Question 1

Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today.

Accepted Answer

A)  $17,226 
B)  $14,868 
C)  $23,252 
D)  $18,725 
E)  $21,760

Question 2

The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.

Accepted Answer

A)  continuously 
B)  daily 
C)  monthly 
D)  semi-annually 
E)  annually

Question 3

Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? Use a financial calculator to determine the amount to be deposited today.

Accepted Answer

A)  $32,625 
B)  $34,852 
C)  $36,234 
D)  $38,996 
E)  $40,252

Question 4

Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance.

Accepted Answer

A)  N = 6, I/Y = 5, PV = 2,700 
B)  N = 5, I/Y = 6%, PV = -2,700 
C)  N = 5, I/Y = 6%, PV = 2,700 
D)  N = 5, I/Y = 6, PV = 2,700 
E)  N = 5, I/Y = 6, PV = -2,700

Question 5

Bill is considering investing $450 at the end of every month in a fixed income instrument. He will be receiving $27,000 at the end of 4 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?

Accepted Answer

A)  11.04% 
B)  22.25% 
C)  15.07% 
D)  18.30% 
E)  13.58%

Question 6

Pelican Corporation is planning to invest $12,000 for the next 8 years. It will have to pay the amount at the beginning of each year. This form of payment is known as a(n) _____.

Accepted Answer

A)  immediate annuity 
B)  annuity due 
C)  uneven cash flow stream 
D)  ordinary annuity 
E)  deferred annuity

Question 7

When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.

Accepted Answer

A)  ordinary annuity 
B)  annuity due 
C)  immediate annuity 
D)  deferred annuity 
E)  discounted annuity

Question 8

Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation.

Accepted Answer

A)  $7,254 
B)  $7,086 
C)  $6,874 
D)  $6,636 
E)  $6,420

Question 9

Paul wants to accumulate $14,500 in order to make the down payment for a new condo. Today he can start investing $2,500 annually in an investment account that pays 10 percent interest compounded annually. How long would it take him to have enough money to make the down payment?

Accepted Answer

A)  3.50 years 
B)  5.90 years 
C)  6.10 years 
D)  4.80 years 
E)  7.60 years

Question 10

An annuity with payments that occur at the beginning of each period is known as a _____.

Accepted Answer

A)  deferred annuity 
B)  ordinary annuity 
C)  immediate annuity 
D)  annuity due 
E)  discounted annuity

Question 11

Adam plans to invest $1500 today in a mutual fund. If he earns 12 percent interest compounded monthly, to what amount will his investment grow in 20 years? Use a financial calculator to make the calculation.

Accepted Answer

A)  $17,289 
B)  $15,897 
C)  $16,339 
D)  $12,450 
E)  $18,546

Question 12

Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest was compounded annually, what is the annual rate of return earned on the investment?

Accepted Answer

A)  7.25% 
B)  8.18% 
C)  9.52% 
D)  10.75% 
E)  11.66%

Question 13

Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans. Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest compounded semiannually. What would be the difference between the future values of the two investments if Mira's investment horizon is seven years? (Round your answer to two decimal places.)

Accepted Answer

A)  $4,204.52 
B)  $3,577.87 
C)  $1,152.34 
D)  $2,703.79 
E)  $3,250.22

Question 14

The payment of utility bills is an example of _____.

Accepted Answer

A)  immediate annuity 
B)  ordinary annuity 
C)  annuity due 
D)  lump-sum payments 
E)  uneven cash flows

Question 15

Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment.

Accepted Answer

A) True 
 B)False

Question 16

The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.

Accepted Answer

A)  discounting 
B)  compounding 
C)  amortization 
D)  consolidation 
E)  annualizing

Question 17

An investment carries an interest rate of 8% compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations.

Accepted Answer

A) True 
 B)False

Question 18

A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of payment represents a(n) _____.

Accepted Answer

A)  lump-sum payment 
B)  uneven cash flow stream 
C)  annuity due 
D)  ordinary annuity 
E)  immediate annuity

Question 19

A leading bank is coming up with an investment that pays 8 percent interest compounded semiannually. What is the investment's effective annual rate (rEAR)? Use a financial calculator to determine the amount.

Accepted Answer

A)  8.16% 
B)  8.36% 
C)  8.56% 
D)  8.76% 
E)  8.96%

Question 20

Gale Corporation acquires a printing equipment through lease. The terms of the lease require the monthly lease payments to be made at the beginning of every month. This is an example of an annuity due.

Accepted Answer

A) True 
 B)False

Exam 4: Time Value of Money

Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today.

The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.

Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? Use a financial calculator to determine the amount to be deposited today.

Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance.

Bill is considering investing $450 at the end of every month in a fixed income instrument. He will be receiving $27,000 at the end of 4 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?

Pelican Corporation is planning to invest $12,000 for the next 8 years. It will have to pay the amount at the beginning of each year. This form of payment is known as a(n) _____.

When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.

Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation.

Paul wants to accumulate $14,500 in order to make the down payment for a new condo. Today he can start investing $2,500 annually in an investment account that pays 10 percent interest compounded annually. How long would it take him to have enough money to make the down payment?

An annuity with payments that occur at the beginning of each period is known as a _____.

Adam plans to invest $1500 today in a mutual fund. If he earns 12 percent interest compounded monthly, to what amount will his investment grow in 20 years? Use a financial calculator to make the calculation.

Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest was compounded annually, what is the annual rate of return earned on the investment?

The payment of utility bills is an example of _____.

Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment.

The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.

An investment carries an interest rate of 8% compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations.

A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of payment represents a(n) _____.

A leading bank is coming up with an investment that pays 8 percent interest compounded semiannually. What is the investment's effective annual rate (rEAR) ? Use a financial calculator to determine the amount.

Gale Corporation acquires a printing equipment through lease. The terms of the lease require the monthly lease payments to be made at the beginning of every month. This is an example of an annuity due.