Deck 6: Time Value of Money

Question 1

What is the yield-to-maturity on a 15-year, $1,000, zero-coupon bond, selling for $375.39?

A) 5.97%
B) 5.60%
C) 7.32%
D) 6.75%

Answer 1

6.75%

Question 2

Darlene wishes to accumulate $50,000 by the end of 10 years by making equal annual end-of-yeardeposits over the next 10 years. If Darlene can earn 5 percent on her investments, how much mustshe deposit at the end of each year?

A) $3,975
B) $4,513
C) $6,475
D) $5,000

Answer 2

$3,975

Question 3

$1,200 is received at the beginning of year 1, $2,200 is received at the beginning of year 2, and$3,300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, theircombined future value at the end of year 3 is ________ .

A) $ 6,700
B) $ 8,141
C) $17,000
D) $12,510

Answer 3

$ 8,141

Question 4

The rate of interest agreed upon contractually charged by a lender or promised by a borrower is ________theinterest rate.

A) nominal
B) discounted
C) continuous
D) effective

Question 5

You have been offered a project paying $300 at the beginning of each year for the next 20 years.What is the maximum amount of money you would invest in this project if you expect 9 percentrate of return to your investment?

A) $15,347.70
B) $ 2,738.70
C) $ 2,985.18
D) $ 6,000.00

Question 6

The present value interest factor is

A) between 2.0 and 0.0.
B) always less than 1.0.
C) always negative.
D) a discount rate.

Question 7

Mary will receive $12,000 per year for the next 10 years as royalty for her work on a finance book.What is the present value of her royalty income if the opportunity cost is 12 percent?

A) $67,800
B) $38,640
C) $120,000
D) none of the above

Question 8

Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000 and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents on the cruise?

A) $2,234
B) $2,457
C) $1,862
D) $3,000

Question 9

You would like to start a $1,000 per year scholarship fund for first year commerce students at theUniversity of Calgary. The first payment will be in one year from today. You will invest themonies in long-term Government of Canada bonds at 5% per annum. How large does the fund need to be to meet your objective?

A) $25,000
B) $20,000
C) $33,333
D) $100,000

Question 10

If the interest rate is zero, the future value interest factor equals ________

A) 1.0
B) 2.0
C) 0.0
D) -1.0

Question 11

What is the rate of return on an investment of $16,278 if the company expects to receive $3,000 peryear for the next 10 years?

A) 3 percent
B) 13 percent
C) 18 percent
D) 8 percent

Question 12

In future value or present value problems, unless stated otherwise, cash flows are assumed to be

A) at the end of a time period.
B) in the middle of a time period.
C) spread out evenly over a time period.
D) at the beginning of a time period.

Question 13

Michael is planning for his son's college education to begin ten years from today. He estimates the yearly tuition, books, and living expenses to be $10,000 per year for a four year degree. How much must Michael deposit today, at an interest rate of 12 percent, for his son to be able to withdraw$10,000 per year for four years of college?

A) $40,000
B) $10,953
C) $18,950
D) $12,880

Question 14

The future value of a dollar ________as the interest rate increases and ________ the farther in the future an initial deposit is to be received.

A) decreases; increases
B) decreases; decreases
C) increases; decreases
D) increases; increases

Question 15

The future value interest factor is

A) always less than 0.
B) sometimes negative.
C) always greater than 1.0.
D) never greater than 25.

Question 16

The future value of an annuity of $1,000 each year for 10 years, deposited at 12 percentcompounded quarterly is ________ .

A) $11,200
B) $17,549
C) $75,400
D) $93,049

Question 17

The future value of $100 received today and deposited at 6 percent for four years is ________

A) $ 79
B) $124
C) $116
D) $126

Question 18

Currently you are 25 years old and planning for retirement in 30 years. You plan to buy into a mutual fund at $100 per month and expect to obtain a return of 1.25% per month. How much will the mutual fund be worth in 30 years?

A) $692.328
B) $561,453
C) $893,001
D) $1,041,009

Question 19

You currently have $100,000 in the stock market.per annum return. You estimate that you will need $250,000 from this investment before you canretire. How many years are you from retirement?

A) 21.0 years
B) 4.9 years
C) 15.3 years
D) 8.1 years

Question 20

In comparing an ordinary annuity and an annuity due, which of the following is true?

A) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due.
B) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.
C) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
D) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.

Question 21

$100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is ________ .

A) $ 727
B) $1,536
C) $1,245
D) $ 672

Question 22

The future value of $200 received today and deposited at 8 percent for three years is ________

A) $158
B) $200
C) $248
D) $252

Question 23

Gina has planned to start her college education four years from now. To pay for her college education, she has decided to save $1,000 a quarter for the next four years in a bank account paying12 percent compounded quarterly. How much will she have at the end of the fourth year?

A) $1,574
B) $16,000
C) $20,157
D) $19,116

Question 24

Donna makes annual end-of-year payments of $5,043.71 on a four year loan with an interest rate of13 percent. The original principal amount was ________ .

A) $ 3,092
B) $15,000
C) $24,462
D) $20,175

Question 25

To pay for her college education, Gina is saving $2,000 at the beginning of each year for the nexteight years in a bank account paying 12 percent interest. How much will Gina have in that accountat the end of 8th year?

A) $24,600
B) $27,552
C) $16,000
D) $17,920

Question 26

Chris is planning for her son's college education to begin five years from today. She estimates the yearly tuition, books, and living expenses to be $5,000 per year for a four year degree. How much must Chris deposit today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four years of college?

A) $13,620
B) $39,520
C) $20,000
D) $12,172

Question 27

If a Canada Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?

A) 7 percent
B) 9 percent
C) 6 percent
D) 8 percent

Question 28

Young Sook owns stock in a company which has consistently paid a growing dividend over the last10 years. The first year Young Sook owned the stock, she received $4.50 per share and in the 10thyear, she received $4.92 per share. What is the growth rate of the dividends over the last 10 years?

A) 4 percent
B) 1 percent
C) 5 percent
D) 2 percent

Question 29

If the present value of a perpetual income stream is increasing, the discount rate must be

A) changing unpredictably.
B) decreasing.
C) increasing.
D) increasing proportionally.

Question 30

The future value of an ordinary annuity of $2,000 each year for 10 years, deposited at 12 percent, is ________.

A) $39,310
B) $35,098
C) $20,000
D) $11,300

Question 31

As the interest rate increases for any given period, the future value interest factor will

A) remain unchanged.
B) decrease.
C) increase.
D) move toward 1.

Question 32

The future value of a $10,000 annuity due, deposited at 12 percent compounded annually for each of the next 5 years is ________ .

A) $71,154
B) $36,050
C) $40,376
D) $63,530

Question 33

The present value of a $20,000 perpetuity at a 7 percent discount rate is ________

A) $140,000
B) $186,915
C) $285,714
D) $325,000

Question 34

Indicate which formula is correct to determine the future value of an annuity due.

A) FVAs = PMT × [FVIFAi,n/(1 + i)]
B) FVAs = PMT × FVIFAi,n
C) FVAs = PMT × FVIFAi,n+1
D) FVAs = PMT × [FVIFAi,n × (1 + i)]

Question 35

Bill plans to fund his registered retirement savings plan (RRSP) with a contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year?

A) $19,292
B) $14,938
C) $144,105
D) $40,000

Question 36

How much will an investment of $1,000 earning 12% compounded monthly be worth in 40 years?

A) $118,647
B) $93,051
C) $11,764,772
D) none of the above are correct

Question 37

David wishes to accumulate $1 million by the end of 20 years by making equal annual end-of-yeardeposits over the next 20 years. If David can earn 10 percent on his investments, how much must hedeposit at the end of each year?

A) $117,453
B) $14,900
C) $17,460
D) $50,000

Question 38

The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each ofthe next 10 years is ________.

A) $13,420
B) $31,291
C) $28,974
D) $14,494

Question 39

The future value of $200 received today and deposited at 8 percent compounded semiannually forthree years is ________.

A) $252
B) $380
C) $158
D) $253

Question 40

The future value of $200 received today and deposited for three years in an account which pays semiannual interest of 8 percent is ________ .

A) $158.00
B) $252.00
C) $134.66
D) $253.00

Question 41

When the amount earned on a deposit has become part of the principal at the end of a specified time period, the concept is called

A) future value.
B) primary interest.
C) discount interest.
D) compound interest.

Question 42

The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is ________.

A) $518
B) $200
C) $77
D) $50

Question 43

A local brokerage firm is offering a zero coupon certificate of deposit for $10,000. At maturity, threeyears from now, the investor will receive $14,000. What is the rate of return on this investment?

A) 11 percent
B) 12 percent
C) 13 percent
D) 14 percent

Question 44

You are planning for you newly arrived daughters education in 18 years when she heads off to university. You have a $1,000 and would like to have $10,000 when she enters school. What interest rate must be earned on your investment for this to be possible?

A) 7.22%
B) 19.65%
C) 13.65%
D) 11.12%

Question 45

For a given interest rate, as the length of time until receipt of the funds increases, the present value interest factor

A) remains unchanged.
B) changes proportionally.
C) decreases.
D) increases.

Question 46

A perpetuity is a cash flow stream that

A) continues forever.
B) has a fixed number of years than stops.
C) continues for 1,000 years than stops.
D) none of the above; a perpetuity is a term used in marketing, not finance

Question 47

Indicate which of the following is true about annuities.

A) An annuity due is a payment paid or received at the beginning of each period, that increases by an equal amount each period.
B) An ordinary annuity is an equal payment paid or received at the beginning of each period.
C) An ordinary annuity is an equal payment paid or received at the end of each period, that increases by an equal amount each period.
D) An annuity due is an equal payment paid or received at the beginning of each period.

Question 48

A local bank is offering a zero coupon certificate of deposit for $25,000. At maturity, three yearsfrom now, the investor will receive $32,000. What is the rate of return on this investment?

A) 6 percent
B) 9 percent
C) 12 percent
D) 3 percent

Question 49

Dan plans to fund his registered retirement savings plan (RRSP) with a contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 10 percent on his contributions, how much will he have at the end of the tenth year?

A) $12,290
B) $20,000
C) $51,880
D) $31,874

Question 50

A beach house in southern California now costs $350,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Louis and Kate retire from successful careers in commercial art. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement?

A) $79,977
B) $17,350
C) $4,323
D) $11,471

Question 51

Kathy borrows $10,000 from the bank. For a four year loan, the bank requires annual end-of-year payments of $3,223.73. The annual interest rate on the loan is

A) 11 percent.
B) 10 percent.
C) 9 percent.
D) 12 percent.

Question 52

How long will it take your money to triple in value at 12% compounded quarterly?

A) 9.3 years
B) 37.2 years
C) 10.3 years
D) 6.9 years

Question 53

The annual rate of return is variously referred to as

A) the cost of capital.
B) the opportunity cost.
C) the discount rate.
D) all of the above.

Question 54

Marion makes annual end-of-year payments of $6,260.96 on a five year loan with an 8 percent interest rate. The original principal amount was _________.

A) $31,000
B) $25,000
C) $20,000
D) $30,000

Question 55

The future value of an ordinary annuity of $1,000 each year for 10 years, deposited at 3 percent, is ________.

A) $ 8,530
B) $11,464
C) $10,000
D) $11,808

Question 56

You are looking at a new $40,000 sports car and wondering what the monthly payments will be.You plan to finance the car over five years at an interest rate of 12% compounded monthly. Yourmonthly payments will be

A) $989.
B) $1,110.
C) $711.
D) $890.

Question 57

The rate of return earned on an investment of $50,000 today that guarantees an annuity of $10,489for six years is approximately

A) 30%.
B) 7%.
C) 5%.
D) none of the above

Question 58

A ski chalet in Aspen now costs $250,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 10 years before Barbara and Phil retire from successful investment banking careers. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon retirement?

A) $25,005
B) $22,109
C) $8,333
D) $13,572

Question 59

The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is ________.

A) $699
B) $75
C) $236
D) $42

Question 60

You are looking to invest some money and are comparing bank rates. Bank A has a quoted rate of8.1% compounded semi-annually, while Bank B has a quoted rate of 8% compounded monthly. Which bank provides the better investment opportunity?

A) Cannot be determined with the limited information provided
B) Bank B
C) They have the same equivalent rates
D) Bank A

Question 61

The rate of interest actually paid or earned is the ________interest rate.

A) discounted
B) continuous
C) effective
D) nominal

Question 62

The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called

A) future value.
B) present value interest factor.
C) present value.
D) future value interest factor.

Question 63

A generous benefactor to the local ballet plans to make a one-time endowment which would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be?

A) $750,000
B) $3,000,000
C) $300,000
D) $1,428,571

Question 64

What is the rate of return on an investment of $124,090 if the company expects to receive $10,000 per year for the next 30 years?

A) 7 percent
B) 0 percent
C) 4 percent
D) 1 percent

Question 65

Charlene owns stock in a company which has consistently paid a growing dividend over the last five years. The first year Charlene owned the stock, she received $1.71 per share and in the fifth year, she received $2.89 per share. What is the growth rate of the dividends over the last five years?

A) 12 percent
B) 7 percent
C) 5 percent
D) 14 percent

Question 66

Julian was given a gold coin originally purchased for $1 by his great grandfather 50 years ago.Today the coin worth $450. The rate of return realized on the sale of this coin is approximatelyequal to

A) 13%.
B) 50%.
C) 7.5%.
D) cannot be determined with given information

Question 67

Entertainer's Aid plans five annual colossal concerts, each in a different nation's capital. The concerts will raise funds for an endowment which would provide the World Wide Hunger Fund with $3,000,000 per year into perpetuity. The endowment will be given at the end of the sixth year. The rate of interest is expected to be 9 percent in all future periods. How much must Entertainer's Aid deposit each year to accumulate to the required amount?

A) $5,569,500
B) $8,569,000
C) $1,830,300
D) $3,333,300

Question 68

The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and$1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is________ .

A) $2,500
B) $6,516
C) $2,856
D) $3,043

Question 69

A college received a contribution to its endowment fund of $2 million. They can never touch the principal, but they can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year?

A) $95,000
B) $18,000
C) $19,000
D) $190,000

Question 70

A generous philanthropist plans to make a onetime endowment to a renowned heart researchcenter which would provide the facility with $250,000 per year into perpetuity. The rate of interestis expected to be 8 percent for all future time periods. How large must the endowment be?

A) $2,314,814
B) $3,125,000
C) $2,000,000
D) $3,000,000

Question 71

The time value concept/calculation used in amortizing a loan is the

A) present value of a dollar.
B) future value of a dollar.
C) future value of an annuity.
D) present value of an annuity.

Question 72

An annuity with an infinite life is called

A) a perpetuity.
B) an indefinite.
C) a deep discount.
D) a primia.

Question 73

The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost of 11 percent, is ________ .

A) $18,800
B) $12,093
C) $27,869
D) $ 1,020

Question 74

The present value of a $25,000 perpetuity at a 14 percent discount rate is________

A) $350,000
B) $219,298
C) $178,571
D) $285,000

Question 75

If the present value interest factor for i percent and n periods is 0.270, the future value interest factor for the same i and n is _________.

A) 3.704
B) 0.730
C) 3.797
D) cannot be determined

Question 76

Susan is planning to accumulate $40,000 by the end of 5 years by making 5 equal annual deposits. If she plans to make her first deposit today and can earn an annual compound rate of 9 percent on her investment, how much must each deposit be in order to accumulate the $40,000?

A) $9,434
B) $23,844
C) $6,683
D) $6,132

Question 77

You recently graduated and borrowed $10,000 from you parents. Your parents want you to be responsible and have asked that you repay them $100 per month payable at the end of each month. They also require a 6% compounded monthly interest charge. How many years before you will have this loan paid off?

A) 16.32 years
B) 7.88 years
C) 11.58 years
D) 21.88 years

Question 78

The future value of $100 received today and deposited in an account for four years paying semiannual interest of 6 percent is________ .

A) $134
B) $126
C) $889
D) $450

Question 79

What is the highest effective rate attainable with a 12 percent nominal rate?

A) 12.00%
B) 12.55%
C) 12.95%
D) 12.75%

Question 80

James plans to fund his individual retirement account, beginning today, with 20 annual deposits of$2,000, which he will continue for the next 20 years. If he can earn an annual compound rate of 8percent on his deposits, the amount in the account upon retirement will be________ .

A) $21,207
B) $91,524
C) $98,846
D) $19,636