A, B, and C) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the nine-year investment period, complete the following table and indicate whether Paolo should invest in each of the investments.

Note: When calculating each investments future value, assume that all interest is compounded annually. The final value should be rounded to the nearest whole dollar.

Investment	Interest rate and Method	Expected future value	Make this investment?
A	10% simple interest	$105,536, $57,000 or $65,157	NO or YES
B	6% compound interest	$105,536, $57,000 or $65,157	NO or YES
C	7% compound interest	$105,536, $57,000 or $65,157	NO or YES

All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest earned during the deposit or investment period. Each line on the following graph corresponds to an interest rate: 096, 896, or 11%. Identify the interest rate that corresponds with each line. 20000 15000 10000 5000 0 1 23 45 6 7 8 910 TIME (periods)