Principles of Finance Final Exam Correct 100%!

Principles of Finance Final Exam Correct 100%! Principles of Finance Final Exam Correct 100%! Principles of Finance Final Exam Correct 100%! Why does money have time value? - ANSWER same reasons interest rates are greater than zero - Risk that one exposes themselves to when they save or invest - Inflationary Expectations because one must forecast when saving/investing - Opportunity Cost because when one saves/invests one delays current consumption - People have positive time preference for consumption—will delay consumption but only if they're compensated Simple Interest - ANSWER interest earned from initial investment - Calculations: Initial deposit/principal (P) x annual interest rate (i) x periods/years (n) Compound Interest - ANSWER finding the future value of a single or series of cash flows - More frequently interest is compounded the more interest earned on investment Intra-Year Compounding - ANSWER interest paid more than once a year (semi-annually, quarterly, etc.) Effective Rate of Interest/Annual Percent Yield (APY) - ANSWER when actual interest rate is higher than the stated rate - The more frequently the periods compounded are the higher APY will be - Calculations: 2nd [ICONV]; enter NOM %(nominal interest rate or stated rate); enter C/Y (# times compounded per year); use up/down arrows to find EFF then press CPT Annuity - ANSWER series of cash flows; inflows or outflows - When finding annuities, a financial calculator can be used if: (all criteria must be met) - Cash flows are identical - Interval between cash flows is the same - There are no gaps between annuity (one or more points in time where there are no cash flows) Is LAST cash flow being compounded for one period? - ANSWER Future Value - NO—Ordinary Annuity: makes payments at end of period - YES—Annuity Due: makes payments at beginning of period -- Compounded an additional time -- Worth more Is FIRST cash flow being discounted for one period? - ANSWER PRESENT VALUE - YES—Ordinary Annuity: -