Time Value of Money Analysis

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Assess your learning of Time Value of Money concepts and analysis.

Assessment Concepts: Future Value, Present Value, Future Value of Annuity, Present Value of Annuity, Continuous Compounding, Finding Rate, Finding Number of periods, Installment, Perpetuity,

Application of Microsoft Excel Functions: FV, PV, RATE, PMT, Effect

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In 2 years you are to receive $10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would __________.

1 point

fall

rise

remain unchanged

The correct answer cannot be determined without more information.

Clear selection

To increase a given future value, the discount rate should be adjusted __________.

1 point

upward

downward

first upward and then downward

None of the above answers are correct; you should use PVIF.

Clear selection

You are going to place $12,500 into a certificate of deposit (CD) at a 6% annual rate (compounded annually) with a maturity of 30 months. How much money will you receive when the CD matures?

2 points

Necessary information is not available to solve the problem.

$14,460

$14,491

$14,518

Clear selection

What is the present value of a $1,000 ordinary annuity that earns 8% annually for an infinite number of periods?

2 points

$80

$800

$1,000

$12,500

Clear selection

Which of the following investment alternatives would provide the greatest ending wealth for your investment?

2 points

10% compounded daily (360 days).

10.5% compounded annually.

10.25% compounded quarterly.

There is not sufficient information to determine the best alternative from the above information.

Clear selection

You are considering investing in a zero-coupon bond that sells for $500. At maturity in 8 years, it will be redeemed for $1,000. During the life of the bond NO interest coupons will be paid. Using the Rule of 72, what approximate annual rate of growth does this represent?

1 point

8 percent.

9 percent.

12 percent.

25 percent.

Clear selection

Interest paid (earned) on only the original principal borrowed (lent) is often referred to as __________.

1 point

present value

simple interest

future value

compound interest

Clear selection

Assume that the interest rate is greater than zero. Which of the following cash-inflow streams totaling $1,500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively.

1 point

$700 $500 $300

$300 $500 $700

$500 $500 $500

Any of the above, since they each sum to $1,500.

Clear selection

Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is often referred to as __________.

1 point

present value

simple interest

future value

compound interest

Clear selection

You expect to deposit the following cash flows at the end of years 1 through 5, $1,000; $4,000; $9,000; $5,000; and $2,000 respectively. What is the future account value at the end of year 6 if you can earn 10% compounded annually?

2 points

$15,633.62

$21,000.00

$25,178.10

$27,695.91

Clear selection

You have just graduated and have decided to purchase a brand new sports car to enjoy your newfound freedom. Your local credit union will provide financing for 60 months at a 9 percent annual rate, compounded monthly. You will give 15 percent of the $26,000 purchase price in cash to the dealer. The credit union will be used to finance the remaining 85 percent of the purchase price with the first payment due 1 month from today. What will be your monthly payment?

2 points

$539.71

$458.76

$433.33

$368.33

Clear selection

For $1,000 you can purchase a 5-year ordinary annuity which will pay you a yearly payment of $263.80 for 5 years. What is the annual interest rate implicit in this investment to the nearest whole percentage point?

2 points

8 percent.

9 percent.

10 percent.

11 percent.

Clear selection

The ShortHolder bank pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit. If you deposit $20,000 you would expect to earn around __________ in interest.

2 points

$840

$858

$1,032

$1,121

Clear selection

With continuous compounding at 8 percent for 20 years, what is the approximate future value of a $20,000 initial investment?

2 points

$52,000

$93,219

$99,061

$915,240

Clear selection

You are considering borrowing $100,000 for 30 years at a compound annual interest rate of 9 percent. The loan agreement calls for 30 equal annual payments, to be paid at the end of each of the next 30 years. (Payments include both principal and interest.) What is the annual payment that will fully amortize the loan?

2 points

$3,333.33

$6,400.30

$9,733.63

$12,333.33

Clear selection

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