Basics of Corporate Finance

You have completed Unit Three: Time Value of Money. Before proceeding to Unit Four: Valuing Financial Assets, please answer the following questions. They will check your comprehension of the concepts presented in this unit. If you answer any questions incorrectly, we suggest that you review the appropriate text.

PROGRESS CHECK 3

1. ABC Bank receives a loan payment of $1,000 principal and interest from a customer. The bank loans the $1,000 to another customer for one year at the rate of 6.25% per annum. The second customer will pay $1,062.50 to the bank. This amount represents the:
_____ a) loan made to the second customer discounted to its present value on the maturity date.
_____ b) compounded value of the first customer's payment after it was loaned to customer two.
_____ c) future value of the loan payment received from the first customer calculated on a simple interest basis.
_____ d) simple interest future value of the amount of the loan made to the first customer.

2. In the future value formula FVT = P (1 + R/M)T x M, if:
_____ a) M equals two, interest is compounded semi-annually for each year in the period.
_____ b) T equals one and M equals twelve, interest is compounded once during each twelve month period.
_____ c) T equals three, interest is compounded every four months.
_____ d) T equals five and M equals one, simple interest is calculated once each year for five years.

3. In the formula FVT = P x eRT,eRT represents:
_____ a) the future value interest factor for a discrete number of compounding periods.
_____ b) the future value interest factor for an infinitely large number of compounding periods.
_____ c) simple interest calculated on a continuous basis for a specified period of time.
_____ d) interest factor compounded for a discrete period (e) at a certain rate (R) for a specific amount of time (T).