Question 1

If the interest rate is positive,then the future value of an annuity due will be greater than the future value of an ordinary annuity.

Accepted Answer

A) True 
 B)False

Question 2

Today is your 21st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded semiannually.How much will be in the account on your 50th birthday?

Accepted Answer

A)  $159,795 
B)  $162,183 
C)  $163,823 
D)  $164,631

Question 3

The present value of $1,000 to be received in 5 years is ________ if the discount rate is 7.8%.

Accepted Answer

A)  $368 
B)  $494 
C)  $548 
D)  $687

Question 4

It is your 5th birthday today.You have a trust fund with $50,000 that is earning 8% per year.You expect to withdraw $20,000 per year for 4 years starting on your 21st birthday for graduate school.How much money will be left in the trust fund after your last withdrawal (rounded to the nearest $10)?

Accepted Answer

A)  $125,660 
B)  $135,780 
C)  $91,30 
D)  You will not have enough money to pay for graduate school.

Question 5

If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semi-annually,what will the account balance be in seven years?

Accepted Answer

A)  18,151 
B)  14,356 
C)  16,987 
D)  15,555

Question 6

It is January 1st and Darwin Davis has just established an IRA (Individual Retirement Account).Darwin will put $1000 into the account on December 31st of this year and at the end of each year for the following 39 years (40 years total).How much money will Darwin have in his account at the end of the 40th year? Assume that the account pays 12% interest compounded annually and round to nearest $1000.

Accepted Answer

A)  $93,000 
B)  $766,000 
C)  $767,000 
D)  $850,000

Question 7

A financial analyst tells you that investing in stocks will allow you to double your money in 7 years.What annual rate of return is the analyst assuming you can earn?

Accepted Answer

A)  8.76% 
B)  9.87% 
C)  10.01% 
D)  10.41%

Question 8

You are thinking of buying a craft emporium.It is expected to generate cash flows of $30,000 per year in years 1 through 5,and $40,000 per year in years 6 through 10.If the appropriate discount rate is 8%,what amount are you willing to pay for the emporium?

Accepted Answer

A)  $135,288 
B)  $167,943 
C)  $215,048 
D)  $228,476

Question 9

A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

Accepted Answer

A) True 
 B)False

Question 10

The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity.

Accepted Answer

A) True 
 B)False

Question 11

You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.).How much will you have in the account after five years?

Accepted Answer

A)  $1,276 
B)  $1,359 
C)  $1,462 
D)  $1,338

Question 12

Congratulations! You are the proud winner of the multi-state Sour Ball Lottery.You are to receive $2,000,000 at the end of each year for the next 20 years.While the Lottery Commission refers to this as a $40,000,000 jackpot,if you choose the "cash option" they will give you much less than that; you can receive a lump sum payment today equal to the present value of the ordinary annuity instead of the 20 annual payments.If the discount rate that the Lottery Commission uses to determine the lump sum payoff is 7%,what is your payoff if you select the cash option?

Accepted Answer

A)  $26,945,332 
B)  $39,707,503 
C)  $42,977,401 
D)  $21,188,028

Question 13

You have been depositing money at the end of each year into an account drawing 8% interest.What is the balance in the account at the end of year four if you deposited the following amounts?
Year End of Year Deposit

Accepted Answer

A)  $1,622 
B)  $2,207 
C)  $2,384 
D)  $2,687

Question 14

If you put $10 in a savings account at the beginning of each month for 10 years,how much money will be in the account at the end of the 10th year? Assume that the account earns 12% compounded monthly and round to the nearest $1.

Accepted Answer

A)  $1,200 
B)  $2,323 
C)  $1,344 
D)  $3,727

Question 15

An investment promises to pay you the following amounts at the end of each of the next 10 years:
 (1)$1,000,(2)$2,000,(3)$3,000,(4)$4,000,(5)- (10)$5,000 per year.If you want to earn a return of 8% per year,how much will you be willing to pay for the investment today?

Accepted Answer

The answer of An investment promises to pay you the...

Question 16

To evaluate or compare investment proposals,we must adjust the value of all cash flows to a common date.

Accepted Answer

A) True 
 B)False

Question 17

A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives.Which of the following statements is most correct?

Accepted Answer

A)  Because of the time value of money, the man will always be better off taking the $500,000 up front. 
B)  The higher the interest rate, the more likely the man will prefer the $500,000 lump sum. 
C)  If the man expects to live more than 10 years, then he will prefer the annuity. 
D)  If the man is certain the company will not default on its future payments, he should select the $50,000 per year.

Question 18

Today is your 21st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded quarterly.How much will be in the account on your 50th birthday?

Accepted Answer

A)  $159,795 
B)  $162,183 
C)  $163,832 
D)  $164,631

Question 19

If the future value of an annuity is known,then the present value of the annuity can be found using the present value of a lump sum formula,even if the amount of each annuity payment is unknown.

Accepted Answer

A) True 
 B)False

Question 20

You are currently earning 12% compounded semiannually.Your investment company is switching all accounts to daily compounding.What rate will give you the same effective annual rate of return as you are receiving now?

Accepted Answer

A)  10.83% 
B)  10.97% 
C)  11.66% 
D)  11.89%

Exam 5: The Time Value of Money

If the interest rate is positive,then the future value of an annuity due will be greater than the future value of an ordinary annuity.

Today is your 21^st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded semiannually.How much will be in the account on your 50^th birthday?

The present value of $1,000 to be received in 5 years is ________ if the discount rate is 7.8%.

If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semi-annually,what will the account balance be in seven years?

A financial analyst tells you that investing in stocks will allow you to double your money in 7 years.What annual rate of return is the analyst assuming you can earn?

You are thinking of buying a craft emporium.It is expected to generate cash flows of $30,000 per year in years 1 through 5,and $40,000 per year in years 6 through 10.If the appropriate discount rate is 8%,what amount are you willing to pay for the emporium?

A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity.

You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.) .How much will you have in the account after five years?

You have been depositing money at the end of each year into an account drawing 8% interest.What is the balance in the account at the end of year four if you deposited the following amounts? Year End of Year Deposit

If you put $10 in a savings account at the beginning of each month for 10 years,how much money will be in the account at the end of the 10th year? Assume that the account earns 12% compounded monthly and round to the nearest $1.

An investment promises to pay you the following amounts at the end of each of the next 10 years: (1)$1,000,(2)$2,000,(3)$3,000,(4)$4,000,(5)- (10)$5,000 per year.If you want to earn a return of 8% per year,how much will you be willing to pay for the investment today?

To evaluate or compare investment proposals,we must adjust the value of all cash flows to a common date.

A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives.Which of the following statements is most correct?

Today is your 21^st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded quarterly.How much will be in the account on your 50^th birthday?

If the future value of an annuity is known,then the present value of the annuity can be found using the present value of a lump sum formula,even if the amount of each annuity payment is unknown.

You are currently earning 12% compounded semiannually.Your investment company is switching all accounts to daily compounding.What rate will give you the same effective annual rate of return as you are receiving now?

Exam 5: The Time Value of Money

If the interest rate is positive,then the future value of an annuity due will be greater than the future value of an ordinary annuity.

Today is your 21st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded semiannually.How much will be in the account on your 50th birthday?

The present value of $1,000 to be received in 5 years is ________ if the discount rate is 7.8%.

It is your 5th birthday today.You have a trust fund with $50,000 that is earning 8% per year.You expect to withdraw $20,000 per year for 4 years starting on your 21st birthday for graduate school.How much money will be left in the trust fund after your last withdrawal (rounded to the nearest $10) ?

If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semi-annually,what will the account balance be in seven years?

A financial analyst tells you that investing in stocks will allow you to double your money in 7 years.What annual rate of return is the analyst assuming you can earn?

You are thinking of buying a craft emporium.It is expected to generate cash flows of $30,000 per year in years 1 through 5,and $40,000 per year in years 6 through 10.If the appropriate discount rate is 8%,what amount are you willing to pay for the emporium?

A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity.

You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.) .How much will you have in the account after five years?

You have been depositing money at the end of each year into an account drawing 8% interest.What is the balance in the account at the end of year four if you deposited the following amounts? Year End of Year Deposit

If you put $10 in a savings account at the beginning of each month for 10 years,how much money will be in the account at the end of the 10th year? Assume that the account earns 12% compounded monthly and round to the nearest $1.

An investment promises to pay you the following amounts at the end of each of the next 10 years: (1)$1,000,(2)$2,000,(3)$3,000,(4)$4,000,(5)- (10)$5,000 per year.If you want to earn a return of 8% per year,how much will you be willing to pay for the investment today?

To evaluate or compare investment proposals,we must adjust the value of all cash flows to a common date.

A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives.Which of the following statements is most correct?

Today is your 21st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded quarterly.How much will be in the account on your 50th birthday?

If the future value of an annuity is known,then the present value of the annuity can be found using the present value of a lump sum formula,even if the amount of each annuity payment is unknown.

You are currently earning 12% compounded semiannually.Your investment company is switching all accounts to daily compounding.What rate will give you the same effective annual rate of return as you are receiving now?

Today is your 21^st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded semiannually.How much will be in the account on your 50^th birthday?

Today is your 21^st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded quarterly.How much will be in the account on your 50^th birthday?