Question 1

The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.

Accepted Answer

A) True 
 B)False

Question 2

Given a set future value, which of the following will contribute to a lower present value?

Accepted Answer

A) Higher discount rate 
B) Fewer time periods 
C) Less frequent discounting 
D) Lower discount factor

Question 3

According to the Rule of 72, what approximate interest rate is being offered on a deposit that doubles in value over an eight-year period?

Accepted Answer

A) 7.2 percent 
B) 8.0 percent 
C) 9.0 percent 
D) 12.5 percent

Question 4

In calculating the present value of $1,000 to be received 5 years from today, the discount factor has been calculated to be 7008.What is the apparent interest rate?

Accepted Answer

A) 5.43 percent 
B) 7.37 percent 
C) 8.00 percent 
D) 9.50 percent discount factor =

Question 5

Assume your uncle recorded his salary history during a 40-year career and found that it had increased ten-fold.If inflation averaged 5 percent annually during the period, how would you describe his purchasing power, on average?

Accepted Answer

A) His purchasing power remained on par with inflation 
B) He "beat" inflation by nearly 1 percent annually 
C) He "beat" inflation by slightly over 2 percent annually 
D) He "beat" inflation by 5 percent annually

Question 6

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

Accepted Answer

A) True 
 B)False

Question 7

A furniture store is offering free credit on purchases of over $1,000.You observe that a big-screen television can be purchased for nothing down and $4,000 due in one year.The store next door offers an identical television for $3,650 but does not offer credit terms.Which statement below best describes the "free" credit?

Accepted Answer

A) The "free" credit costs about 8.75 percent 
B) The "free" credit costs about 9.13 percent 
C) The "free" credit costs about 9.59 percent 
D) The "free" credit effectively costs zero percent

Question 8

If inflation in Wonderland averaged about 20% per month in 2008, what was the annual inflation rate?

Accepted Answer

A) 20% 
B) 240% 
C) 790% 
D) 890%

Question 9

Discuss the statement, "It is always preferred to select an account that offers compound interest over an account that offers simple interest."

Accepted Answer

The answer of Discuss the statement, "It is always preferred...

Question 10

What three pieces of information do you need to calculate the future value of an annuity?

Accepted Answer

The answer of What three pieces of information do you...

Question 11

What is the difference between real and nominal cash flows and between real and nominal interest rates?

Accepted Answer

The answer of What is the difference between real and...

Question 12

Which of the following strategies will allow real retirement spending to remain approximately equal, assuming savings of $1,000,000 invested at 8 percent, a 25-year horizon, and 4 percent expected inflation?

Accepted Answer

A) Spend approximately $63,000 annually 
B) Spend approximately $78,225 annually 
C) Spend approximately $93,680 annually 
D) Spend approximately $127,500 annually Real Rate = -1 = 3.85%
$1,000,000 = pmt

Question 13

How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12 percent?

Accepted Answer

A) $3,604,78 
B) $3,746.25 
C) $4,037.35 
D) $4,604.78 PV =

Question 14

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year.The annual interest rate is 12 percent and payments begin in one month.What is the present value of this two-year loan?

Accepted Answer

A) $6,246.34 
B) $6,389.78 
C) $6,428.57 
D) $6,753.05 PV = $200

Question 15

What EAR is being earned on a deposit of $5,000 made ten years ago today if the deposit is worth $9,948.94 today? The deposit pays interest semi-annually.

Accepted Answer

A) 3.56 percent 
B) 6.76 percent 
C) 7.00 percent 
D) 7.12 percent $9,948.94 = $5,000

Question 16

Lincoln wants to buy a new Mercedes-Benz Jeep.He will need to borrow $20,000 to go with his down payment in order to afford this car.If car loans are available at a 6 percent annual interest rate, what will Lincoln's monthly payment be on a four-year loan?

Accepted Answer

The answer of Lincoln wants to buy a new Mercedes-Benz...

Question 17

What will be the approximate population of the United States, if its current population of 275 million grows at a compound rate of 2 percent annually for 25 years?

Accepted Answer

A) 413 million 
B) 430 million 
C) 451 million 
D) 466 million

Question 18

An annual percentage rate (APR) is determined by annualizing the rate using compound interest.

Accepted Answer

A) True 
 B)False

Question 19

Your retirement account has a current balance of $50,000.What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?

Accepted Answer

A) 5.02 percent 
B) 7.24 percent 
C) 9.80 percent 
D) 10.07 percent

Question 20

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13 percent rate?

Accepted Answer

A) $130.00 
B) $138.83 
C) $169.00 
D) $353.34 1000 (e.13) =
1000 x 1.1388 = $1,138.83

Exam 5: The Time Value of Money

The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.

Given a set future value, which of the following will contribute to a lower present value?

According to the Rule of 72, what approximate interest rate is being offered on a deposit that doubles in value over an eight-year period?

In calculating the present value of $1,000 to be received 5 years from today, the discount factor has been calculated to be 7008.What is the apparent interest rate?

Assume your uncle recorded his salary history during a 40-year career and found that it had increased ten-fold.If inflation averaged 5 percent annually during the period, how would you describe his purchasing power, on average?

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

If inflation in Wonderland averaged about 20% per month in 2008, what was the annual inflation rate?

Discuss the statement, "It is always preferred to select an account that offers compound interest over an account that offers simple interest."

What three pieces of information do you need to calculate the future value of an annuity?

What is the difference between real and nominal cash flows and between real and nominal interest rates?

Which of the following strategies will allow real retirement spending to remain approximately equal, assuming savings of $1,000,000 invested at 8 percent, a 25-year horizon, and 4 percent expected inflation?

How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12 percent?

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year.The annual interest rate is 12 percent and payments begin in one month.What is the present value of this two-year loan?

What EAR is being earned on a deposit of $5,000 made ten years ago today if the deposit is worth $9,948.94 today? The deposit pays interest semi-annually.

Lincoln wants to buy a new Mercedes-Benz Jeep.He will need to borrow $20,000 to go with his down payment in order to afford this car.If car loans are available at a 6 percent annual interest rate, what will Lincoln's monthly payment be on a four-year loan?

What will be the approximate population of the United States, if its current population of 275 million grows at a compound rate of 2 percent annually for 25 years?

An annual percentage rate (APR) is determined by annualizing the rate using compound interest.

Your retirement account has a current balance of $50,000.What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13 percent rate?