Deck 9: Time Value of Money

Question 1

With compound interest, interest is earned only on the investment's principal.

Answer 1

False

Question 2

The present value of a $100 deposit in 10 years at 10% is $259.37.

Answer 2

False

Question 3

Money has a time value so long as interest is earned by saving or investing money.

Answer 3

True

Question 4

Compound interest is interest earned on interest in addition to interest earned on the principal.

Question 5

If we know the future value of an investment, we can find its present value.

Question 6

If the compound inflation rate were greater than the compound interest rate, future purchasing power on our savings would fall.

Question 7

Future value is the value of a loan at a specified time or date in the future.

Question 8

If the interest rate is 0% for 10 years, then the present value will be less than the future value.

Question 9

Discounting is an arithmetic process whereby a future sum decreases at a compounding interest rate over time to reach a present value.

Question 10

The future value of a $100 annuity deposited for 10 years at 10% is $614.46.

Question 11

As the number of periods increases, present value increases.

Question 12

The future value of a $100 deposit in 10 years at 10% is $259.37.

Question 13

As the interest rate increases, present value decreases.

Question 14

The present value of a $100 deposit in 10 years at 10% is $38.55.

Question 15

The future value of a $100 deposit in 10 years at 10% is $38.55.

Question 16

The future value of a $100 annuity deposited for 10 years at 10% is $1,593.74.

Question 17

Future value = Present value + (1 x Interest).

Question 18

The Rule of 72 is an estimate of how long it would take to double a sum of money at a given interest rate.

Question 19

Compounding means that interest earned each year, plus the principal, will be reinvested at the stated rate.

Question 20

Simple interest is interest earned on the investment's principal and subsequently-earned interest.

Question 21

$1,000 deposited in a bank that earns 7% per year will become approximately $7,600 in 30 years.

Question 22

The return provided by a $100 annuity deposited for 10 years that results in a future value of $1,593.74 is 15%.

Question 23

The return provided by $100 deposited for 10 years that results in a future value of $614.46 is 19.91%.

Question 24

The return provided by a $100 annuity deposited for 10 years that results in a future value of $1,593.74 is 10%.

Question 25

If I earn 3% on my deposit of $500, it will take 9 years before I have $550.

Question 26

At very low interest rates, the "Rule of 72" does not approximate the compounding process well.

Question 27

An annuity due may also be referred to as a deferred annuity.

Question 28

To find out how long it will take for your money in an investment to double, just multiply the interest times 72.

Question 29

When the annual interest rate stays the same, more frequent interest compounding helps savers earn more interest over the course of the year.

Question 30

The present value of a $100 annuity deposited for 10 years at 10% is $1,593.74.

Question 31

For a given discount rate, an ordinary annuity and an annuity due have the same present value.

Question 32

An ordinary annuity exists when the equal payments occur at the beginning of each time period.

Question 33

It will take approximately 18.8 years for a $100 deposit to grow to $600 if I can earn 10% on my deposit.

Question 34

At very high interest rates the "Rule of 72" will result in a small estimation error for the estimate of the time for an investment to double.

Question 35

Level cash flow amounts that occur at the end of each period, starting at the end of the first period, are an annuity due.

Question 36

It will take approximately 9.6 years for a $100 deposit to result in a future value of $600 if I can earn 10% on my deposit.

Question 37

The return provided by a $100 annuity deposited for 10 years that results in a future value of $614.46 is 11.45%.

Question 38

An annuity is a series of equal payments that occur over a number of time periods.

Question 39

At a zero interest rate, the present value of $1 remains at $1 and is not affected by time.

Question 40

The present value of a $100 annuity deposited for 10 years at 10% is $614.46.

Question 41

Interest earned only on an investment's principal or original amount is referred to as:

A) simple interest
B) compound interest
C) discount interest
D) annuity interest

Question 42

An amortized loan is repaid in equal payments over a specified time period.

Question 43

Your current bank is paying 6.25% simple interest rate. You can move your savings account to Harris Bank that pays 6.25% compounded annually or to First Chicago bank paying 6% compounded semi-annually. To maximize your return you would choose:

A) your current bank
B) Harris Bank
C) First Chicago bank
D) you are indifferent, because the effective interest rate for all three banks is the same

Question 44

The interest portion increases and the principal portion decreases over time under a typical loan amortization schedule.

Question 45

The annual percentage rate (APR) overstates the true or effective interest cost.

Question 46

Which of the following equations is correct?

A) Future value = Present value + (Present value x Periods)
B) Future value = Present value + (Present value x Interest rate)
C) Future value = Present value + (Present value + Interest rate)
D) Future value = Present value x (Present value + Interest rate)

Question 47

A loan amortization schedule shows the breakdown of each payment between interest and principal, as well as the remaining balance after each payment.

Question 48

The effective annual rate is determined by multiplying the interest rate charged per period by the number of periods in a year.

Question 49

A fixed-rate mortgage is an example of an annuity.

Question 50

The effective annual rate measures the true interest rate when compounding occurs more frequently than once a year.

Question 51

The annual percentage rate is the true opportunity cost measure of the interest rate.

Question 52

Because interest compounds, the annual percentage rate formula will overstate the true interest cost of a loan.

Question 53

The effective annual rate (EAR) is sometimes called the annual effective yield.

Question 54

The act of lending money at an excessively high interest rate is called loan sharking.

Question 55

The effective annual rate (EAR) is the true opportunity cost measure of the interest rate.

Question 56

The basic future and present value equations contain four variables. Which one of the following is not included?

A) present value (PV)
B) future value (FV)
C) interest rate (r)
D) inflation rate (I)
E) number of periods (n)

Question 57

The method of calculating the annual percentage rate (APR) is set by law.

Question 58

For the same annual percentage rate, more frequent compounding increases the future value of an investor's funds more quickly.

Question 59

The _________ value of a savings or investment is its amount or value at the current time.

A) present
B) future
C) book
D) capital

Question 60

When solving for the future value of an amount deposited now, which one of the following factors would not be part of the calculation?

A) present value amount
B) 1 plus the interest rate
C) 1 divided by the sum of 1 plus the interest rate
D) number of periods to compound over

Question 61

What would be the future value of a CD of $1,000 for two years if the bank offered a 10% interest rate compounded semiannually?

A) $1,720
B) $1,960
C) $1,200
D) $1,216

Question 62

The future value of a dollar ________ as the interest rate increases and ________ the farther in the future is the funds are to be received.

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

Question 63

Tracey deposits $5,000 in a five-year certificate of deposit paying 6% compounded semi-annually. How much will Tracey have at the end of the five-year period?

A) $6,720
B) $6,690
C) $6,596
D) $6,910

Question 64

If the stated or nominal interest rate is 10 percent and the inflation rate is 5 percent, the net or differential compounding rate would be ________ percent

A) ten
B) five
C) two
D) fifteen

Question 65

You need to have $35,000 on hand to buy a new Lexus five years from today. To achieve that goal, you want to know how much you must invest today in a certificate of deposit guaranteed to return you 3% per year. To help determine how much to investment today, you will use:

A) present value factors
B) annuity value factors
C) present value factors of an annuity
D) future value factors of an annuity

Question 66

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) 0.730.
B) 3.797.
C) 3.704.
D) 3.777.

Question 67

You put $2,000 in an IRA account at Northern Trust. This account pays a fixed interest rate of 8% compounded quarterly. How much money do you have in five years?

A) $2,914
B) $2,938
C) $2,972
D) $2,999

Question 68

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

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

Question 69

__________ is the arithmetic process whereby an initial value increases or grows at a compound interest rate over time to reach a value in the future.

A) Discounting
B) Future value
C) Inflation
D) Compounding

Question 70

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

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

Question 71

$2,000 invested today at 6% in 3 years would result in a future value of:

A) $2,000
B) $2,382
C) $6,362
D) none of the above

Question 72

Sally would like to take an extra special trip in four years. She estimates she will need $10,000 for the trip. The best safe investment she can find currently pays 4% interest. How much must she invest today to have her $10,000 in four years? Round your answer to a while number.

A) $8,237
B) $8,548
C) $8,590
D) $11,841

Question 73

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

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

Question 74

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

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

Question 75

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

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

Question 76

For positive interest rates, the present value interest factor is

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

Question 77

The amount earned on a deposit becomes part of the principal at the end of a period and can earn a return in future periods is called

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

Question 78

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

A) $253
B) $252
C) $158
D) $135

Question 79

Joseph has just accepted a job as a stockbroker. He estimates his gross pay each year for the next three years is $35,000 in year 1, $21,000 in year 2, and $32,000 in year 3. The present value of these cash flows, if they are discounted at 4%, is closest to

A) $79,452.30
B) $80,294.50
C) $81,517.10
D) $88,000

Question 80

For positive interest rates, the future value interest factor is

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