Deck 5: The Time Value of Money

Question 1

The further in the future you receive a dollar, the more it is worth today.

Answer 1

False

Question 2

The value of a dollar invested at a positive interest rate grows over time.

Answer 2

True

Question 3

The future value of an investment of $5,000 to be received in three years at a discount rate of 10 percent is $6,655.

Answer 3

True

Question 4

The higher the rate of interest, the more likely you will elect to invest your funds and forgo current consumption.

Question 5

The growth in the future value of an investment over time is not linear, but exponential.

Question 6

The process of converting the initial amount into future value is called discounting.

Question 7

Due to compounding effects, the growth in the future value of an investment over time is linear.

Question 8

Compounding is the process by which interest earned on an investment is reinvested so that in future periods, interest is earned on the interest previously earned as well as the original principal.

Question 9

The more frequently the interest payments are compounded, the larger the future value of $1 for a given time period.

Question 10

The higher the interest rate on an investment, the more money that is accumulated for any time period.

Question 11

The future value of an investment of $5,000 earning an annual interest of 10 percent equals $6,000 at the end of one year.

Question 12

Compounding accelerates the growth of the total interest earned.

Question 13

The time value of money is based on the belief that people have a positive time preference for consumption.

Question 14

William invested $5,000 in an account earning 10 percent for one year. If he had left his investment in that account for another two years, he would expect the total interest earned over the three years to be higher by exactly $1,000.

Question 15

The future value factor for 10 years at 15% is calculated as (1 + 0.15)¹⁰.

Question 16

The future value technique uses discounting to find the future value of each cash flow at the end of a project's life.

Question 17

The value of a dollar invested at a positive interest rate grows over time but at a slower rate further into the future.

Question 18

If Bank A pays interest on a monthly basis and Bank B pays the same interest on a quarterly basis, then investing $1,000 in Bank B will lead to a higher future value than investing the same amount in Bank A.

Question 19

Compound interest increases as the number of year decreases.

Question 20

Compound interest consists of both simple interest and interest on interest.

Question 21

The present value factor 1 / (1 + i)ⁿ is the reciprocal of the future value factor (1 + i)ⁿ.

Question 22

The present value technique uses discounting to find the present value of each cash flow at the beginning of a project.

Question 23

The present value of $3,000 to be received in two years at a discount rate of 10 percent is $3,630.

Question 24

The Rule of 72 allows one to calculate the approximate time needed to double an investment.

Question 25

Future value measures:

A) what one or more cash flows are worth at the end of a specified period.
B) what one or more cash flows that is to be received in the future will be worth today.
C) the value of an investment after subtracting interest earned on it for one or more periods.
D) the value of an investment's worth today.

Question 26

If you had a choice of choosing a payment of $5,000 to be received in five years being discounted at 8 percent or at 10 percent, you should always choose the higher rate because it gives you the higher present value.

Question 27

The process of calculating the present value of a future cash flow is called compounding.

Question 28

To calculate the present value of a future amount, we divide the future amount by the future value factor.

Question 29

The present value factor increases as the number of period decreases.

Question 30

The higher the discount rate, the lower the present value of a future cash flow.

Question 31

The farther in the future a dollar will be received, the less it is worth today.

Question 32

The compound annual growth rate (CAGR) is the average annual growth rate over a specified period of time.

Question 33

Which of the following statements is true?

A) The value of a dollar invested at a positive interest rate decreases over time.
B) The further in the future you receive a dollar, the less it is worth today.
C) A dollar in hand today is worth less than a dollar to be received in the future.
D) The higher the rate of interest, the more likely an investor will elect to consume at present and forgo invest his funds.

Question 34

Which of the following statements is true of time value of money?

A) A dollar received today is worth more than a dollar to be received in the future because future dollars are not affected by inflation.
B) A dollar received today is worth less than a dollar to be received in the future because future dollars are not affected by inflation.
C) A dollar received today is worth more than a dollar to be received in the future because funds received today can be invested to earn a return.
D) A dollar to be received in the future is worth more than a dollar received today because it would have less risk associated with it.

Question 35

The present value is simply the current value of a future cash flow that has been discounted at an appropriate discount rate.

Question 36

Which of the following statements is true of the time value of money?

A) It means a dollar received today is worth less than a dollar received tomorrow.
B) It assumes that inflation rate remains constant for the foreseeable future.
C) It refers to the fact that higher cash flows in earlier years are less desirable.
D) It is based on the assumption that people prefer to consume things at some time in the future rather than today.

Question 37

Future value focuses on the valuation of cash flows received over time, while present value focuses only on the valuation of cash flows received at a point in time.

Question 38

Compound growth occurs when the initial value of a number increases or decreases each period by the factor (1 + growth rate).

Question 39

The Rule of 72 allows one to calculate the return earned on an investment over six years.

Question 40

The time value of money refers to the issue of:

A) what the value of the stream of future cash flows is today.
B) why a dollar received tomorrow is worth more than a dollar received today.
C) what the time required to double an amount of money.
D) why people prefer to consume things at some time in the future rather than today.

Question 41

Richard McLean wants to invest $3,000 in an account paying 5.25 percent compounded quarterly. What is the interest on interest after four years?

A) $695.98
B) $65.98
C) $630.00
D) $157.50

Question 42

Your brother has asked you to help him to choose an investment. He has $6,000 to invest today for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with the interest being paid quarterly. What will be the value of the investment in two years?

A) $6,550
B) $6,529
C) $6,107
D) $6,216

Question 43

Lorene Buckley wants to invest $3,500 today in a money market fund that pays a quarterly interest at 5 percent. She plans to fund a scholarship with the proceeds at her alma mater, Towson University. How much will Lorene have at the end of seven years? (Round to the nearest dollar.)

A) $5,091
B) $3,849
C) $4,956
D) $5,075

Question 44

Your aunt is looking to invest a certain amount today. Which of the following choices will give the maximum interest?

A) Three-year CD at 6.5% annual rate
B) Three-year CD at 6.75% annual rate
C) Three-year CD at 6.25% annual rate
D) Three-year CD at 7% annual rate

Question 45

Juan Vinson is planning to buy a house in five years. He is looking to invest $25,000 today in an index mutual fund that will provide him a return of 12 percent annually. How much will he have at the end of five years? (Round to the nearest dollar.)

A) $45,000
B) $28,000
C) $44,059
D) $28,530

Question 46

Which of the following equations is used to compute the future value for continuous compounding?

A) FV_∞ = PV × e ^{i × n}
B) FV_∞ = PV ÷ e ^{i × n}
C) FV_∞ = eⁱ ÷ PV
D) FV_∞ = eⁱ × PV

Question 47

You are interested in investing $15,000, a gift from your grandparents, for the next four years in a mutual fund that will earn an annual return of 8 percent. What will your investment be worth at the end of four years? (Round to the nearest dollar.)

A) $18,816
B) $20,407
C) $20,221
D) $18,089

Question 48

Which of the following investments will have the highest future value?

A) $1,300 invested at an annual interest rate of 10% for 5 years
B) $1,000 invested at an quarterly interest rate of 2.25% for 10 years
C) $1,300 invested at an quarterly interest rate of 2.25% for 5 years
D) $1,000 invested at an annual interest rate of 10% for 10 years

Question 49

The process of converting an amount given at the present time into a future value is called:

A) annualizing.
B) discounting.
C) compounding.
D) capital budgeting.

Question 50

Joseph Ray just received an inheritance of $35,775 from his great aunt. He plans to invest the funds for retirement. If Joseph can earn 4.75% per year with quarterly compounding for 32 years, how much will he have accumulated? (Round off to the nearest dollar.)

A) $237,416
B) $71,550
C) $184,622
D) $162,113

Question 51

Jack Palomo has deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? If the account paid compound interest, what would be the interest on interest in five years?

A) $750; $95.56
B) $150; $845.56
C) $150; $95.56
D) $95.56; $845.56

Question 52

Which of the following statements is true?

A) The longer the time period that funds are invested, the greater the future value.
B) The lower the discount rate that funds are invested at, the greater the future value.
C) The shorter the time period that funds are invested, the greater the future value.
D) The higher the interest rate, the slower the value of an investment will grow.

Question 53

Kevin Robertson would like to buy a condo in Florida in six years. He is looking to invest $75,000 today in a stock that is expected to earn a return of 18.3 percent annually. How much will he have at the end of six years? (Round to the nearest dollar.)

A) $205,575
B) $157,350
C) $184,681
D) $273,620

Question 54

Camille Noah is investing $5,000 in an account paying 6.75 percent annually for three years. What is the interest on interest if interest is compounded?

A) $1,012.50
B) $1,082.38
C) $82.38
D) $69.88

Question 55

Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank CD that will earn interest at 5.75 percent annually. How much will he have at the end of three years? (Round to the nearest dollar.)

A) $8,870
B) $8,575
C) $8,681
D) $8,990

Question 56

Lori Willis plans to invest for retirement, which she hopes will be in 20 years. She is planning to invest $25,000 today in U.S. Treasury bonds that will earn interest at 6.25 percent annually. How much will she have at the end of 20 years? (Round to the nearest dollar.)

A) $68,870
B) $50,625
C) $84,046
D) $75,000

Question 57

Which of the following is true of the future value of an investment?

A) The higher the interest rate, the higher the future value of an investment.
B) The higher the inflation rate, the lower the future value of an investment.
C) The lower the number of compounding periods, the higher the future value of an investment.
D) The lower the present value of an investment, the higher the future value of an investment.

Question 58

Paul Springer plans to save for a down payment for a house in 10 years. He will be able to invest $12,000 today in a money market account that will pay him an interest of 5.50 percent on a monthly basis. How much will he have at the end of 10 years?

A) $12,640
B) $20,773
C) $24,859
D) $23,080

Question 59

Dynoxo Textiles has a cash inflow of $1 million, which it needs for a long-term investment, at the end of one year. It plans to deposit the money in a bank CD that pays daily interest at 4.50 percent. What will be the value of the investment at the end of the year? (Round to the nearest dollar.)

A) $1,020,475
B) $1,000,103
C) $1,037,500
D) $1,046,025

Question 60

Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which will have the highest future value if she plans to invest for three years?

A) 3.50% compounded daily
B) 3.25% compounded monthly
C) 3.40% compounded quarterly
D) 3.75% compounded annually

Question 61

Which of the following statements is true with respect to the present value of a future amount?

A) The higher the discount rate, the higher the present value of a single sum for a given time period.
B) The relation between present value and time is exponential.
C) The greater the time period, the higher the present value of a single sum for a given interest rate.
D) The lower the discount rate, the lower the present value of a single sum for a given time period.

Question 62

When discount rate:

A) decreases, the present value of the future cash flow does not change.
B) decreases, the present value of any future cash flow increases.
C) increases, the present value of any future cash flow increases.
D) increases, the present value of any future cash flow does not change.

Question 63

Which of the following statements is true?

A) Present value calculations involve converting the initial amount into a future amount.
B) The present value (PV) is often called the compounded value of future cash payments.
C) The present value is calculated by using the discount factor.
D) The future value of an investment is the reciprocal of its present value.

Question 64

Leroy Diaz plans to invest some money today so that he will receive $7,500 in three years. If the investment he is considering will pay 3.65 percent compounded daily, how much will he have to invest today?

A) $5,276
B) $6,722
C) $6,897
D) $7,140

Question 65

Dat Nguyen is depositing $17,500 in an account paying an annual interest rate of 8.25 percent compounded monthly. What is the interest on interest after six years?

A) $8,662.50
B) $10,925.44
C) $2,497.63
D) $1,092.48

Question 66

Joyce Thomas wants to buy a house in six years. She hopes to have $25,000 at that time. If the bank CD she wants to invest in will pay 7.5 percent annually, how much will she have to invest today? (Round to the nearest dollar.)

A) $18,472
B) $13,987
C) $16,199
D) $23,256

Question 67

When discount rate:

A) increases, the present value of a future cash flow decreases.
B) increases, the present value of a future cash flow increases.
C) decreases, the present value of a future cash flow will remain the same.
D) decreases, the present value of a future cash flow decreases.

Question 68

Tamera Watson is saving for her daughter's college education. She wants to have $50,000 available when her daughter graduates from high school in four years. If the investment she is considering will pay 8.25 percent compounded monthly, how much will she have to invest today to reach her target? (Round to the nearest dollar.)

A) $35,987
B) $39,659
C) $41,275
D) $36,450

Question 69

Shawn Bowker invested $10,000 in a money market account that will pay 5.75 percent compounded daily. How much will the interest on interest be after two years?

A) $1,218.63
B) $1,150.00
C) $33.06
D) $68.63

Question 70

Which of the following equations is used to calculate the future value of an investment when interest is compounded m times a year?

A) FV_n = PV ÷ (1 + i)^m×n
B) FV_n = PV × (1 + i/m)^m×n
C) FV_n = (1 + i)^m×n+ PV
D) FV_n = (1 + i)^m×n÷ PV

Question 71

Celesta Frank wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she were to deposit the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.)

A) $6,432
B) $7,826
C) $8,148
D) $7,763

Question 72

Juan and Rachel Burpo plan to buy a time-share in six years of $16,860. In order to have adequate funds to do so, the Burpo want to make a deposit to their money market fund today. Assume that they will be able to earn an investment rate of 5.75%, compounded annually. How much will Juan and Rachel need to deposit today to achieve their goal? (Round off to the nearest dollar.)

A) $11,138
B) $8,885
C) $12,055
D) $14,243

Question 73

Robert Kelly wants to start a business in 10 years. He hopes to have $100,000 at that time to invest in the business. To reach his goal, he plans to invest a certain amount today in a bank CD that will pay him 9.50 percent annually. How much will he have to invest today to achieve his target? (Round to the nearest dollar.)

A) $54,233
B) $63,837
C) $91,324
D) $40,351

Question 74

Jacob's friend, Albert, borrows today with a promise to repay $7,418.87 in four years. If Jacob could earn 5.45 percent annually on the any investment he makes today, how much would he be willing to lend Albert today? (Round to nearest dollar.)

A) $6,000
B) $7,035
C) $6,500
D) $7,150

Question 75

Joseph Harris is considering an investment that pays 6.5 percent annually. How much must he invest today such that he will have $25,000 in seven years? (Round to the nearest dollar.)

A) $17,474
B) $18,850
C) $16,625
D) $16,088

Question 76

Which of the following equations is used to calculate the future value of an investment?

A) FV_n = PV ÷ (1 + i)ⁿ
B) FV_n = PV × (1 + i)ⁿ
C) FV_n = (1 + i)ⁿ + PV
D) FV_n = (1 + i)ⁿ ÷ PV

Question 77

You need to have $15,000 in five years to payoff a home equity loan. You can invest in an account that pays 5.75 percent compounded quarterly. How much will you have to invest today to attain your target in five years? (Round to the nearest dollar.)

A) $4,903
B) $11,275
C) $13,184
D) $12,250

Question 78

The process of converting future cash flows to what its present value is called:

A) annualizing.
B) discounting.
C) compounding.
D) capital budgeting.

Question 79

Steve Fisher is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

A) $22,680
B) $26,454
C) $16,670
D) $19,444

Question 80

Michael Peterson is seeking to accumulate $25,000 in six years to invest in a real estate venture. He can earn 6.35 percent annual interest with monthly compounding in a private investment. How much will he have to invest today to reach his goal? (Round to the nearest dollar.)

A) $18,527
B) $23,015
C) $17,097
D) $19,648