Chapter 05 Introduction to Valuation: The Time Value of Money Answer Key
Multiple Choice Questions
1. You are investing $100 today in a savings account
... [Show More] at your local bank. Which one of the
following terms refers to the value of this investment one year from now?
A. future value
B. present value
C. principal amounts
D. discounted value
E. invested principal
Refer to section 5.1
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-1
Section: 5.1
Topic: Future value
2. Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By
leaving her interest earnings in her account, she increases the amount of interest she earns
each year. The way she is handling her interest income is referred to as which one of the
following?
A. simplifying
B. compounding
C. aggregation
D. accumulation
E. discounting
Refer to section 5.1
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-1
Section: 5.1
Topic: Compounding
5-1
Chapter 05 - Introduction to Valuation: The Time Value of Money
3. Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10
interest on his $100 investment. He reinvested the $10. The second year, he earned $11
interest on his $110 investment. The extra $1 he earned in interest the second year is referred
to as:
A. free interest.
B. bonus income.
C. simple interest.
D. interest on interest.
E. present value interest.
Refer to section 5.1
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-1
Section: 5.1
Topic: Interest on interest
4. Interest earned on both the initial principal and the interest reinvested from prior periods is
called:
A. free interest.
B. dual interest.
C. simple interest.
D. interest on interest.
E. compound interest.
Refer to section 5.1
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-1
Section: 5.1
Topic: Compound interest
5-2
Chapter 05 - Introduction to Valuation: The Time Value of Money
5. Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as
she earns any interest so she only receives interest on her initial $500 investment. Which type
of interest is Sara earning?
A. free interest
B. complex interest
C. simple interest
D. interest on interest
E. compound interest
Refer to section 5.1
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-1
Section: 5.1
Topic: Simple interest
6. Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her
winnings today discounted at her discount rate is called which one of the following?
A. single amount
B. future value
C. present value
D. simple amount
E. compounded value
Refer to section 5.2
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-2
Section: 5.2
Topic: Present value
5-3
Chapter 05 - Introduction to Valuation: The Time Value of Money
7. Terry is calculating the present value of a bonus he will receive next year. The process he is
using is called:
A. growth analysis.
B. discounting.
C. accumulating.
D. compounding.
E. reducing.
Refer to section 5.2
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-2
Section: 5.2
Topic: Discounting
8. Steve just computed the present value of a $10,000 bonus he will receive in the future. The
interest rate he used in this process is referred to as which one of the following?
A. current yield
B. effective rate
C. compound rate
D. simple rate
E. discount rate
Refer to section 5.2
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-2
Section: 5.2
Topic: Discount rate
5-4
Chapter 05 - Introduction to Valuation: The Time Value of Money
9. The process of determining the present value of future cash flows in order to know their
worth today is called which one of the following?
A. compound interest valuation
B. interest on interest computation
C. discounted cash flow valuation
D. present value interest factoring
E. complex factoring
Refer to section 5.2
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 5-2
Section: 5.2
Topic: Discounted cash flow valuation [Show Less]