Deck 9: Time Value of Money

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

As the interest rate increases,present value decreases.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

If the compound inflation rate were greater than the compound interest rate,purchasing power would fall.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

As the number of periods increases,present value increases.

Question 20

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 21

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

Question 22

The values of stocks and bonds are not affected by time value of money concepts.

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

In actual practice,most corporate bonds pay interest four times a year.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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 44

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

Question 45

Suppose you have a choice of two equally risky annuities,each paying $1,000 per year for 20 years.One is an annuity due,while the other is an ordinary annuity.Which annuity would you choose?

A)the ordinary annuity
B)the annuity due
C)either one because the annuities have the same present value
D)without information about the appropriate interest rate,we cannot tell which annuity is better

Question 46

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

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

Question 47

A potential investment pays $10 per year indefinitely.The appropriate discount rate for the potential investor is 10%.The present value of this cash flow is calculated by:

A)multiplying $10 by the appropriate present value factor
B)dividing $10 by 10
C)multiplying $10 by the present value factor of an annuity
D)dividing $10 by .10

Question 48

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

Question 49

Which of the following statements is most correct?

A)There is an inverse relation between the present value interest factor of an annuity and the future value interest factor of an annuity,i.e. ,one is the reciprocal of the other.
B)The future value of an ordinary annuity can be determined as the product of the annual payment and the appropriate future value interest factor for an ordinary annuity.
C)If a bank uses daily compounding for a savings account,the nominal rate will be greater than the effective annual rate.
D)Each of the above statements is equally true.

Question 50

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

A)present
B)future
C)book
D)none of the above

Question 51

It will take approximately 18.8 years for a $100 deposit to result in a future value of $600 if I can earn 10% on my deposit.

Question 52

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

Question 53

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

Question 54

Which of the following characteristics is not descriptive of an amortization schedule?

A)each payment is the same.
B)The same dollar amount of interest is paid with each payment.
C)payment on principal increases with each total payment.
D)balance owed is reduced by each payment.

Question 55

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

Question 56

Which of the following statements is false?

A)the present value of a future sum decreases as either the discount rate or the number of discounting periods per year increases.
B)if the present value of a sum is equal to its future value,the interest rate must be zero.
C)if the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.
D)each of the above statements is true.

Question 57

Which of the following statements is false?

A)More frequent compounding results in additional return on the investment.
B)An amortized loan is repaid in equal payment over a specified time period.
C)The effective annual rate is determined by multiplying the interest rate charged per period by the number of periods in a year.
D)Each of the above statements is true.

Question 58

Which of the following terms best describes an annuity due?

A)a perpetuity
B)unequal payments
C)payment at beginning of year
D)payment at the end of the year

Question 59

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 9% per year.To help determine what today investment is sum must be,you will use:

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

Question 60

A famous athlete is awarded a $9 million contract that stipulates equal payments to be made monthly over a period of five years.To determine what such a contract is worth today,you would need to use:

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

Question 61

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 62

Tom Vu deposited $5,000 in a savings account that paid 8% interest compounded quarterly.What is the effective rate of interest?

A)8.00%
B)8.24%
C)8.33%
D)8.46%

Question 63

A loan that is repaid in equal payments over a specified time period is called a (n)

A)discount loan
B)balloon loan
C)amortized loan
D)none of the above

Question 64

John deposits $2,000 per year at the end of the year for the next 20 years into an IRA account that pays 6%.How much will John have on deposit at the end of 20 years?

A)$67,520
B)$73,572
C)$81,990
D)$75,686

Question 65

Daniel deposits $2,000 per year at the end of the year for the next 15 years into an IRA account that currently pays 7%.How much will Daniel have on deposit at the end of the 15 years?

A)$39,981
B)$46,753
C)$49,002
D)$50,258

Question 66

Cecilia bought 100 shares of Minnesota Mining and Manufacturing in June,1987 for $38 a share for a total investment of $3,800.She sold the shares in June,1996 for $8,960.What is Cecilia's annual rate of return on her investment?

A)10%
B)10.6%
C)11%
D)11.2%

Question 67

The method of calculating interest on a loan that is set by law is called the:

A)negotiated legal rate (NLR)
B)effective annual rate (EAR)
C)annual percentage rate (APR)
D)none of the above

Question 68

Christine has just purchased a used Mercedes for $18,995.She plans to make a $2,500 down payment on the new car.What is the amount of her monthly payment on the remaining loan if she must pay 12% annual interest on a 24-month car loan?

A)$759.53
B)$776.48
C)$894.16
D)$899.87

Question 69

How much would you be willing to pay for a preferred stock that pays $6.50 to perpetuity if the appropriate discount rate is 9%?

A)$65.00
B)$72.22
C)$81.25
D)$722.20

Question 70

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.What is the present value of these cash flows if they are discounted at 4%?

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

Question 71

You want to buy a Volvo in seven years.The car is currently selling for $50,000,and the price will increase at a compound rate of 10% per year.You can presently invest in high-yield bonds earning a compound annual rate 14% per year.How much must you invest at the end of each of the next seven years to be able to purchase your dream car in seven years?

A)$8,831.46
B)$9,080.20
C)$9,125.42
D)$9,282.09

Question 72

Your subscription to Consumer Reports is about to expire.You may renew it for $24 a year or,instead,you may get a lifetime subscription to the magazine for a onetime payment of $400 today.Payments for the regular subscription are made at the beginning of each year.Using a discount rate of 5%,how many years does it take to make the lifetime subscription the better deal?

A)25 years
B)28 years
C)30 years
D)40 years

Question 73

You need $8,000 four years from now for a down payment on your future house.How much money must you deposit today if your credit union pays 5% interest compounded annually? Pick the closest answer.

A)$6,269.59
B)$6,578.95
C)$6,394.12
D)$6,189.83

Question 74

Your college has agreed to give you a $10,000 tuition loan.As part of the agreement,you must repay $12,600 at the end of the three-year period.What interest rate is the college charging?

A)8%
B)9%
C)11%
D)6%

Question 75

You deposit $1,000 in a long-term certificate of deposit with a fixed interest rate of ? 9%.How many years will it take for you to triple your deposit? Pick the closest ? answer.

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

Question 76

In 1966,the average tuition for one year in the MBA program at the University of Chicago was $3,600.Thirty years later,in 1996,the average tuition was $27,400.What is the compound annual growth rate in tuition (rounded to the nearest whole percentage)over the 30-year period?

A)6%
B)7%
C)8%
D)10%

Question 77

In 1976,the average price of a domestic car was $5,100.Twenty years later,in 1996,the average price was $16,600.What was the annual growth rate in the car price over the 20-year period?

A)5%
B)6%
C)7%
D)8%

Question 78

Jill Clinton puts $1,000 in a savings passbook that pays 4% compounded quarterly.How much will she have in her account after five years?

A)$1,200.50
B)$1,220.20
C)$1,174.80
D)$1,217.50

Question 79

You borrow $10,000 to pay for your college tuition.The loan is amortized over a three-year period with an interest rate of 18%.What is your remaining balance at the end of year two?

A)$7,201
B)$4,599
C)$3,898
D)$3,303

Question 80

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