#1
What does the concept of time value of money suggest?
Money grows over time
ExplanationThe idea that a sum of money has a different value today than it will in the future due to its earning potential.
#2
Which of the following formulas represents the future value of an investment?
FV = PV * (1 + r)
ExplanationThe equation for calculating the value of an investment at a future date based on the initial investment and the interest rate.
#3
What does the term 'opportunity cost' refer to in investment analysis?
The cost of the next best alternative that is foregone
ExplanationThe value of the best alternative forgone when a decision is made to pursue a particular investment.
#4
What is the primary objective of investment analysis?
To maximize returns while minimizing risk
ExplanationThe overarching goal of evaluating investments is to achieve the highest returns with the least amount of risk.
#5
Which of the following is a characteristic of a bond?
Fixed interest payments
ExplanationBonds typically provide regular interest payments at a fixed rate.
#6
What does the term 'discount rate' refer to in the context of investment analysis?
The rate at which future cash flows are discounted
ExplanationThe rate used to convert future cash flows into their present value.
#7
Which of the following is a characteristic of a mutual fund?
Pooled funds invested in various securities
ExplanationA collective investment vehicle that pools funds from multiple investors to invest in a diversified portfolio of securities.
#8
What is the formula for calculating the present value of a single future sum?
PV = FV / (1 + r)
ExplanationThe formula to determine the current value of a future sum, taking into account the discount rate.
#9
Which of the following is NOT a component of the time value of money?
Future Value
ExplanationFuture Value is not directly a part of the time value of money, which focuses on present and past values.
#10
What is the internal rate of return (IRR) of an investment?
The interest rate at which the present value of cash inflows equals the initial investment
ExplanationThe rate at which an investment's present value of cash inflows equals its initial cost.
#11
Which of the following is a disadvantage of using the payback period as an investment evaluation method?
It ignores cash flows beyond the payback period
ExplanationThe payback period method disregards cash flows occurring after the initial investment is recovered.
#12
What does the term 'compounding' refer to in the context of time value of money?
The process of reinvesting earnings to generate additional earnings
ExplanationEarning interest on both the initial investment and the accumulated interest over time.
#13
Which of the following factors affects the present value of an investment?
All of the above
ExplanationInterest rate, time to maturity, and future cash flows all influence the present value of an investment.
#14
What is the formula for calculating the future value of an annuity?
FV = PMT * ((1 + r)^n - 1) / r
ExplanationDetermining the value of a series of equal payments at a future date, taking into account the interest rate.
#15
What does the term 'discounting' refer to in the context of time value of money?
The process of reducing future cash flows to their present value
ExplanationAdjusting future cash flows to their current value by applying a discount rate.
#16
Which of the following is a characteristic of a perpetuity?
It pays an equal amount at regular intervals indefinitely
ExplanationAn investment that provides a constant cash flow at regular intervals indefinitely.
#17
What is the formula for calculating the net present value (NPV) of an investment?
NPV = Sum of PV of cash flows - Initial Investment
ExplanationThe difference between the present value of cash inflows and the initial investment in a project.
#18
In the context of investment analysis, what does the term 'sensitivity analysis' refer to?
An analysis of the impact of changes in key variables on project outcomes
ExplanationExamining how variations in key parameters affect the outcomes of an investment project.
#19
Which of the following is a characteristic of an annuity due?
Payments occur at the beginning of each period
ExplanationAn annuity with cash flows starting at the beginning of each period.
#20
What does the term 'risk premium' represent in investment analysis?
The additional return expected for taking on additional risk
ExplanationCompensation demanded by investors for accepting higher levels of risk in their investments.
#21
In investment analysis, what does the term 'capital budgeting' refer to?
The process of evaluating and selecting long-term investments
ExplanationThe systematic assessment and decision-making process for long-term investments in projects or assets.