Question 1

Cash flows occurring in different periods should not be compared unless:

Accepted Answer

A) interest rates are expected to be stable. 
B) the flows occur no more than one year from each other. 
C) high rates of interest can be earned on the flows. 
D) the flows have been discounted to a common date. 
A) interest rates are expected to be stable. 
B) the flows occur no more than one year from each other. 
C) high rates of interest can be earned on the flows. 
D) the flows have been discounted to a common date.

Question 2

If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate?

Accepted Answer

A) 1.04% 
B) 4.17% 
C) 5.00% 
D) 8.19% 
A) 1.04% 
B) 4.17% 
C) 5.00% 
D) 8.19%

Question 3

Three thousand dollars is deposited into an account paying 10% annually to provide three annual withdrawals of $1,206.34 beginning in one year.How much remains in the account after the second payment has been withdrawn?

Accepted Answer

A) $1,326.97 
B) $1,206.34 
C) $1,096.69 
D) $587.32 
A) $1,326.97 
B) $1,206.34 
C) $1,096.69 
D) $587.32

Question 4

What factor is fixed if you establish a scholarship fund in perpetuity?

Accepted Answer

A) present value 
B) payment amount 
C) interest rate 
D) discount rate 
A) present value 
B) payment amount 
C) interest rate 
D) discount rate

Question 5

Your retirement account has a current balance of $50,000.What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?

Accepted Answer

A) 5.02% 
B) 7.24% 
C) 9.80% 
D) 10.07% 
A) 5.02% 
B) 7.24% 
C) 9.80% 
D) 10.07%

Question 6

What is the present value of a four-year annuity of $100 per year that begins 2 years from today (end of year 1) if the discount rate is 9%?

Accepted Answer

A) $297.22 
B) $323.97 
C) $356.85 
D) $272.68 
A) $297.22 
B) $323.97 
C) $356.85 
D) $272.68

Question 7

Assume you are making $989 monthly payments on your amortized mortgage.The amount of each payment that is applied to the principal balance:

Accepted Answer

A) decreases with each succeeding payment. 
B) increases with each succeeding payment. 
C) is constant throughout the loan term. 
D) fluctuates monthly with changes in market interest rates. 
A) decreases with each succeeding payment. 
B) increases with each succeeding payment. 
C) is constant throughout the loan term. 
D) fluctuates monthly with changes in market interest rates.

Question 8

Which one of the following will increase the present value of an annuity, other things equal?

Accepted Answer

A) increasing the interest rate 
B) decreasing the interest rate 
C) decreasing the number of payments 
D) decreasing the amount of the payment 
A) increasing the interest rate 
B) decreasing the interest rate 
C) decreasing the number of payments 
D) decreasing the amount of the payment

Question 9

Other things being equal, the more frequent the compounding period, the:

Accepted Answer

A) higher the annual percentage rate. 
B) lower the annual percentage rate. 
C) higher the effective annual interest rate. 
D) lower the effective annual interest rate. 
A) higher the annual percentage rate. 
B) lower the annual percentage rate. 
C) higher the effective annual interest rate. 
D) lower the effective annual interest rate.

Question 10

What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period?

Accepted Answer

A) 7.36% 
B) 7.50% 
C) 7.64% 
D) 8.01% 
A) 7.36% 
B) 7.50% 
C) 7.64% 
D) 8.01%

Question 11

The term "constant dollars" refers to equal payments for amortizing a loan.

Accepted Answer

A) True 
 B)False

Question 12

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate?

Accepted Answer

A) $130.00 
B) $138.83 
C) $169.00 
D) $353.34 
A) $130.00 
B) $138.83 
C) $169.00 
D) $353.34

Question 13

You invested $1,200 three years ago.During the three years, you earned annual rates of return of 4.8%, 9.2%, and 11.6%.What is the value of this investment today?

Accepted Answer

A) $1,498.08 
B) $1,512.11 
C) $1,532.60 
D) $1,549.19 
A) $1,498.08 
B) $1,512.11 
C) $1,532.60 
D) $1,549.19

Question 14

If inflation in Wonderland averaged about 3% per month in 2013, what was the annual rate of inflation?

Accepted Answer

A) 36.00% 
B) 42.58% 
C) 40.09% 
D) 41.27% 
A) 36.00% 
B) 42.58% 
C) 40.09% 
D) 41.27%

Question 15

What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3?

Accepted Answer

A) $5,022.10 
B) $5,144.03 
C) $5,423.87 
D) $5,520.00 
A) $5,022.10 
B) $5,144.03 
C) $5,423.87 
D) $5,520.00

Question 16

What is the discount factor for $1 to be received in 5 years at a discount rate of 8%?

Accepted Answer

A) .4693 
B) .5500 
C) .6000 
D) .6806 
A) .4693 
B) .5500 
C) .6000 
D) .6806

Question 17

If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments, what is the annual percentage rate?

Accepted Answer

A) 4.02% 
B) 10.02% 
C) 14.50% 
D) 15.19% 
A) 4.02% 
B) 10.02% 
C) 14.50% 
D) 15.19%

Question 18

An amortizing loan is one in which:

Accepted Answer

A) the principal remains unchanged with each payment. 
B) accrued interest is paid regularly. 
C) the maturity of the loan is variable. 
D) the principal balance is reduced with each payment. 
A) the principal remains unchanged with each payment. 
B) accrued interest is paid regularly. 
C) the maturity of the loan is variable. 
D) the principal balance is reduced with each payment.

Question 19

A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate.What is its present value?

Accepted Answer

A) $33,333.33 
B) $37,681.16 
C) $38,333.33 
D) $65,217.39 
A) $33,333.33 
B) $37,681.16 
C) $38,333.33 
D) $65,217.39

Question 20

How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually?

Accepted Answer

A) 9.81 years 
B) 14.27 years 
C) 22.01 years 
D) 25.00 years 
A) 9.81 years 
B) 14.27 years 
C) 22.01 years 
D) 25.00 years

Exam 5: The Time Value of Money

Cash flows occurring in different periods should not be compared unless:

If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate?

Three thousand dollars is deposited into an account paying 10% annually to provide three annual withdrawals of $1,206.34 beginning in one year.How much remains in the account after the second payment has been withdrawn?

What factor is fixed if you establish a scholarship fund in perpetuity?

Your retirement account has a current balance of $50,000.What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?

What is the present value of a four-year annuity of $100 per year that begins 2 years from today (end of year 1) if the discount rate is 9%?

Assume you are making $989 monthly payments on your amortized mortgage.The amount of each payment that is applied to the principal balance:

Which one of the following will increase the present value of an annuity, other things equal?

Other things being equal, the more frequent the compounding period, the:

What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period?

The term "constant dollars" refers to equal payments for amortizing a loan.

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate?

You invested $1,200 three years ago.During the three years, you earned annual rates of return of 4.8%, 9.2%, and 11.6%.What is the value of this investment today?

If inflation in Wonderland averaged about 3% per month in 2013, what was the annual rate of inflation?

What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3?

What is the discount factor for $1 to be received in 5 years at a discount rate of 8%?

If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments, what is the annual percentage rate?

An amortizing loan is one in which:

A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate.What is its present value?

How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually?

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