Question 1

To decrease the amount required today to fund a $10,000 debt due two years from now, you could _____ on your savings.

Accepted Answer

A)  Increase the rate of interest earned 
B)  Decrease the number of compounding periods per year 
C)  Earn simple interest rather than compound interest 
D)  Both decrease the rate of interest and the number of compounding periods per year 
E)  Either decrease the rate of interest or decrease the number of compounding periods per year 
A)  Increase the rate of interest earned 
B)  Decrease the number of compounding periods per year 
C)  Earn simple interest rather than compound interest 
D)  Both decrease the rate of interest and the number of compounding periods per year 
E)  Either decrease the rate of interest or decrease the number of compounding periods per year

Question 2

The term interest-on-interest refers to:

Accepted Answer

A)  The payment of interest more than once per year. 
B)  The interest earned on previous interest earnings which were reinvested. 
C)  Earning interest on an investment for a period greater than one year. 
D)  Earning interest only on the principal amount invested. 
E)  The process of accumulating interest on an investment over time to earn more interest. 
A)  The payment of interest more than once per year. 
B)  The interest earned on previous interest earnings which were reinvested. 
C)  Earning interest on an investment for a period greater than one year. 
D)  Earning interest only on the principal amount invested. 
E)  The process of accumulating interest on an investment over time to earn more interest.

Question 3

Explain what compounding is and the relationship between compound interest earned and the
number of years over which an investment is compounded.

Accepted Answer

Compounding is earning interes

Question 4

Marie needs $26,000 as a down payment for a house 4 years from now. She earns 5.25% on her savings. Marie can either deposit one lump sum today for this purpose or she can wait a year and
Deposit a lump sum. How much additional money must Marie deposit if she waits for one year
Rather than making the deposit today?

Accepted Answer

A)  $878.98 
B)  $911.13 
C)  $1,112.36 
D)  $1,348.03 
E)  $1,420.18 
A)  $878.98 
B)  $911.13 
C)  $1,112.36 
D)  $1,348.03 
E)  $1,420.18

Question 5

What is the present value of $36,500 to be received ﬁve years from today if the discount rate is 6.75%?

Accepted Answer

A)  $26,330.16 
B)  $26,678.19 
C)  $26,911.47 
D)  $28,008.19 
E)  $28,123.76 
A)  $26,330.16 
B)  $26,678.19 
C)  $26,911.47 
D)  $28,008.19 
E)  $28,123.76

Question 6

Provide a graphical illustration of future value over a ten year time span given rates of return of 0%,
5%, 10%, 15% and 20%.

Accepted Answer

The answer of Provide a graphical illustration of future value...

Question 7

Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000 ﬁve years from now. Which one of the following statements is correct if both Katie and Wilt apply a 5%
Discount rate to these amounts?

Accepted Answer

A)  The present value of Katie and Wilt's money is equal. 
B)  The value of Wilt's money will be greater than the value of Katie's money six years from now. 
C)  In today's dollars, Wilt's money is worth more than Katie's. 
D)  In ﬁve years, the value of Katie's money will be less than the value of Wilt's money. 
E)  Katie's money is worth more than Wilt's money today. 
A)  The present value of Katie and Wilt's money is equal. 
B)  The value of Wilt's money will be greater than the value of Katie's money six years from now. 
C)  In today's dollars, Wilt's money is worth more than Katie's. 
D)  In ﬁve years, the value of Katie's money will be less than the value of Wilt's money. 
E)  Katie's money is worth more than Wilt's money today.

Question 8

Explain intuitively why it is that present values decrease as the discount rate increases.

Accepted Answer

Intuitively, a dollar today is

Question 9

Which one of the following statements is correct?

Accepted Answer

A)  The future value decreases as the period of time increases, all else constant. 
B)  The future value of $100 invested at 6% simple interest increases at a constant rate as the period of time increases. 
C)  There is an inverse relationship between the future value of a lump sum investment and the length of the investment period. 
D)  The future value of $100 invested at 6%, compounded annually, increases over time in an exponential manner. 
E)  Because time is the exponent in the future value formula, the length of an investment period has minimal effect on the future value of the investment. 
A)  The future value decreases as the period of time increases, all else constant. 
B)  The future value of $100 invested at 6% simple interest increases at a constant rate as the period of time increases. 
C)  There is an inverse relationship between the future value of a lump sum investment and the length of the investment period. 
D)  The future value of $100 invested at 6%, compounded annually, increases over time in an exponential manner. 
E)  Because time is the exponent in the future value formula, the length of an investment period has minimal effect on the future value of the investment.

Question 10

You just received $278,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 38 years from today. How
Much more will you have in your account on the day you retire if you can earn an average return of
9)5% rather than just 9.0%?

Accepted Answer

A)  $794,014 
B)  $1,396,036 
C)  $1,611,408 
D)  $1,818,342 
E)  $2,033,333 
A)  $794,014 
B)  $1,396,036 
C)  $1,611,408 
D)  $1,818,342 
E)  $2,033,333

Question 11

You collect model airplanes. One particular model is currently valued at $275. If this model increases in value by 5% annually, it will be worth ____ six years from now and _____ twelve years
From now.

Accepted Answer

A)  $368.01; $442.89 
B)  $368.01; $461.34 
C)  $368.53; $442.89 
D)  $368.53; $467.08 
E)  $368.53; $493.86 
A)  $368.01; $442.89 
B)  $368.01; $461.34 
C)  $368.53; $442.89 
D)  $368.53; $467.08 
E)  $368.53; $493.86

Question 12

Provide a deﬁnition of discount.

Accepted Answer

To calculate the pre

Question 13

Wexter and Daughter invested $165,000 to help fund a company expansion project planned for 3 years from now. How much additional money will the ﬁrm have saved 3 years from now if it can
Earn 7% rather than 5% on this money?

Accepted Answer

A)  $7,940.09 
B)  $8,218.07 
C)  $11,123.97 
D)  $12,648.18 
E)  $13,211.21 
A)  $7,940.09 
B)  $8,218.07 
C)  $11,123.97 
D)  $12,648.18 
E)  $13,211.21

Question 14

You wish to have $400,000 at the end of twenty-ﬁve years. In the last ten years, you contribute
$1,000 semi-annually at a rate of 5.8% compounded monthly. During the middle ten years, you
withdraw $750 quarterly at a rate of 4.5% compounded annually. Given this information, determine
the initial deposit that has to be made at the start of the ﬁrst ﬁve years at a rate of 4% compounded
monthly.

Accepted Answer

The initia

Question 15

You have just landed your ﬁrst job. Part of the offer includes a $4,000 new employee bonus which is intended to cover your relocation costs. You have determined that you can move yourself for
$1,000. Thus, you have decided to open an Individual Retirement Account with the remaining
$3,000. How much more will this investment be worth 35 years from now if you can earn an
Average rate of return of 9.5% rather than 9%?

Accepted Answer

A)  $10,639.32 
B)  $10,676.16 
C)  $11,207.91 
D)  $11,341.41 
E)  $11,454.54 
A)  $10,639.32 
B)  $10,676.16 
C)  $11,207.91 
D)  $11,341.41 
E)  $11,454.54

Question 16

The current value of future cash ﬂows discounted at the appropriate discount rate is called the:

Accepted Answer

A)  Principal value. 
B)  Future value. 
C)  Present value. 
D)  Simple interest rate. 
E)  Compound interest rate. 
A)  Principal value. 
B)  Future value. 
C)  Present value. 
D)  Simple interest rate. 
E)  Compound interest rate.

Question 17

Robin invested $10,000 in an account that pays 5% simple interest. How much more could she have earned over a 40-year period if the interest had compounded annually?

Accepted Answer

A)  $38,207.16 
B)  $38,414.14 
C)  $40,399.89 
D)  $48,414.14 
E)  $50,399.89 
A)  $38,207.16 
B)  $38,414.14 
C)  $40,399.89 
D)  $48,414.14 
E)  $50,399.89

Question 18

You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using
Compound interest. You should:

Accepted Answer

A)  Choose the simple interest option because both have the same basic interest rate. 
B)  Choose the compound interest option because it provides a higher return. 
C)  Choose the compound interest option only if the compounding is for monthly periods. 
D)  Choose the simple interest option only if compounding occurs more than once a year. 
E)  Choose the compound interest option only if you are investing less than $5,000. 
A)  Choose the simple interest option because both have the same basic interest rate. 
B)  Choose the compound interest option because it provides a higher return. 
C)  Choose the compound interest option only if the compounding is for monthly periods. 
D)  Choose the simple interest option only if compounding occurs more than once a year. 
E)  Choose the compound interest option only if you are investing less than $5,000.

Question 19

Provide a deﬁnition of time value of money.

Accepted Answer

Refers to the fact that a doll

Question 20

You wish to have $200,000 at the end of twenty years. In the last ﬁve years, you withdraw $1,000
annually at a rate of 3.8% compounded quarterly. During the middle ten years, you contribute $500
monthly at a rate of 2.8% compounded semi-annually. Given this information, determine the initial
deposit that has to be made at the start of the ﬁrst ﬁve years at a rate of 4% compounded monthly.

Accepted Answer

The initia

Exam 5: Introduction to Valuation: the Time Value of Money

To decrease the amount required today to fund a $10,000 debt due two years from now, you could _____ on your savings.

The term interest-on-interest refers to:

Explain what compounding is and the relationship between compound interest earned and the number of years over which an investment is compounded.

What is the present value of $36,500 to be received ﬁve years from today if the discount rate is 6.75%?

Provide a graphical illustration of future value over a ten year time span given rates of return of 0%, 5%, 10%, 15% and 20%.

Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000 ﬁve years from now. Which one of the following statements is correct if both Katie and Wilt apply a 5% Discount rate to these amounts?

Explain intuitively why it is that present values decrease as the discount rate increases.

Which one of the following statements is correct?

You collect model airplanes. One particular model is currently valued at $275. If this model increases in value by 5% annually, it will be worth ____ six years from now and _____ twelve years From now.

Provide a deﬁnition of discount.

Wexter and Daughter invested $165,000 to help fund a company expansion project planned for 3 years from now. How much additional money will the ﬁrm have saved 3 years from now if it can Earn 7% rather than 5% on this money?

The current value of future cash ﬂows discounted at the appropriate discount rate is called the:

Robin invested $10,000 in an account that pays 5% simple interest. How much more could she have earned over a 40-year period if the interest had compounded annually?

You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using Compound interest. You should:

Provide a deﬁnition of time value of money.

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Filters

You collect model airplanes. One particular model is currently valued at $275. If this model increases in value by 5% annually, it will be worth six years from now and _ twelve years From now.