Deck 11: Time Value of Money

Question 1

A summary measure of an investment's projected performance based on the possible rates of return and the likelihood of those rates of return occurring is called:

A)inflation rate of return
B)relative risk rate of return
C)expected rate of return
D)risk-free rate of return

Answer 1

expected rate of return

Question 2

In compound interest calculations,as the frequency of compounding decreases,the:

A)total amount of interest decreases
B)interest rate increases
C)total amount of interest increases
D)the interest rate decreases

Answer 2

total amount of interest decreases

Question 3

Sphinx Enterprises is contemplating investing in a copper mine.An investment of $750,000 would be made for one year with the following potential outcomes: The expected rate of return for this investment is:

A)22.0%
B)15.5%
C)62.0%
D)8.3%

Answer 3

22.0%

Question 4

Art Burtscher has a choice of investing $10,000 at either 5% simple interest or 5% compound interest that is compounded annually.What will be the difference between
The total amount of interest earned after two years?

A)No difference
B)$25
C)$50
D)$100

Question 5

The future value of a $7,000 investment at the end of 4 years with an interest rate of 6% compounded annually is:

A)$8,680.00
B)$8,837.50
C)$5,544.70
D)$8,867.60

Question 6

Which of the following is NOT true about compound interest

A)As the number of compoundings increases the annual effective interest rate increases
B)As the number of compoundings increases the incremental amount of interest
Increases
C)As the number of compoundings increases the total amount of interest increases
D)As the number of compoundings increases the interest rate remains the same

Question 7

Yar Ebadi lost $5,000 on an investment which represented a 10% negative rate of return after one year.How much did Yar invest?

A)$55,000
B)$45,000
C)$50,000
D)Can not be determined given the information available

Question 8

Vladimir Boscak invested $35,000 on March 1,2009,and in return he received a total of $39,600,which he collected on March 1,2010.The rate of return on Vladimir's investment was:

A)11.6%
B)13.1%
C)12.3%
D)7.6%

Question 9

Ople Brown made an investment on November 1,2009 which yielded $15,000 and a
10% return on November 1,2010.How much did Ople invest?

A)$150,000
B)$140,000
C)$160,000
D)$155,000

Question 10

The rate of return is calculated as:

A)(dollar amount of average investment)x (dollar amount of return)
B)(present value of $1)/(dollar amount of average investment)
C)(dollar amount of return)/(dollar amount of initial investment)
D)(future value of $1)x (dollar amount of initial investment)

Question 11

In compound interest calculations,as the frequency of compounding increases,the:

A)total amount of interest decreases
B)annual interest rate increases
C)total amount of interest increases
D)the interest rate decreases

Question 12

Ivan Valentine made $4,000 on an investment which yielded an 8% return after 1 year. How much did Ivan invest?

A)$40,000
B)$50,000
C)$60,000
D)$70,000

Question 13

Adam Gross invested $2,500 on July 1,2009,and in return he received a total of $2,850,which he collected on July 1,2010.The rate of return on Adam's investment was:

A)13.1%
B)12.3%
C)7.1%
D)14.0%

Question 14

When an investment loses money,the amount of money lost is called?

A)A return on investment
B)A return of investment
C)An investment risk
D)An investment casualty

Question 15

Bobby Bell has $500,000 and is considering investing in a project that would yield the following returns one year from today: The expected return for this investment is:

A)$57,000
B)$45,000
C)$17,000
D)$32,000

Question 16

Dan Short invested $7,000 on October 1,2009,and in return he received a total of $6,200,which he collected on October 1,2010.The rate of return on Dan's investment was:

A)(12.9%)
B)12.9%
C)11.4%
D)(11.4%)

Question 17

Interest calculated only on the amount borrowed is referred to as:

A)compound interest
B)risk-free interest
C)inflation interest
D)simple interest

Question 18

A measure of the performance of investments on a common-size basis which eliminates the distortion caused by the size of the initial investment is referred to as:

A)rate of return
B)risk premium ratio
C)return of capital
D)rate of inflation

Question 19

Bobby Bell has $500,000 and is considering investing in a project that would yield the following returns one year from today: The expected rate of return for this investment is:

A)11.4%
B)9%
C)3.4%
D)6.4%

Question 20

All of the following are primary risk factors that generate risk premiums except:

A)inflation risk
B)business risk
C)relative risk
D)liquidity risk

Question 21

Midwest,Inc.has just borrowed $100,000 to purchase a new piece of equipment.The contract calls for 10 semiannual payments of $12,637.88,beginning six months from today.The annual interest rate Southland is paying equals:

A)9%
B)12%
C)10%
D)cannot be determined from the information given

Question 22

The present value on January 1,2010 of 8 annual payments of $7,500 each with the first payment to be made on January 1,2011,assuming a 9% interest rate is:

A)$63,764.25
B)$41,511.14
C)$30,114.00
D)$82,713.75

Question 23

Steve MacIntosh would like to have $20,000 in 5 years time to start his own business.The amount that MacIntosh would have to invest today,assuming an interest rate of 8% compounded quarterly,in order to reach his goal is:

A)$13,612.00
B)$29,386.00
C)$79,854.00
D)$13,459.43

Question 24

Mary Fagan invested $6,500 in a bank account that pays interest at the rate of 8% compounded annually.If Fagan makes no withdrawals,the account balance after 5 years will be:

A)$9,550.45
B)$9,100.00
C)$4,423.90
D)$9,603.75

Question 25

The present value of $13,000 received seven years from today,assuming an interest rate of 5% compounded annually is:

A)$ 9,269.00
B)$18,292.30
C)$17,550.00
D)$ 9,238.85

Question 26

Assuming an 8% interest rate,the dollar amount available on June 1,2016,resulting from 7 annual deposits of $3,500 each with the first deposit made on June 1,2010,is:

A)$18,222.40
B)$31,229.81
C)$41,988.10
D)$30,498.30

Question 27

Southland,Inc.has just borrowed $50,000 to purchase a delivery truck.The contract calls for 4 annual payments of $15,773.54,beginning one year from today.The annual interest rate Southland is paying equals:

A)8%
B)12%
C)10%
D)cannot be determined from the information given

Question 28

If $10,000 was invested 6 years ago and has now grown to $15,007,the rate of interest earned,assuming the interest rate was compounded annually,was:

A)8.3%
B)2.5%
C)7.0%
D)cannot be determined from the information given

Question 29

Ishvar Patel is going to make 5 annual deposits of $4,500 each into a savings account beginning on July 1,2010.Assuming an interest rate of 6%,on July 1,2014,Ishvar's bank account will have a balance of:

A)$28,521.90
B)$30,608.55
C)$18,955.80
D)$25,366.92

Question 30

Terry Lampron wishes to make 8 annual withdrawals of $3,000 each beginning on May 1,2011.Assuming a 4% interest rate,on May 1,2010,Lampron must deposit an amount of money equal to:

A)$20,198.23
B)$27,642.60
C)$26,192.10
D)$ 9,936.30

Question 31

The future value of a $4,800 investment at the end of 4 years with an interest rate of 10% compounded semiannually is:

A)$7,092.00
B)$6,720.00
C)$7,027.68
D)$3,248.64

Question 32

Bruce Derr invested $25,000 in an account which pays interest at a rate of 7% that is compounded monthly.At the end of 4 years how much will Bruce have?

A)$26,796.47
B)$33,051.35
C)$26,015.10
D)$32,998.23

Question 33

The future value of an $11,600 investment at the end of 5 years with an interest rate of 12% compounded quarterly is:

A)$20,442.68
B)$18,560.00
C)$20,950.89
D)$ 6,581.84

Question 34

How will the present value of a future amount be affected if the number of compounding increases?

A)The present value will increase
B)The present value will decrease
C)The present value will not change
D)Must know the amount of the future value before this can be answered

Question 35

What if the present value of $2,000 received nine years from today,assuming an interest rate of 8% compounded semiannually?

A)$987.26
B)$12,493.80
C)$ 3,998.00
D)$ 1,000.40

Question 36

What is the difference in the future value of $10,000 in 5 years if it is invested at 7% simple interest or invested at 7% compounded semiannually?

A)$605.88
B)$525.52
C)$6,171.51
D)No Difference

Question 37

When calculating the present or future value of an annuity we assume:

A)The number of compoundings each year is independent of the payments per year.
B)The number of compoundings per year is equal to the number of payments per year.
C)The number of compoundings depends on the size of the payment.
D)The number of compoundings depends on the annual interest rate.

Question 38

The future value of a $20,000 investment at the end of 7 years,assuming 9% simple interest,is:

A)$ 36,560.00
B)$ 32,600.00
C)$ 10,940.00
D)$184,008.00

Question 39

How will the present value of a future amount be affected if the interest rate is lowered.

A)The present value will increase
B)The present value will decrease
C)The present value will not change
D)Must know the amount of the future value before this can be answered

Question 40

Kelly Smith deposited $8,500 in an account which pays interest at the rate of 8% compounded quarterly.At the end of 3 years,Smith will have:

A)$10,540.00
B)$10,780.05
C)$ 6,747.30
D)$10,707.45

Question 41

You are trying to decide between leasing a car or buying it.In each case you would have the use of the car for 48 months.At the end of that time,you expect the car to be worth $6,000.Explain how to determine whether leasing or buying is the best for you.

Question 42

Tanya Wagner plans to make annual deposits of $7,674.36 until she has accumulated $50,000.Assuming she earns 7% on her investment,Wagner will need to make a total of:

A)9 payments
B)7 payments
C)6 payments
D)cannot be determined from the information given

Question 43

Calculate the expected rate of return for an investment of $550,000.What does the expected rate of return mean?

Question 44

Sinclair Corporation wants to know how much it should deposit each month in order to have $1,000,000 in five years.What type of problem is this?

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

Question 45

You have just purchased a new BMW for $40,000 to determine your monthly payments which of the following would you use?

A)future value of an annuity of $1 per period
B)present value of an annuity of $1 per period
C)future value of the amount of $1 at compound interest
D)present value of the amount of $1 at compound interest

Question 46

Which of the following should be used to compute the monthly payments on a home loan?

A)future value of an annuity of $1 per period
B)present value of an annuity of $1 per period
C)future value of the amount of $1 at compound interest
D)present value of the amount of $1 at compound interest

Question 47

Gina's Fashion plans to make semiannual deposits of $1,963.64 until she has accumulated $72,000.Assuming she earns 7% on her investment,Wagner will need to make a total of:

A)12 payments
B)36 payments
C)24 payments
D)cannot be determined from the information given

Question 48

The difference between the present and future value of an amount is

A)income
B)interest
C)annuity
D)premium

Question 49

If you are loaning money,which of the following would you prefer?

A)interest compounded semiannually
B)interest compounded quarterly
C)interest compounded monthly
D)simple interest

Question 50

On January 1,2008,BP Company purchased equipment on a three-year note.To determine the amount at which to record the machine,the three annual year-end payments must be calculated by using.

A)present value of an annuity of $1 per period
B)future value of an annuity of $1 per period
C)present value of the amount of $1
D)future value of the amount of $1

Question 51

Central Metals,Inc.is considering investing in a silver mine.An investment of $500,000 would be made for one year with the following potential outcomes:
The expected rate of return for this investment is:

Question 52

Alfred Bester wants to know how much he should have in retirement saving when he retires if he wants to withdraw $40,000 per year.What type of problem is this?

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

Question 53

Wildcat Enterprises is considering two projects that will required the investment of $100,000.Using the expected rate of return for each project,indicate which of the two you would recommend.Justify your choice.
Project A
Project B

Question 54

The present value of a future cash receipt

A)decreases as the interest rate goes down
B)decreases as the time till receipt goes up
C)increases as the time till receipt goes up
D)increases as the interest rate goes up

Question 55

If compounding is changed from an annual to a semiannual basis,what happens to future value and present value? Future value Present value

A)Decreases Decreases
B)Decreases Increases
C)Increases Decreases
D)Increases Increases

Question 56

Explain how inflation risk,business risk,and liquidity risk impact investment decisions.

Question 57

Why does the future value of an amount increase when interest is compounded semiannually instead of annually?

Question 58

Explain the difference between "return of investment" and "return on investment".In judging the success of an investment,is the dollar amount of the return the only factor considered? If not,what additional information is necessary to properly evaluate an investment? What available measure of the performance of investments helps eliminate the distortion caused by the relative size of an initial investment?

Question 59

Explain the relationship between an expected rate of return on an investment and the actual return that will actually occur.Explain the role expected return plays in investment decisions.

Question 60

You want to have $50,000 in a savings account 8 years from today and you are going to make payments every month to achieve this goal.To determine the amount of monthly payments you have to make starting today you will need to use which of the following?

A)present value of an annuity of $1 per period
B)future value of an annuity of $1 per period
C)present value of the amount of $1
D)future value of the amount of $1

Question 61

Acme Company wants to have $1,200,000 twenty years from today.How much must it put in the bank today to achieve this goal if it can earn 8 percent that is compounded monthly?

Question 62

Your client is 25 years old and wants to start receiving payments of $100,000 per year when she retires on her 60^th birthday until her 89^th birthday.As her financial advisor,how much must she invest every year staring today to achieve her goal if she can earn 7 percent annual interest?

Question 63

Lisa Corsetti would like to have $50,000 in 10 years time to pay for her daughters' college education.The amount that Corsetti would have to invest today,assuming an interest rate of 6% compounded semiannually,in order to reach her goal is:

Question 64

You have $3,000 and are going to put it into a savings account.How much will you have in 10 years if you can earn:
(A.)7% compounded semi-annually?
(B.)10% compounded monthly?

Question 65

Heather Whitestone wants to retire at the age of 65.She is 45 years old today and will start making semiannual deposits into an investment account in 6 months.Heather would like to have $1,000,000 on her 65th birthday.Assuming Whitestone can earn 8% interest compounded semiannually on her investments; determine the required amount of each semiannual deposit.

Question 66

Johnstone Supply Company has $100,000 to invest.Determine the amount of money Johnstone will have at the end of 5 years in each of the following independent situations:
(

A)Johnstone invests the $100,000 to earn 7% interest compounded annually.
(b)Johnstone invests the $100,000 to earn 6% compounded semiannually.
(c)Johnstone invests the $100,000 to earn 4% compounded quarterly.

Question 67

Mary and Becky are 22-year-old recent college graduates.Both want to be able to retire at age 50.Mary makes $1,200 annual payments starting immediately.Becky waits ten years,then begins making $2,400 annual payments.Both earn 6% annually on their savings.Which one will have paid more money into her retirement fund when she reaches age 50? Which will have the highest balance in her retirement fund? Why?

Question 68

John Stamos will have $1,000,000 in his investment account on the day he retires.
Stamos would like to be able to make a series of equal quarterly withdrawals from the
account for 20 years beginning 3 months after he retires.Assuming the investment
account will earn 10% determine the amount of each quarterly withdrawal.

Question 69

Susan Ivanova has just accepted a position as a test pilot for Babylon Industries.Her starting salary is $80,000 and she has been promised raises of at least five percent each year.What will Ivanova's salary be in ten years?

Question 70

If $18,000 was invested at 10% interest compounded semiannually,and it grew to be $32,326.20,the number of years the money was invested totaled:

Question 71

How much must you invest today to receive ten,$6,000 payments every 3 months (quarterly)if you can earn 10% annual interest?

Question 72

The present value on April 1,2010 of 16 semiannual payments of $5,000 each,with the first payment to be made on October 1,2010,assuming an 8% interest rate compounded semiannually is:

Question 73

Casey Cohen would like to have $24,500 in 5 years time to buy a car.The amount that Cohen would have to invest today,assuming an interest rate of 4% compounded annually,in order to reach his goal is:

Question 74

Chuck Purinton wants to receive $120,000 a year when he retires at age 65 and expects to live until 85.He believes he can earn 7%.How much must he have saved to achieve this goal and what age must he have this money saved?

Question 75

Joe Bittner has just passed his CPA exam and has a great job with a Big 4 CPA firm and has decided to buy a new BMW.If the price of the car is $36,000 how much will his monthly payments be if he make payments over the next 4 years if he can get a 6% interest rate?

Question 76

Marcus Perry wants to retire at age 60 with $1,500,000.He is 23 years old today and says
that on his 25^th birthday he will start making annual payments into a fund that will
generate 7% interest.How much must Marcus put into the fund annually to achieve his
goal?

Question 77

You have just purchased a new Corvette Convertible for $52,000.You have paid $5,000 down and have financed the rest.The financing arrangement calls for you to make monthly payments for the next 5 years at an 8% interest rate.What will be the amount of your payment?

Question 78

You are going to put $4,000 into a savings account every six months starting Sept 1,2010 and ending on March 1,2014.How much will be in the savings account on March 1,2014 if you can earn a 6% annual rate?

Question 79

Frank Gatta invested $15,0000 in a bank account.If Gatta makes no withdrawals,how
much will Gatta have in the bank account balance after 7 years under each of the
following circumstances?
A.Earns 4% compounded annually
B.Earns 4% compounded monthly
C.Earns 6% compounded monthly

Question 80

Given a 10% interest rate compounded semiannually,the dollar amount available on September 1,2015,assuming 12 semiannual deposits of $2,000 each with the first deposit made on March 1,2010,is: