Question 1

What is the future value of $2,500 deposited for one year earning a 14 percent interest rate annually?

Accepted Answer

A)  $2,550
B)  $2,850
C)  $2,950
D)  $3,150 B

Question 2

What is the future value of $2,000 deposited for one year earning 6 percent interest rate annually?

Accepted Answer

A)  $120
B)  $2.000
C)  $2,120
D)  $4,120 C

Question 3

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 years
C)  0.43 years
D)  1.18 years C

Question 4

Which of the following would you prefer?

Accepted Answer

A)  $500 to be received in 10 years when rates are 8 percent
B)  $300 today
C)  $600 to be received in 12 years when rates are 8 percent
D)  $700 to be received in 12 years when rates are 7 percent

Question 5

You borrow $3,500 and will pay back the entire amount in 5 years. You are charged 9 percent interest per year. How much interest do you pay on this loan?

Accepted Answer

A)  $1,885.18
B)  $1,907.35
C)  $1,959.02
D)  $2,106.81

Question 6

You just won the lottery and after taxes you have $32,000. You want to have $1,000,000 by the time you are 65, which is 45 years from now. Assuming that you can earn 9 percent each on your money, how much (in dollars) of the $32,000 must you invest today?

Accepted Answer

A)  $17,891.62
B)  $18,524.91
C)  $20,692.24
D)  $22,943.28

Question 7

How are future values affected by changes in interest rates?

Accepted Answer

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

Question 8

You invested $5,000 in the stock market one year ago. Today, the investment is valued at $5,500. What return did you earn? What return would you suffer next year for your investment to be valued at the original $5,000?

Accepted Answer

A)  10 percent, -9.09 percent, respectively
B)  -10 percent, +9.09 percent, respectively
C)  110 percent, -10 percent, respectively
D)  110 percent, -9.09 percent, respectively

Question 9

How long will it take for the purchasing power of $1 to be cut in half if inflation is 4 percent?

Accepted Answer

A)  4.97 years
B)  7.42 years
C)  10.72 years
D)  17.67 years

Question 10

Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?

Accepted Answer

A)  12.00 percent
B)  25.00 percent
C)  49.33 percent
D)  86.99 percent

Question 11

How long will it take $3,000 to reach $5,000 when it grows at 7 percent per year?

Accepted Answer

A)  7.00 years
B)  7.55 years
C)  9.52 years
D)  10.29 years

Question 12

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 13

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 14

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?

Accepted Answer

A)  $6,000.00
B)  $7,715.61
C)  $7,908.48
D)  $11,193.97

Question 15

What is the value in year 3 of a $250 cash flow made in year 15 when interest rates are 12 percent?

Accepted Answer

A)  $45.67
B)  $64.17
C)  $177.95
D)  $220.00

Question 16

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 17

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 18

You invested $2,000 in the stock market one year ago. Today, the investment is valued at $9,500. What return did you earn? What return would you need to suffer next year for your investment to be valued at the original $2,000?

Accepted Answer

A)  -78.95 percent; 0 percent
B)  375 percent; -78.95 percent
C)  250 percent; -51.8 percent
D)  -78.95 percent; 100 percent

Question 19

Approximately what rate is needed to double an investment over five years?

Accepted Answer

A)  8 percent
B)  12.2 percent
C)  14.4 percent
D)  15.8 percent

Question 20

Consider a $2,000 deposit earning 6 percent interest per year for five years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

Accepted Answer

A)  $60.00
B)  $76.45
C)  $600.00
D)  $676.45

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