Deck 5: Time Value of Money

Question 1

What happens to the present value of an annuity as the interest rate increases?

A)It decreases.
B)It stays the same.
C)It increases.
D)All of the above.

Answer 1

A

Question 2

The difference between an ordinary annuity and an annuity due is the

A)interest rate.
B)timing of the payments.
C)amount of the payments.
D)number of periods.

Answer 2

B

Question 3

Which of the following properly describes the present value of an ordinary annuity?

A)The first payment is one period after the present value.
B)The last payment is one period after the future value.
C)The first payment is on the same date as the present value.
D)The last payment is on the same date as the future value.

Answer 3

A

Question 4

You plan to borrow $20,000 and repay the loan with 48 equal monthly payments. Which of the following best describes this?

A)present value of a perpetuity
B)future value of an annuity
C)present value of an annuity
D)present value of a series of non-constant cash flows

Question 5

Everything else being the same, the higher the interest rate, the higher the present value.

Question 6

An infinite annuity is called a perpetuity.

Question 7

Which of the following properly describes the future value of an annuity due?

A)The first payment is one period after the present value.
B)The last payment is one period after the future value.
C)The first payment is on the same date as the present value.
D)The last payment is on the same date as the future value.

Question 8

The interest paid on an amortized loan decreases with each payment.

Question 9

Everything else being the same, the more frequent the compounding, the higher the future value.

Question 10

An investment that pays $1,000 in a year, $1,500 in two years, and $2,000 in three years can properly be described as an annuity.

Question 11

The future value of an annuity due is on the same date as the last payment.

Question 12

A loan amortization schedule shows how much of the principal balance is paid off with each loan payment.

Question 13

What happens to the future value of an annuity as the interest rate increases?

A)It decreases.
B)It stays the same.
C)It increases.
D)None of the above.

Question 14

The first payment of a deferred annuity is deferred more than one period into the future.

Question 15

Suppose you are investing money at a 10% annual nominal interest rate. To earn as much as possible, which one of the following compounding periods should you prefer?

A)daily
B)weekly
C)monthly
D)annually

Question 16

Which of the following properly describes the future value of an ordinary annuity?

A)The first payment is one period after the present value.
B)The last payment is one period after the future value.
C)The first payment is on the same date as the present value.
D)The last payment is on the same date as the future value.

Question 17

Suppose you are borrowing money at a 10% annual nominal interest rate. To pay as little as possible, which one of the following compounding periods should you prefer?

A)weekly
B)monthly
C)daily
D)annually

Question 18

If an interest rate is compounded monthly, the annual nominal rate is greater than the effective annual rate.

Question 19

The process of computing the present value of a future value is called discounting.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Question 20

Which of the following properly describes the present value of an annuity due?

A)The first payment is one period after the present value.
B)The last payment is one period after the future value.
C)The first payment is on the same date as the present value.
D)The last payment is on the same date as the future value.

Question 21

Odarta can afford to pay $12,000 at the end of each of the next 30 years to repay a home loan. If the interest rate is 5.50%, what is the most Odarta can borrow?

A)$174,404.94
B)$869,225.74
C)$218,181.82
D)$360,000.00

Question 22

What is the future value of $1,500 invested at a 5% rate for 7 years?

A)$2,103.83
B)$1,066.02
C)$12,213.01
D)$2,110.65

Question 23

What is the present value of $7,500 to be received in 8 years if 6% is the proper discount rate?

A)$46,573.45
B)$4,705.59
C)$4,726.27
D)$11,953.86

Question 24

A money multiplier certificate is selling for $8,000 today and promises to be worth $10,000 in 3 years. What is the rate of return on this investment?

A)7.17%
B)19.28%
C)7.72%
D)11.93%

Question 25

You plan to invest $2,000 annually. The first $2,000 will be invested on your 22^nd birthday and the last $2,000 will be invested on your 49^th birthday. What is the value of this investment on your 50^th birthday if all invested funds earn 8% annually?

A)$205,931.87
B)$190,677.66
C)$188,677.66
D)$174,701.54

Question 26

You have invested $5,000 into a certificate of deposit for 5 years. It pays a 6% annual nominal rate, compounded semiannually. What is the value of the certificate of deposit at the end of 5 years?

A)$6,691.13
B)$6,719.58
C)$28,185.46
D)$8,954.24

Question 27

Hyun just turned 25 today. By her 60^th birthday she would like to have $1,000,000 saved. She plans to invest equal annual payments beginning with her 26^th birthday and ending on her 60^th birthday. If all invested funds earn 8% annually, how much does she need to invest each year to have exactly $1,000,000 by her 60^th birthday?

A)$28,571.43
B)$6,304.11
C)$5,803.26
D)$5,344.67

Question 28

Jose is investing for his daughter's college education. He expects to need $30,000 in 10 years, $31,000 in 11 years, $32,000 in 12 years, and $33,000 in 13 years. If Jose can earn 6% annually on his investment, what single amount does he need to invest today to provide for his daughter's college education?

A)$68,324.38
B)$60,808.46
C)$62,724.99
D)$64,456.96

Question 29

You plan to invest $2,000 at the end of each of the next 25 years. If the investment earns 7% annually, what is the investment worth at the end of 25 years?

A)$132,748.33
B)$23,307.17
C)10,854.87
D)$126,498.08

Question 30

An investment promises to return $1,000 at the end of each of the next 5 years and then $2,000 at the end of each of the next 10 years years 6 through 15). What is the value of this investment today at a 4% interest rate?

A)$16,429.84
B)$17,784.95
C)$11,421,37
D)$15,570.21