Deck 8: Time Value of Moneypart I: Future and Present Value of Lump Sums

Question 1

In inflation, a dollar received now can purchase more than a dollar received five years from now.

Answer 1

True

Question 2

Fixed Principal Commercial Loans can use either a fixed amount of interest or a variable amount.

Answer 2

True

Question 3

The effective rate takes compounding into effect.

Answer 3

True

Question 4

If you paid $5.00 to go to a movie in 2001 and you paid $7.00 to go to a movie in 2007, the increase is price is probably due to

A) greed on the part of moviemakers.
B) inflation.
C) compound interest.
D) deflation.

Question 5

Fixed Principal Commercial Loans use the same principal payment for the duration of the loan.

Question 6

A Bridge Loan is a simple interest loan that provides funds to homeowners and business owners, bridging the time gap between the sale of one piece of property and the purchase of another piece of property.

Question 7

If you deposit $1,000 in an account that compounds quarterly at 8 percent interest, the amount of your account at the end of 5 years will be

A) $1,104.10.
B) $1,485.90.
C) $1,469.30.
D) $4,661.00.

Question 8

Compound interest is the interest that is earned or charged on both the principal amount and on the interest already accrued.

Question 9

Which of the following is true for Fixed Principal Commercial Loans?

A) The bank calculates the total interest due even on variable interest loans.
B) The bank provides an amortization schedule with a variable interest loan.
C) The borrower will probably be required to make a 20 percent down payment.
D) The borrower does not have to make a down payment.

Question 10

In a Bridge Loan, the new owner can only own one property at a time.

Question 11

The effective rate does not take compounding into effect.

Question 12

If you paid $7.00 to go to a movie in 2006, what will the price of this movie be in the year 2011 if inflation averages 6 percent?

A) $5.12
B) $5.23
C) $9.37
D) $9.73

Question 13

The time value of money is the gain of purchasing power that occurs over time as a result of deflation.

Question 14

Fixed Principal Commercial Loans use a fixed interest rate but vary the principal payment.

Question 15

Another name for the effective rate is the stated, or quoted, rate.

Question 16

Fixed Principal Commercial Loans can only use a fixed amount of interest.

Question 17

The time value of money is the loss of purchasing power that occurs over time as a result of inflation.

Question 18

Simple interest is added on to the principal to determine the total amount owed or due.

Question 19

In inflation, a dollar received now can purchase less than a dollar received five years from now.

Question 20

The time value of money is the gain of purchasing power that occurs over time as a result of inflation.

Question 21

Using the rule of 72, how long will it take $1,000 to double if you earn 6% interest per year?

A) 6 years
B) 10 years
C) 7.2 years
D) 12 years
E) Cannot calculate with information provided.

Question 22

Which of the following is true for Fixed Principal Commercial Loans?

A) I, II, III & IV
B) I, II, IV & V
C) I, II, III & V
D) I, III, IV & V
E) All of the above are true.

Question 23

With a Fixed Principal Commercial Loan where the amount borrowed is $120,000 for 5 years at 8 percent, the first monthly payment will be

A) $2,000
B) $2,800
C) $9,600
D) $11,600

Question 24

If inflation averages 6 percent per year, what is the value of a dollar ten years from now?

A) 53 cents
B) 56 cents
C) 79 cents
D) $1.79

Question 25

If inflation averages 6 percent per year, what is the loss of purchasing power for a dollar ten years from now?

A) 74 cents
B) 47 cents
C) 44 cents
D) 31 cents

Question 26

The rate that the bank is offering is 2 percent compounded monthly. This is an actual rate of interest of _ percent.

A) 2.00
B) 2.02
C) 2.04
D) 2.50

Question 27

You have an absolutely brilliant child who is six years old and will be attending a private college in twelve years. You know that a four -year college now costs at least $30,000 per year, including tuition, books, and room and board. The cost of sending a child to college has increased by 7 percent per year, and you believe this will be true for the next twelve years. How much will the annual tuition be when your child is eighteen?

A) 2.2522
B) 2.2107
C) 2.0122
D) 1.5007

Question 28

How long will it take for $500 to amount to $850 at 10% simple interest?

A) 10 years
B) 5 years
C) 3.5 years
D) 7 years
E) none of the above

Question 29

With a Fixed Principal Commercial Loan where the amount borrowed is $120,000 for 5 years at 8 percent, the second monthly payment will be

A) $2,000
B) $2,800
C) $2,786.67
D) none of the above.

Question 30

You have to make a balloon payment on your house five years from now of $15,000. If money can earn an average of 6 percent a year for the five -year period, how much interest will you earn on your deposit in five years?

A) $3,791.13
B) $3,807.00
C) $5,073.00
D) $5,101.50

Question 31

You have an absolutely brilliant child who is six years old and will be attending a private college in twelve years. You know that a four -year college now costs at least $30,000 per year, including tuition, books, and room and board. The cost of sending a child to college has increased by 7 percent per year, and you believe this will be true for the next twelve years. How much more tuition will you have to pay per year when your child is eighteen?

A) $15,000.00
B) $30,365.89
C) $36,320.44
D) $37,565.75

Question 32

The approximate time that it takes a deposit to double at a certain interest rate is calculated by dividing the annual interest rate into the number

A) 36.
B) 48.
C) 72.
D) 100.

Question 33

You have an absolutely brilliant child who is six years old and will be attending a private college in twelve years. You know that a four -year college now costs at least $30,000 per year, including tuition, books, and room and board. The cost of sending a child to college has increased by 7 percent per year, and you believe this will be true for the next twelve years. How much will the annual tuition be when your child is eighteen?

A) $67,565.75
B) $66,320.44
C) $60,365.89
D) $45,000.00

Question 34

When you go to a financial institution to obtain a loan, the rate of interest normally quoted will be the

A) effective rate.
B) quoted rate.
C) stated rate.
D) both A and C above.
E) both B and C above.

Question 35

When seeking a Bridge Loan, the borrower

A) owns one piece of property and wishes to purchase another.
B) borrows only the down payment on a second piece of property.
C) borrows the down payment and closing costs on a second piece of property.
D) A and B above.
E) A and C above.

Question 36

In a Bridge Loan, the lender

A) calculates loans the entire value of the property to the borrower.
B) requires a 20 percent down payment on the value of the property.
C) calculates interest on a daily basis.
D) knows the exact payment prior to making the loan.

Question 37

The amount of interest that is deducted from the amount you wish to borrow in order to get proceeds is

A) stated interest.
B) accrued interest.
C) bank discount.
D) simple interest.

Question 38

If you purchase an automobile for $20,000 in 2006 and inflation is 4 percent, how much would a similar automobile sell for four years from then?

A) $16,438
B) $16,454
C) $24,310
D) $24,334

Question 39

If you purchase an automobile for $20,000 in 2004 and inflation is 4 percent, how much would a similar automobile sell for four years from then? To solve this problem you would use the formula for the

A) bank discount.
B) future value of a lump sum.
C) internal rate of return.
D) present value of a lump sum.

Question 40

If you want an effective rate of 6 percent, what is an acceptable quoted rate if interest is compounded quarterly?

A) 5.50
B) 5.65
C) 5.87
D) 6.12

Question 41

Joe M. purchases a house for $410,000. He sells the home 8 years later for $629,000. What is his internal rate of return (IRR)?

A) 5.15%
B) 1.50%
C) 15%
D) 5.50%

Question 42

JT purchases 1,000 shares of stock at $29 per share in January 2006. He sells the 1,000 shares in January 2012 for $32 per share. What is his internal rate of return?

A) 6.15%
B) 5.61%
C) 5.19%
D) 1.65%

Question 43

Joe M. purchases a house for $365,000. He sells the home 5 years later for $440,000. What is his internal rate of return (IRR)?

A) 8.31%
B) 3.81%
C) 3.18%
D) 1.31%

Question 44

N. Trest bought a $10,000 Treasury bill at a 1.32% discount for 13 weeks (91 days). How much does N pay for the bond?

A) $10,000
B) $9,967.09
C) $9,870.54
D) $9,685.90

Question 45

If your money doubled in 8 years, then your annual rate of interest is approximately

A) 7.2%.
B) 8%.
C) 9%.
D) 10%.

Question 46

JT purchases 1,000 shares of stock at $2.48 per share in January 2006. He sells the 1,000 shares in January 2010 for $5.50 per share. What is his internal rate of return?

A) 22.03%
B) 2.03%
C) 3.22%
D) 2.33%

Question 47

JT purchases 1,000 shares of stock at $14.78 per share in January 2006. He sells the 1,000 shares in January 2010 for $15.50 per share. What is his internal rate of return?

A) 11.2%
B) 2.11%
C) 1.2%
D) 1.12%

Question 48

N. Trest bought a $10,000 Treasury bill at a 2.38% discount for 13 weeks (91 days). How much does N pay for the bond?

A) $10,000
B) $9,940.66
C) $6,640.66
D) $9,770.08

Question 49

You buy 1,000 shares of stock at $5.00 per share in January of 2004. You sell the stock at $7.50 per share in January of 2007. What is your internal rate of return (IRR)?

A) 1.1447%
B) 14.47%
C) 18.00%
D) 87.36%

Question 50

JT purchases 1,000 shares of stock at $23.50 per share in January 2006. He sells the 1,000 shares in January 2110 for $35.50 per share. What is his internal rate of return?

A) 10.86%
B) 16.08%
C) 8.06%
D) 6.08%

Question 51

N. Trest bought a $10,000 Treasury bill at a 18% discount for 13 weeks (91 days). How much does N pay for the bond?

A) $10,000
B) $9551.23
C) $8,732.73
D) $8,548.95

Question 52

Juanita purchases a house for $410,000. She sells the home 8 years later for $1,200,000. What is her internal rate of return (IRR)?

A) 14.37%
B) 37.40%
C) 3.74%
D) 34%

Question 53

A noted free agent running back just signed a four -year, 30 -million dollar contract with a new team. He will get a 7 -million dollar signing bonus and a 4.5 -million dollar roster bonus. Additionally, he will get 3.25 million for year one, 5.25 million for year two, 5 million for year three, and 5 million for year four. Salary is paid at the end of the first year. Find the present value of his contract if money can earn 6%.

A) $15,897,083.78
B) $27,397,083.78
C) $23,911,000.35
D) $30,000,000

Question 54

You have an absolutely brilliant child who is six years old and will be attending a private college in twelve years. You know that a four -year college now costs at least $30,000 per year, including tuition, books, and room and board. The cost of sending a child to college has increased by 7 percent per year, and you believe this will be true for the next twelve years. What will a four year college education cost when your child is eighteen?

A) $180,087.64
B) $241,463.56
C) $265,281.76
D) $270,263.00

Question 55

Joe M. purchases a house for $370,000. He sells the home 7 years later for $600,000. What is his internal rate of return (IRR)?

A) 15.7%
B) 7.15%
C) 7.50%
D) 5.70%

Question 56

A college education costs approximately $75,000 at an Ivy League school. If inflation averages 5% per year, what will be the cost of the college education in 15 years?

A) $1,745,697.74
B) $155,919.61
C) $125,754.75
D) $36,076.28

Question 57

A college education costs approximately $75,000 at an Ivy League school, inflation averages 5%, what factor will you use to determine the cost of an education in 15 years?

A) 2.0789
B) 2.7890
C) 2.9500
D) 0.4810

Question 58

A college education costs approximately $75,000 at an Ivy League school. If inflation averages 8% per year, how much more would the education cost in 15 years?

A) $162,912.68
B) $237,912.68
C) $312,912.68
D) $2,036,408