Appendix A
Compound Interest
and the Time-Value of Money
True False
Topic: Compound interest
1. When interest is earned on interest in a savings account in a bank, this is called compound interest.
Answer: True
Rationale: As interest accumulates on an investment, both the original investment and the
accumulated interest will earn a return in subsequent periods.
Topic: Time value of money
2. A dollar received today is worth more than a dollar received two years ago.
Answer: False
Rationale: It is much better to receive money as soon as possible as it can be invested and will earn
additional interest.
Topic: Financial calculator
3. The interest rate on a financial calculator to be inputted using the I/Yr key means to enter the rate per
period.
Answer: True
Rationale: Before entering amounts into a financial calculator, a default must be set designating the
number of periods.
Topic: Compounding
4. If an investment is made that pays 8% annual interest for a 3-year period with quarterly compounding,
the number of periods is 36.
Answer: False
Rationale: There are 12 quarterly periods in three years: 3 years × 4 times per year = 12 periods of
compounding.
2023
Test Bank, Appendix A A-1
, Topic: Installment loans
5. Installment loans require a series of equal payments that often vary in the time period between each
payment.
Answer: False
Rationale: Installment notes have equal payments on a periodic basis, such that the time period
between each payment must be the same.
Topic: Bond valuation
6. There are two cash flows associated with bonds—a balloon payment and periodic interest payments.
Answer: True
Rationale: The balloon payment is the principal due when the bond matures. Interest payments are
most often paid semi-annually.
2023
A-2 Financial Accounting Using IFRS, 3rd Edition
Compound Interest
and the Time-Value of Money
True False
Topic: Compound interest
1. When interest is earned on interest in a savings account in a bank, this is called compound interest.
Answer: True
Rationale: As interest accumulates on an investment, both the original investment and the
accumulated interest will earn a return in subsequent periods.
Topic: Time value of money
2. A dollar received today is worth more than a dollar received two years ago.
Answer: False
Rationale: It is much better to receive money as soon as possible as it can be invested and will earn
additional interest.
Topic: Financial calculator
3. The interest rate on a financial calculator to be inputted using the I/Yr key means to enter the rate per
period.
Answer: True
Rationale: Before entering amounts into a financial calculator, a default must be set designating the
number of periods.
Topic: Compounding
4. If an investment is made that pays 8% annual interest for a 3-year period with quarterly compounding,
the number of periods is 36.
Answer: False
Rationale: There are 12 quarterly periods in three years: 3 years × 4 times per year = 12 periods of
compounding.
2023
Test Bank, Appendix A A-1
, Topic: Installment loans
5. Installment loans require a series of equal payments that often vary in the time period between each
payment.
Answer: False
Rationale: Installment notes have equal payments on a periodic basis, such that the time period
between each payment must be the same.
Topic: Bond valuation
6. There are two cash flows associated with bonds—a balloon payment and periodic interest payments.
Answer: True
Rationale: The balloon payment is the principal due when the bond matures. Interest payments are
most often paid semi-annually.
2023
A-2 Financial Accounting Using IFRS, 3rd Edition
