BA 323 SDSU EXAM 2 EXPECTED QUESTIONS WITH
VERIFIED ANSWERS
Question 1.
time value of money
ANSWER
Adjusting the value of cash flows based on when the cash flows are received.
Question 2.
Future Value
ANSWER
the amount of money in the future that an amount of money today will yield, given prevailing interest
rates
Question 3.
Present Value
ANSWER
The value today of a future cash flow or series of cash flows
Question 4.
Compounding
ANSWER
The arithmetic process of determining the final value of a cash flow or series of cash flows when
compound interest is applied
Question 5.
Know how to solve for the future value, present value, the interest rate, or time.
ANSWER
FVn = PV(1+ I)^n N: Time / Number of years, I: Interest rate per year • Aside: use annual
compounding §PV, FV: • Amount of Money Starting With (PV) or Ending With (FV)
Question 6.
Value of an annuity
ANSWER
the sum of all deposits plus all interest paid. KEY POINT: • To solve, we use PMT and set either Future
value or present value to zero
1
, Question 7.
Understand how different compounding periods impact cash flows (which compounding period
would you prefer?)
ANSWER
Daily! Interest on interest!
Question 8.
bond
ANSWER
A long-term debt instrument in which a borrower agrees to make payments of principal and interest,
on specific dates, to the holders of the bond.
Question 9.
What are the five key features of a bond?
ANSWER
Par value, coupon interest rate, maturity date, issue date, and yield to maturity.
Question 10.
par value
ANSWER
the amount that an investor pays to purchase a bond and that will be repaid to the investor at
maturity. Par value = Future value
Question 11.
coupon interest rate
ANSWER
the percentage of a bond's par value that will be paid annually, typically in two equal semiannual
payments, as interest. (stated interest rate paid by the issuer. Multiply by par value to get dollar
payment of interest.)
Question 12.
Mature Date
ANSWER
years until the bond must be repaid.
2
VERIFIED ANSWERS
Question 1.
time value of money
ANSWER
Adjusting the value of cash flows based on when the cash flows are received.
Question 2.
Future Value
ANSWER
the amount of money in the future that an amount of money today will yield, given prevailing interest
rates
Question 3.
Present Value
ANSWER
The value today of a future cash flow or series of cash flows
Question 4.
Compounding
ANSWER
The arithmetic process of determining the final value of a cash flow or series of cash flows when
compound interest is applied
Question 5.
Know how to solve for the future value, present value, the interest rate, or time.
ANSWER
FVn = PV(1+ I)^n N: Time / Number of years, I: Interest rate per year • Aside: use annual
compounding §PV, FV: • Amount of Money Starting With (PV) or Ending With (FV)
Question 6.
Value of an annuity
ANSWER
the sum of all deposits plus all interest paid. KEY POINT: • To solve, we use PMT and set either Future
value or present value to zero
1
, Question 7.
Understand how different compounding periods impact cash flows (which compounding period
would you prefer?)
ANSWER
Daily! Interest on interest!
Question 8.
bond
ANSWER
A long-term debt instrument in which a borrower agrees to make payments of principal and interest,
on specific dates, to the holders of the bond.
Question 9.
What are the five key features of a bond?
ANSWER
Par value, coupon interest rate, maturity date, issue date, and yield to maturity.
Question 10.
par value
ANSWER
the amount that an investor pays to purchase a bond and that will be repaid to the investor at
maturity. Par value = Future value
Question 11.
coupon interest rate
ANSWER
the percentage of a bond's par value that will be paid annually, typically in two equal semiannual
payments, as interest. (stated interest rate paid by the issuer. Multiply by par value to get dollar
payment of interest.)
Question 12.
Mature Date
ANSWER
years until the bond must be repaid.
2
