Deck 7: The Time Value of Money

Question 1

Which is the largest if the interest rate is 10%?​

A) ​present value of $100 after five years
B) ​present value of $100 annuity for five years
C) future value of $100 annuity for five years
D) future value of $100 after five years

Answer 1

future value of $100 annuity for five years

Question 2

Even if the interest rate is only 1%, a lump sum of $1,000 today is preferred to $100 a year for 10 years.​

Answer 2

True

Question 3

The future value of a dollar​
1) decreases with compounding
2) increases with compounding
3) decreases with higher interest rates
4) increases with higher interest rates

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Answer 3

​2 and 4

Question 4

If interest rates are 9 percent, an annuity of $100 for 10 years is to be preferred to $1,000 after 10 years.​

Question 5

​Which is smallest if the interest rate is 10%?

A) ​present value of $100 annuity for five years
B) ​future value of $100 annuity for five years
C) ​present value of $100 after five years
D) ​$100 received right now

Question 6

If a bank pays 5 percent compounded semi‑annually, the true rate of interest is less than 5 percent annually.​

Question 7

​The more frequently interest is compounded, the larger will be the final or terminal amount.

Question 8

An annuity of $100 for 10 years is currently less valuable if interest rates are 10% instead of 12%.​

Question 9

Compounding refers to the earning of interest on interest.​

Question 10

Discounting refers to the process of bringing the future back to the present.​

Question 11

​The future value of a dollar
1) increases with lower interest rates
2) increases with higher interest rates
3) increases with longer periods of time
4) decreases with longer periods of time

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 12

In an ordinary annuity, the payments are made at the beginning of the year.​

Question 13

The future value of an ordinary annuity will exceed the future value of an annuity due.​

Question 14

If a person owes $50,000 at 10 percent and annually pays $10,000, the loan will be retired in 5 years.​

Question 15

It takes longer than 8 years to retire a $24,000 loan at 8% if the annual payment is $3,000.​

Question 16

​The present value of an annuity due

A) ​is less than the present value of an ordinary annuity
B) ​is greater than the present value of an ordinary due
C) ​is less than the cost of the annuity
D) ​is greater than the cost of the annuity

Question 17

The present value of an annuity is worth more if interest rates are 5% instead of 10%.​

Question 18

Higher rates of interest are associated with greater present values.​

Question 19

The present value of a dollar​
1) increases with lower interest rates
2) increases with higher interest rates
3) increases with longer periods of time
4) decreases with longer periods of time

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 20

If a person buys a stock for $10 and sells it after 10 years for $20, the annual compound return is 10%.​

Question 21

The time value of money suggests​ ​

A) that the present is less attractive than the future
B) ​individuals prefer a dollar in the present to a dollar in the future
C) ​the present value of an annuity is negative
D) ​annuities are worth less than lump sums

Question 22

If interest rates rise,​

A) ​the future value of a dollar declines
B) ​the present value of a dollar rises
C) ​the present value of an annuity falls
D) ​the future value of an annuity falls

Question 23

The New Jersey lotto awarded a prize of $560,000 a year for the next 20 years starting today. If the state sold $21,900,000 in lotto tickets, what proportion of the sales will the state distribute if it earns 8% annually on invested funds?​

Question 24

For investors, an annuity due ​
a.
​is to be preferred to an ordinary annuity
b.
​is worth less than an equal lump sum received at the end of the time period
c.
​receives payments at the end of the time period
d.
​produces unequal payments

Question 25

​An investment is expected to generate $1,000,000 each year for 4 years. If the firm's cost of funds is 10%, what is the maximum amount the firm should pay for the investment?

Question 26

A firm has a $1,000,000 debt (e.g., a bond) outstanding that matures after 10 years. The sinking fund requires the firm to set aside annually an amount so the debt may be retired at maturity. If the firm can earn 10% annually on these funds, how much must it invest annually to meet the sinking fund?​

Question 27

The present value of a dollar​
1) is larger the longer the time period
2) is larger the shorter the time period
3) is larger the greater the interest rate
4) is larger the smaller the interest rate

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 28

You open an individual retirement account (IRA) with a mutual fund and contribute $1,000 into the account each year. How much will be in the account after 20 years if the investment earns 7% annually?

Question 29

​You borrow $100,000 to buy a house; if the annual interest rate is 6% and the term of the loan is 20 years, what is the annual payment required to retire the mortgage loan?

Question 30

Discounting is​
1) the determination of present value
2) the determination of future value
3) expressing the present in the future
4) expressing the future in the present

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 31

You bought an asset for $10,000 and sold it for $20,000 after 10 years. What was the annual rate of return on this investment?​

Question 32

An investor expects a stock to double in 7 years. What is the expected annual rate of growth in the price of the stock?​

Question 33

A person has an individual retirement account and can deposit $2,000 a year. What will be the difference in the amount in the account if this investor earns 8% instead of 6%?​

Question 34

An apartment will generate $12,000 a year for 5 years, after which you expect to sell the property for $100,000. What is the maximum you should pay for the property if your cost of money is 10%?​

Question 35

You are offered two jobs. One initially pays $45,000 annually, and your salary will grow annually at 10%. The other pays $42,000 annually, but your salary will grow at 12%. After 10 years, which job pays the higher salary?​

Question 36

You bought a stock for $30 and after 10 years sold it for $50. It paid an annual dividend of $2. Set up an equation that illustrates how the annual return is determined. Show that this return is not 14%.​

Question 37

The Big-Sox currently have 30,000 spectators per game and anticipate annual growth in attendance of 9%. If the Big Stadium holds 65,000 people, how long will it take for the team reach capacity?​

Question 38

Which of the following is the largest if the interest rate is 12 percent annually?​
1) $100 compounded for three years
2) $100 annuity compounded for three years
​
3) the present value of $100 received after three years

A)​1
B)​2
C)​3
D)​answer cannot be determined

Question 39

​An annuity due is a set of

A) ​equal, annual payments made at the end of the year
B) ​equal, annual payments
C) ​equal, annual payments made at the beginning of the year
D) ​rising annual payments

Question 40

You purchase a home for $100,000 with a 20-year mortgage at 12%. If you make annual mortgage payments that pay the interest and reduce the principal, by how much is the loan reduced at the end of the first year?​

Question 41

You bought a Picasso for $50,000 and sold it after 5 years for $88,000. What was the annual return on the investment?​

Question 42

A firm earns 10 percent annually on its investments. One possible investment offers $50,000 a year for 10 years and costs $300,000. Should the firm make this investment?​

Question 43

If an individual can save $1,500 annually, how much will have been accumulated after 4 years if the funds earn 7 percent?​

Question 44

An annuity offers $1,000 for 10 years. If you can earn 12 percent annually on your funds, what is the maximum amount you should pay for this annuity?​

Question 45

You inherit a trust account that promises to pay $13,000 a year for 10 years and then distribute $100,000. If current yields are 10 percent, what is the value of the trust?​

Question 46

AZ's dividend rose from $1 to $1.61 in five years. What has the dividend's annual rate of growth?​

Question 47

If a company paid a dividend of $1 in 2012 and the dividend grows annually by 7 percent, what will be the dividend in 2017?​

Question 48

If a creditor owes $24,000 and annually pays $3,000, how quickly will the loan be retired if the interest rate is 8 percent annually?​

Question 49

A company earned $2.00 per share in 1995 and paid cash dividends of $1.00. In 2005, it earned $5.20 and paid a dividend of $2.16. What is the annual growth rate in earnings and dividends? If the Consumer Price Index was 100 in 1995 and 163 in 2005, has the investor's purchasing power fallen?​

Question 50

How much additional interest will you earn on $1,000 at 10 percent for 10 years if interest is compounded semi-annually instead of annually?​

Question 51

If a new college graduate wants a car costing $25,000, how much must be saved annually if the funds earn 5 percent?​

Question 52

If an annuity costs $200,000 and yields 7 percent annually for 5 years, how much cash can an individual withdraw each year such that the principal is consumed at the end of the time period?​

Question 53

An employee and employer contribute $3,000 annually for 20 years to a retirement account that earns 9 percent a year, how much will the employee be able to withdraw from the account for 25 years?​