Question 1

Scenario A: At age 27, you invest $1,500 that earns 9 percent each year. Scenario B: At age 40, you invest $2,500 that earns 11 percent per year. Under which scenario do you accumulate more money by age 60?

Accepted Answer

A)  Scenario A 
B)  Scenario B 
C)  Both scenarios have the same value by age 60. 
D)  Need more data to answer.

Question 2

What would be more valuable, receiving $1,895 today or receiving $3,450 in six years if interest rates are 8 percent?

Accepted Answer

A)  receiving $1,895 today 
B)  receiving $3,450 in six years 
C)  They are worth the same amount 
D)  Need more information to make a determination.

Question 3

A deposit of $500 earns the following interest rates? 5 percent in the first year,
6 percent in the second year, and
8 percent in the third year.
What would be the third year future value?

Accepted Answer

A)  $527.14 
B)  $595.00 
C)  $601.02 
D)  $1595.00

Question 4

At age 25 you invest $2,000 that earns 6 percent each year. At age 35 you invest $2,000 that earns 9 percent per year. In which case would you have more money at age 60?

Accepted Answer

A)  At age 25 invest $2,000 at 6 percent. 
B)  At age 35 invest $2,000 at 9 percent. 
C)  Both yield the same amount at age 60. 
D)  There is not enough information to determine which case earns the most money at age 60.

Question 5

Approximately how many years does it take to double a $475 investment when interest rates are 8 percent per year?

Accepted Answer

A)  18 years 
B)  12 years 
C)  9 years 
D)  4.75 years

Question 6

How are present values affected by changes in interest rates?

Accepted Answer

A)  The lower the interest rate, the larger the present value will be. 
B)  The higher the interest rate, the larger the present value will be. 
C)  Present values are not affected by changes in interest rates. 
D)  One would need to know the future value in order to determine the impact.

Question 7

How much would be in your savings account in 12 years if you deposited $1,500 today? Assume the bank pays 5 percent per year.

Accepted Answer

A)  $2,387.12 
B)  $2,491.03 
C)  $2,693.78 
D)  $2,771.09

Question 8

How many years (and months) will it take $4 million to grow to $7 million with an annual interest rate of 12 percent?

Accepted Answer

A)  4 years and 1.92 months 
B)  4 years and 11.28 months 
C)  5 years and 6.54 months 
D)  5 years and 10.86 months

Question 9

Compute the present value of $9,000 paid in four years using the following discount rates: 4 percent in year 1, 5 percent in year 2, 4 percent in year 3, and 3 percent in year 4.

Accepted Answer

A)  $7,693.95 
B)  $8,543.26 
C)  $9,000.00 
D)  $10,823.01

Question 10

We call the process of earning interest on both the original deposit and on the earlier interest payments

Accepted Answer

A)  simple interest. 
B)  compounding. 
C)  future value. 
D)  discounting.

Question 11

A $2 million deposit earns 7 percent for 13 years. If the account earns 9 percent per year forever after that, how long will it take to grow to $5 million?

Accepted Answer

A)  zero; the account exceeds $5 million after 13 years 
B)  0.26 year 
C)  0.43 year 
D)  1.18 years

Question 12

You want to retire in 40 years and you have $40,000 saved in your retirement account. You believe you will need $1,500,000 upon retirement. What rate will you need to earn on the account to achieve this goal?

Accepted Answer

A)  6.75 percent 
B)  7.48 percent 
C)  9.13 percent 
D)  9.48 percent

Question 13

A dollar paid (or received) in the future is

Accepted Answer

A)  worth more than a dollar paid (or received) today. 
B)  worth as much as a dollar paid (or received) today. 
C)  not worth as much as a dollar paid (or received) today. 
D)  not comparable to a dollar paid (or received) today.

Question 14

If an average home in your town currently costs $300,000, and house prices are expected to grow at an average rate of 5 percent per year, what will an average house cost in 10 years?

Accepted Answer

A)  $450,000.00 
B)  $483,153.01 
C)  $488,688.39 
D)  $507,593.74

Question 15

Scenario A: At age 19 you invest $1,500 that earns 8 percent per year. Scenario B: At age 30 you invest $1,500 that earns 13 percent per year. Under which scenario would you have more money at age 55 and what is the dollar difference at age 55 between the two scenarios?

Accepted Answer

A)  Scenario A, $1,085.49 
B)  Scenario A, $2,104.73 
C)  Scenario B, $4,179.36 
D)  Scenario B, $7,893.55

Question 16

What is the present value of a $500 payment in one year when the discount rate is 5 percent?

Accepted Answer

A)  $475.00 
B)  $476.19 
C)  $500.00 
D)  $525.00

Question 17

You invested $1,000 for five years in an account that earns 5 percent. However, today you learn that you are able to move the account into an investment that earns 10 percent. Which of the following statements is correct?

Accepted Answer

A)  If you select the investment earning 10 percent, you will double your profit. 
B)  If you select the investment earning 10 percent, you will more than double your profit. 
C)  If you select the investment earning 10 percent, your profit will be less than double. 
D)  None of the statements is correct.

Question 18

What annual rate of return is earned on a $900 investment when it grows to $2,500 in 15 years?

Accepted Answer

A)  1.78 percent 
B)  2.78 percent 
C)  6.58 percent 
D)  7.05 percent

Question 19

How many years will it take $100 to grow to $1,000 with an annual interest rate of 8 percent?

Accepted Answer

A)  9.00 years 
B)  10.00 years 
C)  29.92 years 
D)  33.35 years

Question 20

You invested $1,000 in the stock market one year ago. Today, the investment is valued at $750. What return did you earn? What return would you need to get next year to break even overall?

Accepted Answer

A)  −112.5 percent, +75 percent, respectively 
B)  −75 percent, +112.5 percent, respectively 
C)  −33.33 percent, +25 percent, respectively 
D)  −25 percent, +33.33 percent, respectively

Exam 4: Time Value of Money 1: Analyzing Single Cash Flows