Deck 4: Introduction to Valuation: the Time Value of Money

Question 1

A financially wise individual would prefer a loan based on __________ interest and an investment earning __________ interest.

A)compound;compound
B)compound;simple
C)simple;compound
D)simple;simple
E)complex;compound

Answer 1

simple;compound

Question 2

The interest rate used to calculate the present value of future cash flows is called the:

A)compound interest rate
B)present value factor
C)future value factor
D)current yield rate
E)discount rate

Answer 2

discount rate

Question 3

The Monthly Bank pays 3 per cent interest,compounded monthly,on their savings accounts.The Daily Bank pays 3 per cent interest,compounded daily,on their savings accounts.You want to have $1000 saved in an account two years from today.The amount you must deposit today in a lump sum to achieve your goal will be:

A)the same regardless of which bank you choose because they both pay 3 per cent
B)the same regardless of which bank you choose because they both pay simple interest
C)the same regardless of which bank you choose because they both pay compound interest
D)greater if you have your account at The Monthly Bank
E)greater if you have your account at The Daily Bank

Answer 3

greater if you have your account at The Monthly Bank

Question 4

Terry invested $2000 today in an investment that pays 6.5 per cent annual interest.Which one of the following statements is correct,assuming all interest is reinvested?

A)Terry will earn the same amount of interest each year.
B)Terry could have the same future value and invest less than $2000 initially if he could earn more than 6.5 per cent interest.
C)Terry will earn an increasing amount of interest each and every year even if he should decide to withdraw the interest annually rather than reinvesting the interest.
D)Terry's interest for year two will be equal to $2000 ´ 0.065 ´ 2.
E)Terry will be earning simple interest.

Question 5

The present value of $10 000 to be received in 10 years will __________ if the discount rate is increased.

A)remain constant
B)decrease
C)increase
D)either remain constant or increase
E)either remain constant or decrease

Question 6

Over time,the future value of $1000 invested today at 6 per cent,compounded annually,will increase by:

A)a constant annual amount given the interest on interest effect
B)a constant annual amount given that interest is compounded annually
C)a decreasing annual amount due to the compounding effect
D)an increasing annual amount given the compound interest effect
E)an increasing annual amount due to the effects of the simple interest rate

Question 7

Today,Courtney wants to invest less than $5000 with the goal of receiving $5000 back some time in the future.Which one of the following statements is correct?

A)The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest.
B)The lower the rate of interest she earns,the shorter the time she will have to wait to reach her goal.
C)She will have to wait longer if she earns 6 per cent compound interest instead of 6 per cent simple interest.
D)The length of time she has to wait to reach her goal is directly related to the interest rate she earns.
E)The period of time she has to wait decreases as the amount she invests today increases.

Question 8

The process of accumulating interest in an investment over time to earn more interest is called:

A)discounting
B)compounding
C)complexing
D)indexing
E)multiplying

Question 9

Given a rate of return of zero,the future value of a lump sum invested today will always:

A)remain constant,regardless of the period of time
B)decrease as the period of time decreases
C)decrease as the period of time increases
D)increase as the period of time increases
E)remain constant or increase as the period of time increases

Question 10

The value of an investment after one or more periods of time is called the:

A)simple value
B)present value
C)discounted value
D)future value
E)interest on interest value

Question 11

Interest earned on both the initial principal and the reinvested interest from prior periods is called:

A)compound interest
B)simple interest
C)complex interest
D)dual interest
E)interest on interest

Question 12

If you invest $5000 now,and your investment pays 12% per annum,how much will you have in three years if compounded annually (to the nearest dollar)?

A)$7025
B)$14 821
C)$6852
D)$8014
E)$5619

Question 13

Precision Engineering invested $110 000 at 6.5 per cent interest,compounded annually for 4 years.How much interest on interest did the company earn over this period of time?

A)$2481.25
B)$2911.30
C)$3014.14
D)$3250.00
E)$3333.33

Question 14

The valuation calculating the present value of a future cash flow to determine its value today is called __________ valuation.

A)complex
B)current
C)discounted cash flow
D)future cash flow
E)compound cash flow

Question 15

All else constant,the present value will __________ as the period of time decreases,provided there is an interest rate greater than zero.

A)remain constant
B)decrease
C)increase
D)either remain constant or decrease
E)either remain constant or increase

Question 16

You have $50 000 now to invest.If you can earn 10% per annum on your deposit,and can invest for 5 years,what will be the future value of your deposit (to the nearest dollar)at the end of the investment period?

A)$150 493
B)$80 526
C)$99 456
D)$85 025
E)$100 013

Question 17

The method of calculating interest once during the entire life of the loan,on the original sum borrowed,is known as:

A)simple interest
B)interest on interest
C)compounding
D)rule of 72
E)compound interest

Question 18

Suppose you need to pay your air-ticket of $2400 for a European trip next year.If you deposit money now,you can earn 7% per annum.How much do you need to invest today?

A)$1759
B)$1968
C)$2000
D)$2151
E)$2243

Question 19

You have been offered an investment that promises to double your money every 9 years.Considering the rule of 72,what is your approximate rate of return on the investment?

A)8%
B)9%
C)14%
D)10%
E)7.20%

Question 20

Jamie deposits $1000 into an account paying 6 per cent interest,compounded annually.
At the same time,Amy deposits $1000 into an account paying 3 per cent interest,compounded annually.Over a five-year period:

A)both Jamie and Amy will earn the same amount of interest
B)Jamie will earn exactly twice the amount of interest that Amy earns
C)Amy will earn exactly twice the amount of interest that Jamie earns
D)Jamie will earn somewhere between one and two times the amount of interest that Amy earns
E)Jamie will earn more than twice the amount of interest that Amy earns

Question 21

Lisa has $1000 in cash today.Which one of the following investment options is most apt to double her money?

A)6 per cent interest for 3 years
B)12 per cent interest for 5 years
C)7 per cent interest for 9 years
D)8 per cent interest for 9 years
E)6 per cent interest for 10 years

Question 22

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

A)compounding
B)factoring
C)time valuation
D)simple cash flow valuation
E)discounted cash flow valuation

Question 23

You expect to receive $12 000 at graduation one year from now.You plan on investing it at 8 per cent until you have $100 000.How long will you wait from now?

A)27.47 years
B)27.51 years
C)27.55 years
D)28.47 years
E)28.55 years

Question 24

You and your brother are planning a large anniversary party 3 years from today for your grandparents' 50^th wedding anniversary.You have estimated that you will need $2500 for this party.You can earn 3.5 per cent compounded annually on your savings.How much would you and your brother have to deposit today in one lump sum to pay for the entire party?

A)$2199.74
B)$2254.86
C)$2308.16
D)$2334.90
E)$2368.81

Question 25

Mavis invests $10 000 today in a managed fund to supplement her employer funded superannuation scheme.She expects to earn 8 per cent,compounded annually,on her money for the next 26 years.After that,she wants to be more conservative,so only expects to earn 5 per cent,compounded annually.How much money will she have in her account when she retires 38 years from now,assuming this is the only deposit she makes into the fund?

A)$129 411.20
B)$132 827.88
C)$134 616.56
D)$141 919.67
E)$142 003.12

Question 26

How long will it take to double your savings if you earn 3.6 per cent interest,compounded annually?

A)17.78 years
B)18.04 years
C)18.67 years
D)19.42 years
E)19.60 years

Question 27

You just won $25 000 and deposited your winnings into an account that pays 6.2 per cent interest,compounded annually.How long will you have to wait until your winnings are worth $50 000?

A)11.52 years
B)12.00 years
C)12.29 years
D)12.67 years
E)12.90 years

Question 28

Todd will be receiving a $10 000 bonus one year from now.The process of determining how much that bonus is worth today is called:

A)aggregating
B)discounting
C)simplifying
D)compounding
E)extrapolating

Question 29

Sue needs to invest $3626 today in order for her savings account to be worth $5000 six years from now.Which one of the following terms refers to the $3626?

A)present value
B)compound value
C)future value
D)complex value
E)factor value

Question 30

By definition,a bank that pays simple interest on a savings account will pay interest:

A)only at the beginning of the investment period
B)on interest
C)only on the principal amount originally invested
D)on both the principal amount and the reinvested interest
E)only if all previous interest payments are reinvested

Question 31

When you were born,your parents opened an investment account in your name and deposited $500 into the account.The account has earned an average annual rate of return of 4.8 per cent.Today,the account is valued at $36 911.22.How old are you?

A)74.47 years
B)76.67 years
C)81.08 years
D)87.33 years
E)91.75 years

Question 32

You want to invest an amount of money today and receive back twice that amount in the future.You expect to earn 8 per cent interest.Approximately how long must you wait for your investment to double in value?

A)6 years
B)7 years
C)8 years
D)9 years
E)10 years

Question 33

Isaac only has $690 today but needs $800 to buy a new laptop.How long will he have to wait to buy the laptop if he earns 5.4 per cent compounded annually on his savings?

A)2.29 years
B)2.48 years
C)2.51 years
D)2.77 years
E)2.81 years

Question 34

Scott has $4800 that he wants to invest for 3 years.He can invest this amount at his credit union and earn 4 per cent simple interest;or he can open an account at Trust Bank and earn 3.65 per cent interest,compounded annually.If he decides to invest at Trust Bank for 3 years,he will:

A)earn $15.02 more than if he had invested with his credit union
B)earn $30.98 less than if he had invested with his credit union
C)earn the same amount as if he had invested with the credit union
D)have a total balance of $4992 in his account after one year
E)have a total balance of $4876 in his account after one year

Question 35

Today,Tony is investing $16 000 at 6.5 per cent,compounded annually,for 4 years.How much additional income could he earn if he had invested this amount at 7 per cent,compounded annually?

A)$323.22
B)$389.28
C)$401.16
D)$442.79
E)$484.08

Question 36

Ben invested $5000 twenty years ago with an insurance company that has paid him 5 per cent simple interest on his funds.Charles invested $5000 twenty years ago in a fund that has paid him 5 per cent interest,compounded annually.How much more interest has Charles earned than Ben over the past 20 years?

A)$0
B)$2109.16
C)$3266.49
D)$7109.16
E)$8266.49

Question 37

Sixty years ago,your grandparents opened two savings accounts and deposited $200 in each account.The first account was with Which Bank at 3 per cent,compounded annually.The second account was with Dragon Bank at 3.5 per cent,compounded annually.Which one of the following statements is true concerning these accounts?

A)The Which Bank account is currently worth $1,201.54.
B)The Which Bank account has earned $211.19 more in interest than the Dragon Bank account.
C)The Dragon Bank account is currently worth $1,526.08.
D)The Dragon Bank account has paid $367.48 more in interest than the Which Bank account.
E)The Dragon Bank account has paid $397.30 more in interest than the Which Bank account.

Question 38

The relationship between the present value and the time period is best described as:

A)direct
B)inverse
C)unrelated
D)ambiguous
E)parallel

Question 39

The present value of a lump sum future amount:

A)increases as the interest rate decreases
B)decreases as the time period decreases
C)is inversely related to the future value
D)is directly related to the interest rate
E)is directly related to the time period

Question 40

Roger just deposited $13 000 into his account at Market Place Bank.The bank will pay 2.3 per cent interest,compounded annually,on this account.How much interest on interest will he earn over the next 15 years?

A)$638.16
B)$799.28
C)$821.03
D)$906.15
E)$923.70

Question 41

Elaine has just received an insurance settlement of $25 000.She wants to save this money until her daughter goes to university.If she can earn an average of 6.5 per cent,compounded annually,how much will she have saved when her daughter enters university 8 years from now?

A)$38 000.00
B)$40 929.02
C)$41 374.89
D)$41 899.60
E)$42 000.00

Question 42

Your parents spent $6200 to buy 500 shares in a company listed on the ASX 13 years ago.The stock has appreciated 9 per cent per year on average.What is the current value of those 500 shares?

A)$18 824.17
B)$19 007.99
C)$19 580.92
D)$20 515.08
E)$22 449.92

Question 43

Which of the following will increase the future value of a lump sum investment?
I.decreasing the interest rate
II.increasing the interest rate
III.increasing the time period
IV.decreasing the amount of the lump sum investment

A)I and III only
B)I and IV only
C)II and III only
D)II and IV only
E)II,III and IV only

Question 44

Thirteen years ago,you deposited $2400 into a superannuation fund.Eight years ago,you added an additional $1000 to this account.You earned 8 per cent,compounded annually,for the first 5 years,and 5.5 per cent,compounded annually,for the last 8 years.How much money do you have in your account today?

A)$4666.67
B)$4717.29
C)$5411.90
D)$6708.15
E)$6946.59

Question 45

A professional rugby league player is offered a bonus of $150 000 if he completes a five year playing contract with an NRL club.If money is worth 7 per cent to him what is this bonus worth today?

A)$106 947.93
B)$210 382.76
C)$140 186.92
D)$130 000.00
E)$160 947.93

Question 46

What is the future value of $4900 invested for 8 years at 7 per cent compounded annually?

A)$8397.74
B)$8419.11
C)$8511.15
D)$8513.06
E)$8520.22

Question 47

Today you invest $1000 in a credit union that pays 5 per cent simple interest.How much will you have accumulated in 4 years?

A)$1215.51
B)$1512.51
C)$1200.00
D)$1215.00
E)$4800.00