Question 1

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

Accepted Answer

A) True 
 B)False  True

Question 2

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

Accepted Answer

A) True 
 B)False  True

Question 3

Prizes are often not "worth" as much as claimed.Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today.Assume an interest rate of 7%.

Accepted Answer

A) $2,833,898.81 
B) $2,911,015.68 
C) $2,609,144.14 
D) $2,738,304.13 
A) $2,833,898.81 
B) $2,911,015.68 
C) $2,609,144.14 
D) $2,738,304.13 A

Question 4

You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of year 3, and $6,000 at end of year 5.What is the present value of these cash flows at an interest rate of 7%?

Accepted Answer

A) $9,731.13 
B) $10,412.27 
C) $10,524.08 
D) $11,524.91 
A) $9,731.13 
B) $10,412.27 
C) $10,524.08 
D) $11,524.91

Question 5

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?

Accepted Answer

A) the interest rate is very high. 
B) the investment period is very long. 
C) the compounding is annually. 
D) this is not possible with positive interest rates. 
A) the interest rate is very high. 
B) the investment period is very long. 
C) the compounding is annually. 
D) this is not possible with positive interest rates.

Question 6

How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?

Accepted Answer

A) $70.00 
B) $80.14 
C) $105.62 
D) $140.00 
A) $70.00 
B) $80.14 
C) $105.62 
D) $140.00

Question 7

If interest is paid m times per year, then the per-period interest rate equals the:

Accepted Answer

A) effective annual rate divided by m. 
B) compound interest rate times m. 
C) effective annual rate. 
D) annual percentage rate divided by m. 
A) effective annual rate divided by m. 
B) compound interest rate times m. 
C) effective annual rate. 
D) annual percentage rate divided by m.

Question 8

What is the APR on a loan that charges interest at the rate of 1.4% per month?

Accepted Answer

A) 10.20% 
B) 14.00% 
C) 16.80% 
D) 18.16% 
A) 10.20% 
B) 14.00% 
C) 16.80% 
D) 18.16%

Question 9

The concept of compound interest refers to:

Accepted Answer

A) earning interest on the original investment. 
B) payment of interest on previously earned interest. 
C) investing for a multiyear period of time. 
D) determining the APR of the investment. 
A) earning interest on the original investment. 
B) payment of interest on previously earned interest. 
C) investing for a multiyear period of time. 
D) determining the APR of the investment.

Question 10

With $1.5 million in an account expected to earn 8% annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today?

Accepted Answer

A) $112,148.50 
B) $120,000.00 
C) $123,371.44 
D) $133,241.15 
A) $112,148.50 
B) $120,000.00 
C) $123,371.44 
D) $133,241.15

Question 11

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year.The annual interest rate is 12% and payments begin in one month.What is the present value of this 2-year loan?

Accepted Answer

A) $6,246.34 
B) $6,389.78 
C) $6,428.57 
D) $6,753.05 
A) $6,246.34 
B) $6,389.78 
C) $6,428.57 
D) $6,753.05

Question 12

What is the present value of $100 to be deposited today into an account paying 8%, compounded semiannually for 2 years?

Accepted Answer

A) $85.48 
B) $100.00 
C) $116.00 
D) $116.99 
A) $85.48 
B) $100.00 
C) $116.00 
D) $116.99

Question 13

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?

Accepted Answer

A) the APR is lower than the annually compounded rate. 
B) the APR is higher than the annually compounded rate. 
C) the APR equals the annually compounded rate. 
D) the answer depends on the interest rate. 
A) the APR is lower than the annually compounded rate. 
B) the APR is higher than the annually compounded rate. 
C) the APR equals the annually compounded rate. 
D) the answer depends on the interest rate.

Question 14

How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years?

Accepted Answer

A) $87,200.00 
B) $675,764.89 
C) $736,583.73 
D) $802,876.27 
A) $87,200.00 
B) $675,764.89 
C) $736,583.73 
D) $802,876.27

Question 15

You should never compare cash flows occurring at different times without first discounting them to a common date.

Accepted Answer

A) True 
 B)False

Question 16

Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually, and the first payment occurs one year from now?

Accepted Answer

A) $1,067,477.62 
B) $1,128,433.33 
C) $1,487,320.09 
D) $1,250,000.00 
A) $1,067,477.62 
B) $1,128,433.33 
C) $1,487,320.09 
D) $1,250,000.00

Question 17

The discount factor is used to calculate the present value of $1 received in year t.

Accepted Answer

A) True 
 B)False

Question 18

When an investment pays only simple interest, this means:

Accepted Answer

A) the interest rate is lower than on comparable investments. 
B) the future value of the investment will be low. 
C) the earned interest is nontaxable to the investor. 
D) interest is earned only on the original investment. 
A) the interest rate is lower than on comparable investments. 
B) the future value of the investment will be low. 
C) the earned interest is nontaxable to the investor. 
D) interest is earned only on the original investment.

Question 19

An annual percentage rate (APR) is determined by annualizing the rate using compound interest.

Accepted Answer

A) True 
 B)False

Question 20

How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for 3 years?

Accepted Answer

A) $107.69 
B) $133.10 
C) $134.49 
D) $313.84 
A) $107.69 
B) $133.10 
C) $134.49 
D) $313.84

Exam 5: The Time Value of Money

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

Prizes are often not "worth" as much as claimed.Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today.Assume an interest rate of 7%.

You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of year 3, and $6,000 at end of year 5.What is the present value of these cash flows at an interest rate of 7%?

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?

How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?

If interest is paid m times per year, then the per-period interest rate equals the:

What is the APR on a loan that charges interest at the rate of 1.4% per month?

The concept of compound interest refers to:

With $1.5 million in an account expected to earn 8% annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today?

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year.The annual interest rate is 12% and payments begin in one month.What is the present value of this 2-year loan?

What is the present value of $100 to be deposited today into an account paying 8%, compounded semiannually for 2 years?

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?

How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years?

You should never compare cash flows occurring at different times without first discounting them to a common date.

Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually, and the first payment occurs one year from now?

The discount factor is used to calculate the present value of $1 received in year t.

When an investment pays only simple interest, this means:

An annual percentage rate (APR) is determined by annualizing the rate using compound interest.

How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for 3 years?

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