2Q Business Finance Summative

Why do individuals generally prefer to receive the same amount now rather than one year from now?

• Because money now is worth less than money in the future

• Because money now has the same value as money in the future

• Because money now is worth more due to the time value of money

• Because money now cannot be invested

What does interest represent in financial terms?

• The cost for using money

• The fee for delaying payment of goods

• The profit from selling goods

• The principal amount lent to a borrower

How is interest calculated?

• By dividing the principal by the interest rate

• By multiplying the interest rate per period by the outstanding principal

• By subtracting the principal from the interest

• By adding the interest rate to the principal

What is compound interest calculated on?

• A fixed amount decided annually

• Only the original principal amount

• The original principal reduced by payments

• The principal and accumulated interest

Why does the interest for each succeeding period increase with compound interest?

• Because the interest is unrelated to previous periods

• Because the principal grows by added interest

• Because the principal is constant over time

• Because the rate decreases over time

What is the present value of an investment?

• The sum of future cash flows

• The total accumulated interest earned over time

• The value at the end of TTT years

• The value today after discounting future cash flows

What does present value describe?

• A discounted future value of cash flow(s) today

• A fixed value of a cash flow

• A measure of the value of all investments

• The interest earned by a principal amount

What is an annuity?

• A series of equal cash flows over a specific number of periods

• A single payment at a future date

• Cash flows lasting indefinitely

• Payments increasing each period

What does a perpetuity mean?

• Cash flows lasting forever

• Cash flows lasting for a definite time

• Cash flows that end when the principal is recovered

• A series of payments that increases over time

When will individuals take on additional risk?

• When they are compensated for inflation

• When they expect a higher return

• When the risk is zero

• When they are certain there is no loss