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time value - questions and answers

time value - questions and answers

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Published by Abhay Grover
basic financial management
basic financial management

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Published by: Abhay Grover on Sep 03, 2011
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11/09/2012

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Time Value of MoneyWork book Section I True, False type questions
State whether the following statements are true (T) or False (F)1.1Money has time value because you forgo something certaintoday for something uncertain tomorrow.1.2The uncertainty factor increases with time – the distant the cashflows, the more uncertain they become.1.3The lower is the compounding period, the higher is the effectiverate of interest.1.4With high inflation rate, the interest rates tend to increase.1.5One of the reasons for attributing time value to money is thatindividuals prefer future consumption to current consumption.1.6The nominal rate of interest is equal to the effective rate of interest when interest is compounded annually.1.7The rule of 72 is more precise (provides a better estimate) thanthe rule of 69 to find the period required to double your initialamount.1.8Financial analysis require an explicit consideration of time valueof money because most financial problems at corporate andindividual level involves cash flows occurring at different pointsin time.1.9Given a principal amount of Rs. 10,000 to be invested for 9months, it is better to invest in a scheme that offers 12% annual
 
compound interest than investing in a scheme that earns 12%simple interest.1.10A bank that pays 10% interest compounded annually pays ahigher effective rate of interest than a bank that pays 10%interest compounded quarterly.1.11The formula for effective rate of interest (re) is- re= (1+r/m)
n
-11.12A regular (deferred) annuity is one in which a series of periodiccash flows of equal amount occur at the beginning of eachperiod.1.13The rule of 72 is useful in determining the future value of anannuity given the rate of interest.1.14Frequency of compounding has no effect on interest earned.1.15Maximum benefit of compounding occurs when money iscompounded daily.1.16Present value of an uneven stream of cash flows can becalculated with the help of present value of annuity table.1.17While investing money it is always better to insist on a higherfrequency of compounding.1.18Increased frequency of compounding means the same thing asdecrease in compounding period.1.19The benefits from increased compounding frequency decreasewith each successive increase in compounding frequency.1.20In case of most of banks, fixed deposit money is compoundedquarterly.
 
1.21Effective rate of interest depends on the compounding period.1.22Higher the compounding period, higher is the effective rate of interest.1.23In simple interest, interest for each year in same.1.24The process of determining present value is often calleddiscounting.1.25Continuous compounding results in the maximum possible futurevalue for given rate of interest and time period.1.26A perpetuity is an annuity that continues for 100 years.1.27In perpetuity, the principal amount remains intact.1.28The present value of any future sum is inversely related with rateof interest.1.29Continuous compounding occurs when interest is compoundingdaily.1.30Sinking fund factor is used to determine the periodic fixedamount that must be invested regularly to accumulate aspecified sum at the end of a given period at a given rate of interest.1.31When debt(loan) is amortized in periodic fixed installments, theprincipal component of installment declines over time.1.32The compound value of any sum invested today varies directlywith rate of interest (r) and time period (n).1.33Money has time value because a sum of money to be received infuture is more valuable than the same amount today.

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