Question 1

The present value of an investment increases as the opportunity cost rate increases.

Accepted Answer

A) True 
 B)False

Question 2

Shekhar invests $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. (Round your answer to two decimal places.)

Accepted Answer

A)  $11,125.76 
B)  $11,857.58 
C)  $12,580.20 
D)  $13,422.50 
E)  $14,871.32

Question 3

If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is _____.

Accepted Answer

A)  10.82% 
B)  11.50% 
C)  12.20% 
D)  12.85% 
E)  13.57%

Question 4

If the opportunity cost rate is 8% and is compounded annually, what is the present value of $8,200 due to be received in 12 years? Use the equation method to determine the present value.

Accepted Answer

A)  $3,068 
B)  $3,254 
C)  $3,552 
D)  $3,688 
E)  $3,854

Question 5

Ordinary annuity is an annuity with payments that occur at the beginning of each period.

Accepted Answer

A) True 
 B)False

Question 6

Effective annual rate considers the effect of compounding, whereas annual percentage rate does not consider the effect of compounding.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following types of annuity best describes the mortgage or rent that you have to pay at the beginning of each month?

Accepted Answer

A)  Annuity due 
B)  Ordinary annuity 
C)  Deferred annuity 
D)  Annuity in arrears 
E)  Immediate annuity

Question 8

An investment has the option of daily compounding, monthly compounding, or annual compounding. The present value of this investment will be lowest when the investment is compounded daily.

Accepted Answer

A) True 
 B)False

Question 9

Andrea's opportunity cost rate is 12 percent compounded annually. How much must he deposit in an account today if he wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.

Accepted Answer

A)  $10,772 
B)  $11,625 
C)  $10,998 
D)  $11,887 
E)  $12,564

Question 10

LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of the two investments?

Accepted Answer

A)  9.38%; 10.50% 
B)  9.38%; 10.25% 
C)  9.75%; 10.25% 
D)  9.75%; 10.50% 
E)  9.94%; 10.45%

Question 11

Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. Using the equation method, what is the worth of the investment today?

Accepted Answer

A)  $36,667 
B)  $38,250 
C)  $40,527 
D)  $44,325 
E)  $46,458

Question 12

The future value of an uneven cash flow stream is also referred to as its _____.

Accepted Answer

A)  discounted value 
B)  amortized value 
C)  consolidated value 
D)  terminal value 
E)  periodic value

Question 13

Which of the following is defined as the rate of return on the best available alternative investment of equal risk?

Accepted Answer

A)  Amortization rate 
B)  Risk adjusted rate 
C)  Required rate of return 
D)  Opportunity cost rate 
E)  Expected rate of return

Question 14

Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments for three years?

Accepted Answer

A)  $10,089.56 
B)  $10,596.42 
C)  $10,857.28 
D)  $11,345.77 
E)  $11,568.25

Question 15

An investor invested in a 10-year bond that makes a $50 coupon payment at the end of every six-month period until the bond matures. These coupon payments received by the investor can be referred to as a(an) _____.

Accepted Answer

A)  perpetuity 
B)  ordinary annuity 
C)  annuity due 
D)  compounded annuity 
E)  discounted annuity

Exam 4: Time Value of Money

The present value of an investment increases as the opportunity cost rate increases.

If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is _____.

If the opportunity cost rate is 8% and is compounded annually, what is the present value of $8,200 due to be received in 12 years? Use the equation method to determine the present value.

Ordinary annuity is an annuity with payments that occur at the beginning of each period.

Effective annual rate considers the effect of compounding, whereas annual percentage rate does not consider the effect of compounding.

Which of the following types of annuity best describes the mortgage or rent that you have to pay at the beginning of each month?

An investment has the option of daily compounding, monthly compounding, or annual compounding. The present value of this investment will be lowest when the investment is compounded daily.

Andrea's opportunity cost rate is 12 percent compounded annually. How much must he deposit in an account today if he wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.

LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of the two investments?

Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. Using the equation method, what is the worth of the investment today?

The future value of an uneven cash flow stream is also referred to as its _____.

Which of the following is defined as the rate of return on the best available alternative investment of equal risk?

Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly) . How much will Ross owe on his vehicle loan after making payments for three years?

An investor invested in a 10-year bond that makes a $50 coupon payment at the end of every six-month period until the bond matures. These coupon payments received by the investor can be referred to as a(an) _____.