Question 1

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

Accepted Answer

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

Question 2

What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today)and earns 10% compounded annually?

Accepted Answer

A)  $25,000.00 
B)  $25,657.91 
C)  $28,223.70 
D)  $29,411.76 
A)  $25,000.00 
B)  $25,657.91 
C)  $28,223.70 
D)  $29,411.76

Question 3

Nominal dollars refer to the amount of purchasing power.

Accepted Answer

A) True 
 B)False

Question 4

Approximately 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 years 
B)  14 years 
C)  22 years 
D)  25 years 
A)  9 years 
B)  14 years 
C)  22 years 
D)  25 years

Question 5

The present value of the following cash flows is known to be $6,939.91; $500 today,$2,000 in 1 year,and $5,000 in 2 years.What discount rate is being used?

Accepted Answer

A)  3% 
B)  4% 
C)  5% 
D)  6% 
A)  3% 
B)  4% 
C)  5% 
D)  6%

Question 6

$3,000 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annual withdrawals of $1,206.34 beginning in one year.How much remains in the account after the second payment has been withdrawn?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 7

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 8

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 9

The salesperson offers,"Buy this new car for $25,000 cash or,with appropriate down payment,pay $500 per month for 48 months at 8% interest." Assuming that the salesperson does not offer a free lunch,calculate the "appropriate" down payment.

Accepted Answer

A)  $1,000.00 
B)  $4,520.64 
C)  $5,127.24 
D)  $8,000.00 
A)  $1,000.00 
B)  $4,520.64 
C)  $5,127.24 
D)  $8,000.00

Question 10

Given a set future value,which of the following will contribute to a lower present value?

Accepted Answer

A)  Higher discount rate 
B)  Fewer time periods 
C)  Less frequent discounting 
D)  Lower discount factor 
A)  Higher discount rate 
B)  Fewer time periods 
C)  Less frequent discounting 
D)  Lower discount factor

Question 11

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 12

A perpetuity is a special form of an annuity.

Accepted Answer

A) True 
 B)False

Question 13

What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments?

Accepted Answer

A)  9.00% 
B)  9.38% 
C)  9.81% 
D)  10.94% 
A)  9.00% 
B)  9.38% 
C)  9.81% 
D)  10.94%

Question 14

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 15

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 16

What will be the monthly payment on a home mortgage of $75,000 at 12% interest,to be amortized over 30 years?

Accepted Answer

A)  $771.46 
B)  $775.90 
C)  $1,028.61 
D)  $1,034.53 
A)  $771.46 
B)  $775.90 
C)  $1,028.61 
D)  $1,034.53

Question 17

What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually?

Accepted Answer

A)  5.00% 
B)  5.66% 
C)  6.00% 
D)  9.46% 
A)  5.00% 
B)  5.66% 
C)  6.00% 
D)  9.46%

Question 18

To calculate present value,we discount the future value by some interest rate r,the discount rate.

Accepted Answer

A) True 
 B)False

Question 19

Discuss the statement,"It is always preferred to select an account that offers compound interest over an account that offers simple interest."

Accepted Answer

This statement is true if the APRs are e

Question 20

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 1 year from now?

Accepted Answer

A)  $1,067,000 
B)  $1,250,000 
C)  $2,315,000 
D)  $2,500,000 
A)  $1,067,000 
B)  $1,250,000 
C)  $2,315,000 
D)  $2,500,000

Exam 5: The Time Value of Money

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

What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today)and earns 10% compounded annually?

Nominal dollars refer to the amount of purchasing power.

Approximately 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?

The present value of the following cash flows is known to be $6,939.91; $500 today,$2,000 in 1 year,and $5,000 in 2 years.What discount rate is being used?

$3,000 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 is the APR on a loan that charges interest at the rate of 1.4% per month?

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?

The salesperson offers,"Buy this new car for $25,000 cash or,with appropriate down payment,pay $500 per month for 48 months at 8% interest." Assuming that the salesperson does not offer a free lunch,calculate the "appropriate" down payment.

Given a set future value,which of the following will contribute to a lower present value?

When an investment pays only simple interest,this means:

A perpetuity is a special form of an annuity.

What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments?

The concept of compound interest refers to:

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

What will be the monthly payment on a home mortgage of $75,000 at 12% interest,to be amortized over 30 years?

What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually?

To calculate present value,we discount the future value by some interest rate r,the discount rate.

Discuss the statement,"It is always preferred to select an account that offers compound interest over an account that offers simple interest."

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 1 year from now?

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Using Discounted Cash-Flow Analysis to Make Investment Decisions

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What is the present value of your trust fund if it promises to pay you $50,000 on your 30^th birthday (7 years from today)and earns 10% compounded annually?