Deck 9: Time Value of Money

Question 1

As the number of periods increases, present value increases.

Answer 1

False

Question 2

As the interest rate increases, present value decreases.

Answer 2

True

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

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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 93% per year.To help determine what how much today investment is sum must betoday, you will use:

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

Question 23

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 24

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

Question 25

$1000 deposited in a bank that earns 7% per year will become approximately $7,600 in 30 years.

Question 26

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

Question 27

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

Question 28

Discounting Compounding means that interest earned each year, plus the principal, will be reinvested at the stated rate.
Changed as original answer incorrect.Discounting is the same as compounding but in different time order.(PV compounds to FV; FV discounts to PV)

Question 29

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

Question 30

In actual practice, most corporate bonds pay interest four times a year.
Not in chapter

Question 31

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

Question 32

The return provided by a $100 annuity deposited for 10 years that results in a future value of $614.46 is -11.45%.
Foolish question as r < 0

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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 alump sum has the same value as the 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 39

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

Question 40

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

Question 41

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 42

Which of the following statements is false?

A)MFor a given APR, more frequent compounding results in additional return on the investment.
B)An amortized loan is repaid in equal payments 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 43

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 44

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 45

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)For a given APR, the present value of a future sum decreases as the number of discounting periods per year decreases.each of the above statements is true.

Question 46

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 47

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

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

Question 48

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 49

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 tThe 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 50

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 (or APR) will be greater than the effective annual rate.
D)Each of the above statements is equally true.

Question 51

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 52

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 53

In 1983, the average tuition for one year in the MBA program at a university was $3,600. Thirty years later, in 2013, 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 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

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 62

If we will receive $100 per year beginning one year from now for a period of three years with a 12% discount rate, what would be the value of our investment today?

A)$230
B)$240
C)$250
D)$260

Question 63

What would be the future value of a loan 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 64

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 65

An investment will mature in 20 years.Its maturity value is $1,000.If the discount rate is 7%, what is the present value of the investment?

A)$178
B)$258
C)$276
D)$362

Question 66

You have just won a lottery! You will receive $50,000 a year beginning one year from now for 20 years.If your required rate of return is 10%, what is the present value of your winning lottery ticket?

A)$418,250
B)$425,700
C)$444,640
D)$453,850

Question 67

If $1,000 were invested now at a 12% interest rate compounded annually, what would be the value of the investment in two years?

A)$1,254
B)$1,210
C)$1,188
D)$1,160

Question 68

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 69

Assume a lender offers you a $25,000, 10%, three-year loan that is to be fully amortized with three annual payments.The first payment will be due one year from the loan date.How much will you have to pay each year?

A)$8,042
B)$9,026
C)$10,053
D)$11,120

Question 70

You deposit $1,000 in a long-term certificate of deposit with an 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 71

Suppose you receive $3,000 a year in years one through four, $4,000 a year in years five through nine, and $2,000 in year 10, with all the money to be received at the end of the year.If your discount rate is 12%, what is the present value of these cash flows?

A)18,926.12
B)19,560.80
C)20,651.24
D)24,175.00

Question 72

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 73

Suppose you were going to save $1,000 per year for three years at a 10% interest rate compounded annually, with the first investment occurring today.What would be the future value of this investment?

A)$2,124
B)$2,310
C)$3,641
D)$3,812

Question 74

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 75

Consolidated Freightways is financing a new truck with a loan of $60,000 to be repaid in six annual end-of-year installments of $13,375.What annual interest rate is Consolidated Freightways paying?

A)7%
B)8%
C)9%
D)10%

Question 76

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 77

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 78

Ken purchases a perpetual investment that pays $90 per year indefinitely, beginning one year from today.What is price of the investment if the current discount rate is 7.6%?

A)$1,000
B)$4,126.45
C)$1,150.66
D)$1,184.21

Question 79

Assume that a borrower is willing to pay you $2,000 at the end of three years in return for a sum of money now.To receive a return of 10%, how much are you willing to lend now?

A)$1,502
B)$1,786
C)$1,802
D)$1,818

Question 80

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