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COB 300 Finance Chp 5 Exam Questions Complete Solutions New Update (A+ Pass)
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COB 300 Finance Chp 5 Exam Questions Complete Solutions New Update (A+ Pass) Time value analysis - Answers - 1st step is to set up a timeline time line - Answers - an important tool used in time value analysis, it is a graphical representation used to show the timing of cash flows. Time perio...

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  • November 25, 2024
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  • 2024/2025
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COB 300 Finance Chp 5 Exam
Questions Complete Solutions
New Update (A+ Pass)
Time value analysis - Answers -✔✔ 1st step is to set up a timeline

time line - Answers -✔✔ an important tool used in time value analysis, it is a graphical
representation used to show the timing of cash flows. Time periods such as years or
months, time 0 is today.

Time 1 is one period from today. Both the end of period 1 and the start of period 2.

Each tick mark corresponds to the end of one period and the beginning of the next one.

Do time lines only deal with years or can other time periods be used? - Answers -✔✔
other time periods can be used

Difference between money and fruit - Answers -✔✔ money can work for you over time,
earning interest

You cannot mix fruits and finance - Answers -✔✔ every time you see money spread
out over time, it must be the same type.

Also, money changes value over time.

Get money now or later? - Answers -✔✔ now is better because you can earn interest

Set up a time line to illustrate the following situation: you currently have 2,000 in a 3-
year certificate of deposit (CD) that pays a guaranteed 4% annually. - Answers -✔✔

Compounding - Answers -✔✔ the process of going to future value from present value.
The arithmatic process of determining the final value of a cash flow or a series of cash
flows withing compound interest is applied.

future value - Answers -✔✔ fv, the amount to which a cash flow or series of cash flows
will grow over a given period of time when compounded at a given interest rate. Ending
amount.

When calculating future value, if present value is an outflow- meaning it leaves our
wallet- then it is -. If an inflow, then +. Typically speaking if you put money into
something and are gaining interest it means that you had an outflow to an investment so

,in most cases this number will be - when calculating the face value given the present
value. This number will be positive when someone gives you money and is charging
you interest- giving you a negative future value.

FVn=PV(1+I)^N

Future value with simple interest - Answers -✔✔ FV=PV+PV(I)(N)

I - Answers -✔✔ interest rate earned per year

INT - Answers -✔✔ dollars of interest earned during the year

N or n - Answers -✔✔ number of periods involved

Compound interest - Answers -✔✔ occurs when interest is earned on prior periods
interest

Simple interest - Answers -✔✔ occurs when interest is not earned on interest

Interest that is paid only on the principal amount.

Interest= Rate * principal amount of loan.

Compounding Interest - Answers -✔✔ the interest rate is a growth rate. This can be
applied to anything that grows: sales, population, earnings per share, future salary,
etc...

Pay interest on an amount that changes over time.

Interest = Rate * (Principal + Accumulated interest)

Frequency of compounding - Answers -✔✔ if interest is compounded more than once
per year, we need to make an adjustment in our calculation. The state rate or nominal
rate of interest is the annual percentage rate (APR).

The rate per period depends on the frequency of compounding.

At the beginning of your freshman year, your favorite family member deposits 10,000
into a 4 year bank certificate of deposit (CD) that pays 5% annual interest. You will
receive the money in the account (including interest) if you graduate with honors in 4
years. How much will be there in the account after 4 years? - Answers -✔✔ Beginning
PV= -10,000
N= 4 years
I= 5
FV?

, PV is negative because cash is being put into your account (leaving you!/ your family!).

FV= 12,155.06

A dollar in hand today is worth more than a dollar to be received next year, why? -
Answers -✔✔ Because of compounding interest.

Simple vs. Compound interest - Answers -✔✔ Simple interest: Take the beginning
number and add that for each year, not on the amount per year.

Compound: Earning interest on interest.

Compound interest is always higher.

What is the effects/benefits on compounding - Answers -✔✔ interest on interest =
Compounded FV- Simple FV

What is compounding? What's the difference between simple interest and compound
interest? What would the future value of $100 be after 5 years at 10% compound
interest? at 10% simple interest? - Answers -✔✔ after 5 years implies END instead of
beginning.

Compound interest:
N=5
I=10
PV= -100
FV=? 161.05

Simple interest= 100 * .10= 10$ per year. 10*5= 50 dollars. So the simply interest would
be 150$ (100 + 50)

Amount invest (1 + interest rate)^ number of years

Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit
(CD) that pays 4% interest compounded annually. How much will you have when the
CD Matures? How would your answer change if the interest rate were 5% or 6% or
20%? - Answers -✔✔ On 4% compounded interest=
N=3
I=4
PV= -2,000
FV? = 2,249.7

5% ?:
N=3
I=5

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