Question 1

Compounding: Chung Lee wants to invest $3,000 in an account paying 5.25 percent compounded quarterly. What is the interest on interest after four years?

Accepted Answer

A)  $695.98 
B)  $65.98 
C)  $630.00 
D)  None of the above

Question 2

Explain the difference between simple interest and compound interest.

Accepted Answer

The answer of Explain the difference between simple interest and...

Question 3

Growth rate: Peterson Electrical Supplies has generated a net income of $161,424 this year. The firm expects to see an annual growth of 30 percent for the next five years, followed by a growth rate of 15 percent for each of the next three years. What will be the firm's expected net income in eight years? (Round to the nearest dollar.)

Accepted Answer

A)  $319,157 
B)  $241,329 
C)  $911,546 
D)  $689,259

Question 4

Multiple compounding periods (FV): Your brother has asked you to help him with choosing an investment. He has $5,000 to invest today for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with the interest being paid quarterly. What will be the value of the investment in two years?

Accepted Answer

A)  $5,434 
B)  $5,441 
C)  $5,107 
D)  $5,216

Question 5

The Rule of 72 allows one to calculate the return earned on an investment over six years.

Accepted Answer

A) True 
 B)False

Question 6

Berrian invested $5,000 in an account earning 10 percent for one year. If he had left his investment in that account for another two years, he would expect the total interest earned over the three years to be higher by exactly $1,000.

Accepted Answer

A) True 
 B)False

Question 7

The Rule of 72

Accepted Answer

A)  can be used to determine the amount of time it takes to double an investment. 
B)  is fairly accurate for interest rates between 25 and 50 percent. 
C)  states that the time to double your money (TDM) approximately equals 72/i, where 72 represents the years it takes to double your investment. 
D)  None of the above describe the Rule of 72.

Question 8

Multiple compounding periods (FV): Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which one will have the highest future value if she plans to invest for three years?

Accepted Answer

A)  3.5% compounded daily 
B)  3.25% compounded monthly 
C)  3.4% compounded quarterly 
D)  3.75% compounded annually

Question 9

Multiple compounding (PV): Darius Miller is seeking to accumulate $50,000 in six years to invest in a real estate venture. He can earn 6.35 percent annual interest with monthly compounding in a private investment. How much will he have invest today to reach his goal? (Round to the nearest dollar.)

Accepted Answer

A)  $37,527 
B)  $47,015 
C)  $34,193 
D)  $31,648

Question 10

Which one of the following statements is NOT true?

Accepted Answer

A)  The value of a dollar invested at a positive interest rate grows over time. 
B)  The further in the future you receive a dollar, the less it is worth today. 
C)  A dollar in hand today is worth more than a dollar to be received in the future. 
D)  The further in the future you receive a dollar, the more it is worth today.

Question 11

The process of converting an amount given at the present time into a future value is called

Accepted Answer

A)  time value of money. 
B)  discounting. 
C)  compounding. 
D)  None of the above.

Question 12

Multiple compounding periods (FV): Hector Cervantes started on his first job last year and plans to save for a down payment on a house in 10 years. He will be able to invest $12,000 today in a money market account that will pay him an interest of 6.25 percent on a monthly basis. How much will he have at the end of 10 years?

Accepted Answer

A)  $12,640 
B)  $22,383 
C)  $24,839 
D)  None of the above

Question 13

Which of the following statements is false with respect to the present value of a future amount?

Accepted Answer

A)  The higher the discount rate, the lower the present value of a single sum for a given time period. 
B)  The relation between present value and time is exponential. 
C)  The greater the time period, the lower the present value of a single sum for a given interest rate. 
D)  The lower the discount rate, the lower the present value of a single sum for a given time period.

Question 14

If Bank A pays interest on a monthly basis and Bank B pays the same interest on a quarterly basis, then investing $1,000 in Bank B will lead to a higher future value than investing the same amount in Bank A.

Accepted Answer

A) True 
 B)False

Question 15

The present value technique uses discounting to find the present value of each cash flow at the beginning of the project.

Accepted Answer

A) True 
 B)False

Question 16

The higher the discount rate, the lower the present value of a future cash flow.

Accepted Answer

A) True 
 B)False

Question 17

Your aunt is looking to invest a certain amount today. Which of the following choices should she opt for?

Accepted Answer

A)  three-year CD at 6.5% annual rate 
B)  three-year CD at 6.75% annual rate 
C)  three-year CD at 6.25% annual rate 
D)  three-year CD at 7% annual rate

Question 18

If you had a choice of choosing a payment of $5,000 to be received in five years being discounted at 8 percent or at 10 percent, you should always choose the higher rate because it gives you the higher present value.

Accepted Answer

A) True 
 B)False

Question 19

Future Value: Herbert Hall just received an inheritance of $35,775 from his great aunt. He plans to invest the funds for retirement. If Herbert can earn 4.75% per year with quarterly compounding for 32 years, how much will he have accumulated? (Round off to the nearest dollar.)

Accepted Answer

A)  $237,416 
B)  $ 71,550 
C)  $184,622 
D)  $162,113

Question 20

Compounding accelerates the growth of the total interest earned.

Accepted Answer

A) True 
 B)False

Exam 5: The Time Value of Money

Compounding: Chung Lee wants to invest $3,000 in an account paying 5.25 percent compounded quarterly. What is the interest on interest after four years?

Explain the difference between simple interest and compound interest.

The Rule of 72 allows one to calculate the return earned on an investment over six years.

Berrian invested $5,000 in an account earning 10 percent for one year. If he had left his investment in that account for another two years, he would expect the total interest earned over the three years to be higher by exactly $1,000.

The Rule of 72

Multiple compounding periods (FV) : Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which one will have the highest future value if she plans to invest for three years?

Multiple compounding (PV) : Darius Miller is seeking to accumulate $50,000 in six years to invest in a real estate venture. He can earn 6.35 percent annual interest with monthly compounding in a private investment. How much will he have invest today to reach his goal? (Round to the nearest dollar.)

Which one of the following statements is NOT true?

The process of converting an amount given at the present time into a future value is called

Which of the following statements is false with respect to the present value of a future amount?

If Bank A pays interest on a monthly basis and Bank B pays the same interest on a quarterly basis, then investing $1,000 in Bank B will lead to a higher future value than investing the same amount in Bank A.

The present value technique uses discounting to find the present value of each cash flow at the beginning of the project.

The higher the discount rate, the lower the present value of a future cash flow.

Your aunt is looking to invest a certain amount today. Which of the following choices should she opt for?

If you had a choice of choosing a payment of $5,000 to be received in five years being discounted at 8 percent or at 10 percent, you should always choose the higher rate because it gives you the higher present value.

Future Value: Herbert Hall just received an inheritance of $35,775 from his great aunt. He plans to invest the funds for retirement. If Herbert can earn 4.75% per year with quarterly compounding for 32 years, how much will he have accumulated? (Round off to the nearest dollar.)

Compounding accelerates the growth of the total interest earned.