Question 1

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) $6,088 
B) $7,086 
C) $6,874 
D) $6,636 
E) $6,420

Question 2

The present value of an uneven cash flow can be determined by using the annuity equations.

Accepted Answer

A) True 
 B)False

Question 3

Identify the correct expression for the effective annual rate (EAR).

Accepted Answer

A) (1 + Periodic rate of interest)Number of borrowing (interest) periods in one year - 1 
B) (1 / Periodic rate of interest)Number of borrowing (interest) periods in one year - 1 
C) (1 - Periodic rate of interest)Number of borrowing (interest) periods in one year - 1 
D) (1 + Periodic rate of interest)Number of borrowing (interest) periods in one year + 1 
E) (1 - Periodic rate of interest)Number of borrowing (interest) periods in one year + 1

Question 4

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

Accepted Answer

A) 11.6% 
B) 22.3% 
C) 15.1% 
D) 11.1% 
E) 13.6%

Question 5

Shekhar plans to invest $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.

Accepted Answer

A) $11,125.76 
B) $11,857.58 
C) $12,580.20 
D) $13,351.39 
E) $14,871.32

Question 6

Ibiza Corporation invested $20,000 for the last four years in an investment that will pay the firm $120,000 at the end of this year. The $120,000 received at the end of this year is an example of a(n) _____.

Accepted Answer

A) uneven cash flow 
B) annuity due 
C) ordinary annuity 
D) deferred annuity 
E) lump-sum amount

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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?

Accepted Answer

A) $4,204.52 
B) $3,577.87 
C) $1,152.34 
D) $2,703.78 
E) $3,250.22

Question 9

Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday?

Accepted Answer

A) 12.36 years 
B) 16.25 years 
C) 15.19 years 
D) 13.52 years 
E) 14.12 years

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 12

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) $21,804

Question 13

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 14

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 15

In most instances, 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 16

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 Investment A and Investment B?

Accepted Answer

A) 9.38 percent and 10.50 percent, respectively 
B) 9.38 percent and 10.25 percent, respectively 
C) 9.75 percent and 10.25 percent, respectively 
D) 9.75 percent and 10.50 percent, respectively 
E) 9.94 percent and 10.45 percent, respectively

Question 17

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)

Accepted Answer

A) Future value = Present value × (1 + r)n 
B) Future value = Present value + (1 + r)n 
C) Future value = Present value - (1 + r)n 
D) Future value = Present value / (1 + r)n 
E) Future value = Present value / [(1 + r) × n]

Question 18

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 19

The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.

Accepted Answer

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

Question 20

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 cash flow pattern represents a(n) _____.

Accepted Answer

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

Exam 4: Time Value of Money

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.

The present value of an uneven cash flow can be determined by using the annuity equations.

Identify the correct expression for the effective annual rate (EAR) .

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

Shekhar plans to invest $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.

Ibiza Corporation invested $20,000 for the last four years in an investment that will pay the firm $120,000 at the end of this year. The $120,000 received at the end of this year is an example of a(n) _____.

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

Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday?

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

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 _____.

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 _____.

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

In most instances, the payment of utility bills is an example of _____.

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 Investment A and Investment B?

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)

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 present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.

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 cash flow pattern represents a(n) _____.