Question 1

How much would $100,growing at 5% per year,be worth after 75 years?

Accepted Answer

A)  $3,689.11 
B)  $3,883.27 
C)  $4,077.43 
D)  $4,281.30 
E)  $4,495.37

Question 2

Suppose Randy Jones plans to invest $1,000.He can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be somewhat less than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 3

Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?

Accepted Answer

A)  $28,532 
B)  $29,959 
C)  $31,457 
D)  $33,030 
E)  $34,681

Question 4

Your investment advisor has recommended your invest in bonds that pay 6.0%,compounded annually.If you invest $10,000 today,how many years will it take for your investment to grow to $30,000?

Accepted Answer

A)  12.37 
B)  13.74 
C)  15.27 
D)  16.97 
E)  18.85

Question 5

You are considering two equally risky annuities,each of which pays $15,000 per year for 20 years.Investment ORD is an ordinary (or deferred)annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Accepted Answer

A)  If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant. 
B)  The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. 
C)  The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
D)  The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
E)  The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

Question 6

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the smaller the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
B)  A time line is not meaningful unless all cash flows occur annually. 
C)  Time lines are not useful for visualizing complex problems prior to doing actual calculations. 
D)  Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
E)  Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Question 8

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Accepted Answer

A)  Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
B)  The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
C)  A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D)  A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
E)  If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

Question 9

Suppose Sally Smith plans to invest $1,000.She can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be more than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 10

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A)  $969 
B)  $1,020 
C)  $1,074 
D)  $1,131 
E)  $1,187

Question 11

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 12

Cochrane Associate's net sales last year were $525 million.If sales grow at 7.5% per year,how large (in millions)will they be 8 years later?

Accepted Answer

A)  $845.03 
B)  $889.51 
C)  $936.33 
D)  $983.14 
E)  $1,032.30

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  A time line is not meaningful unless all cash flows occur annually. 
B)  Time lines are not useful for visualizing complex problems prior to doing actual calculations. 
C)  Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
E)  Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

Question 14

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or less than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 15

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 16

Your Green Investment Tips subscription is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $850,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33

Question 17

A "growing annuity" is any cash flow stream that grows over time.

Accepted Answer

A) True 
 B)False

Question 18

Ten years ago,Kronan Corporation earned $0.50 per share.Its earnings this year were $2.20.What was the growth rate in earnings per share (EPS)over the 10-year period?

Accepted Answer

A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49%

Question 19

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic rate of interest is 5% and the effective rate of interest is also 5%. 
B)  The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. 
C)  The periodic rate of interest is 5% and the effective rate of interest is greater than 5%. 
D)  The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. 
E)  The periodic rate of interest is 2.5% and the effective rate of interest is 5%.

Question 20

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Accepted Answer

A) True 
 B)False

Exam 4: Time Value of Money

How much would $100,growing at 5% per year,be worth after 75 years?

Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?

Your investment advisor has recommended your invest in bonds that pay 6.0%,compounded annually.If you invest $10,000 today,how many years will it take for your investment to grow to $30,000?

You are considering two equally risky annuities,each of which pays $15,000 per year for 20 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the smaller the present value of a given lump sum to be received at some future date.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Cochrane Associate's net sales last year were $525 million.If sales grow at 7.5% per year,how large (in millions) will they be 8 years later?

Which of the following statements is CORRECT?

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or less than the nominal rate on the deposit (or loan).

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

A "growing annuity" is any cash flow stream that grows over time.

Ten years ago,Kronan Corporation earned $0.50 per share.Its earnings this year were $2.20.What was the growth rate in earnings per share (EPS) over the 10-year period?

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.