Question 1

The relationship between the present value and the investment time period is best described as:
A)direct.
B)inverse.
C)unrelated.
D)ambiguous.
E)parallel.

Accepted Answer

The present value of an investment is inversely related to the time period; as the time period increases, the present value decreases, assuming a positive discount rate.

Question 2

Today, Georgia is investing $24,000 at 5.5 percent, compounded annually, for 6 years.How much additional income could she earn if she had invested this amount at 6.5 percent, compounded annually?
A)$1,515.04
B)$1,927.19
C)$2,007,49
D)$2,515.04
E)$2.927.19

Accepted Answer

To find the additional income, calculate the future value for both interest rates and find the difference. At 5.5%, the future value is $24,000 * (1 + 0.055)^6 = $33,276.19. At 6.5%, the future value is $24,000 * (1 + 0.065)^6 = $35,203.38. The additional income is $35,203.38 - $33,276.19 = $1,927.19.

Question 3

Lew has $3,600 that he wants to invest for 5 years.He can invest this amount at his credit union and earn 2.2 percent simple interest.Or, he can open an account at Compass Bank and earn 2.15 percent interest, compounded annually.If he decides to invest at Compass Bank for 5 years, he will:
A)earn $6 more than if he had invested with his credit union.
B)earn $8 more than if he had invested with his credit union.
C)earn the same amount as if he had invested with the credit union.
D)have a total balance of $3,680 in his account after one year.
E)have a total balance of $4,012 in his account after 5 years.

Accepted Answer

The simple interest at the credit union is calculated as $3,600 * 0.022 * 5 = $396. The compound interest at Compass Bank is calculated using the formula $3,600 * (1 + 0.0215)^5 - $3,600, which results in approximately $404. Therefore, he earns $8 more at Compass Bank.

Question 4

Which one of the following is a correct statement, all else held constant?
A)The present value is inversely related to the future value.
B)The future value is inversely related to the period of time.
C)The period of time is directly related to the interest rate.
D)The present value is directly related to the interest rate.
E)The future value is directly related to the interest rate.

Accepted Answer

The future value increases as the interest rate increases, assuming all else is constant, because the interest compounds over time.

Question 5

Today, Charity wants to invest less than $3,000 with the goal of receiving $3,000 back some time in the future.Which one of the following statements is correct?
A)The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest.
B)The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal.
C)She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest.
D)The length of time she has to wait to reach her goal is directly related to the interest rate she earns.
E)The period of time she has to wait decreases as the amount she invests increases.

Accepted Answer

The answer of Today, Charity wants to invest less than...

Question 6

The present value of a lump-sum future amount:
A)increases as the interest rate decreases.
B)decreases as the time period decreases.
C)is inversely related to the future value.
D)is directly related to the interest rate.
E)is directly related to the time period.

Accepted Answer

The present value of a future amount increases as the interest rate decreases because the discounting effect is lessened, making the present value higher.

Question 7

When you were born, your parents opened an investment account in your name and deposited $1,500 into the account.The account has earned an average annual rate of return of 5.3percent.Today, the account is valued at $42,856.How old are you?
A)71.47 years
B)70.67 years
C)61.08 years
D)67.33 years
E)64.91 years

Accepted Answer

The answer of When you were born, your parents opened...

Question 8

You just won $17,500 and deposited your winnings into an account that pays 6.7 percent interest, compounded annually.How long will you have to wait until your winnings are worth $50,000?
A)15.1 years
B)15.31 years
C)15.52 years
D)15.73 years
E)16.19 years

Accepted Answer

The answer of You just won $17,500 and deposited your...

Question 9

Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent. A)PV = $600 (1 + .06)⁷ B)PV = $600 (1 + .07)⁶ C)PV = $600 × (.07 × 6) D)PV = $600/(1 + .07)⁶ E)PV = $600/(1 + 6)^.07

Accepted Answer

The present value (PV) formula is PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods. Here, FV = $600, r = 0.07, and n = 6.

Question 10

Travis invests $5,500 today into a retirement account.He expects to earn 9.2 percent, compounded annually, on his money for the next 13 years.After that, he wants to be more conservative, so only expects to earn 6 percent, compounded annually.How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account?
A)$29,411.20
B)$34,747.80
C)$34,616.56
D)$41,919.67
E)$42,003.12

Accepted Answer

The answer of Travis invests $5,500 today into a retirement...

Question 11

Your parents spent $7,800 to buy 200 shares of stock in a new company 12 years ago.The stock has appreciated 14.6 percent per year on average.What is the current value of those 200 shares?
A)$36,408.70
B)$40,023.03
C)$39,580.92
D)$40,515.08
E)$37,449.92

Accepted Answer

The future value of an investment can be calculated using the formula: FV = PV * (1 + r)^n, where PV is the present value ($7,800), r is the annual appreciation rate (14.6% or 0.146), and n is the number of years (12). Plugging in the values: FV = 7800 * (1 + 0.146)^12 = $40,023.03.

Question 12

What is the future value of $8,000 invested today and held for 15 years at 8.5 percent compounded annually?
A)$25,377.35
B)$27,197.94
C)$29,139.86
D)$29,509.77.
E)$29,139.86.

Accepted Answer

The answer of What is the future value of $8,000...

Question 13

Sixty years ago, your grandparents opened two savings accounts and deposited $250 in each account.The first account was with City Bank at 3.6 percent, compounded annually.The second account was with Country Bank at 3.65 percent, compounded annually.Which one of the following statements is true concerning these accounts? (Do not round intermediate calculations.)
A)The City Bank account is currently worth $2,076.42.
B)The City Bank account has paid $48.19 more in interest than the Country Bank account.
C)The Country Bank account is currently worth $2,170.32.
D)The Country Bank account has paid $72.24 more in interest than the City Bank account.
E)The Country Bank account has paid $61.30 more in interest than the City Bank account.

Accepted Answer

The answer of Sixty years ago, your grandparents opened two...

Question 14

South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts.Northern Bank pays 2.5 percent simple interest on its savings accounts.You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today.The amount you must deposit today:
A)is the same regardless of which bank you choose because they both pay the same rate of interest.
B)is the same regardless of which bank you choose because they both pay simple interest.
C)is the same regardless of which bank you choose because the time period is the same for both banks.
D)will be greater if you invest with South Central Bank.
E)will be greater if you invest with Northern Bank.

Accepted Answer

With simple interest, the interest is calculated only on the principal amount, while with compound interest, the interest is calculated on the principal and the accumulated interest. Therefore, you will need to deposit more initially with Northern Bank to reach the same future value of $1,500, as it offers simple interest.

Question 15

Precision Engineering invested $95,000 at 5.5 percent interest, compounded annually for 2 years.How much interest did the company earn over this period of time?
A)$95,000
B)$10,737.38
C)$10,450.00
D)$2,612.50
E)$10,931.36

Accepted Answer

The correct answer is B. The interest earned over the 2-year period can be calculated using the formula A = P(1 + r/n)^(nt), where A is the final amount, P is the principal amount, r is the annual interest rate, n is the number of times per year that the interest is compounded, and t is the number of years. In this case, P = $95,000, r = 5.5%, n = 1 (since the interest is compounded annually), and t = 2. Plugging these values into the formula, we get A = $95,000(1 + 0.055/1)^(1*2) = $105,737.38. The interest earned is therefore $105,737.38 - $95,000 = $10,737.38.

Question 16

Roberto just deposited $11,500 into his savings account at Security Savings Bank.The bank will pay ..55 percent interest, compounded annually, on this account.How much interest on interest will he earn over the next 6 years?
A)$6.78
B)$9.5.26
C)$87.03
D)$7.60
E)$7.84

Accepted Answer

The answer of Roberto just deposited $11,500 into his savings...

Question 17

Ben invested $7,500 twenty years ago with an insurance company that has paid him 6 percent simple interest on his funds.Charles invested $7,500 twenty years ago in a fund that has paid him 6 percent interest, compounded annually.How much more interest has Charles earned than Ben over the past 20 years?
A)$0
B)$6,827.04
C)$7,553.52
D)$7,109.16
E)$8,266.49

Accepted Answer

Ben earned simple interest: $7,500 * 0.06 * 20 = $9,000. Charles earned compound interest: $7,500 * (1 + 0.06)^20 - $7,500 = $16,553.52. The difference is $16,553.52 - $9,000 = $7,553.52.

Question 18

Your grandparents just gave you a gift of $3,000.You are investing this money for 10 years at 3 percent simple interest.How much money will you have at the end of the 6 years?
A)$3.090
B)$3,270
C)$3,450
D)$3,900
E)$4,031.75

Accepted Answer

The answer of Your grandparents just gave you a gift...

Question 19

Theodoro has just received an insurance settlement of $18,500.She wants to save this money until her daughter goes to college.If she can earn an average of 5.2 percent, compounded annually, how much will she have saved when her daughter enters college 9 years from now?
A)$29,662.53
B)$30,485.41
C)$30,931.28
D)$29,431.45
E)$29,195.33

Accepted Answer

The answer of Theodoro has just received an insurance settlement...

Question 20

Today, you deposit $2,500 in a bank account that pays 3.6 percent simple interest.How much interest will you earn over the next 5 years?
A)$90.00
B)$120.00
C)$450.00
D)$483.59
E)$492.27

Accepted Answer

Simple interest is calculated as Principal x Rate x Time. Here, $2,500 x 0.036 x 5 = $450.00.

Quiz 4: Introduction to Valuation: the Time Value of Money

The relationship between the present value and the investment time period is best described as:

Today, Georgia is investing $24,000 at 5.5 percent, compounded annually, for 6 years.How much additional income could she earn if she had invested this amount at 6.5 percent, compounded annually?

Lew has $3,600 that he wants to invest for 5 years.He can invest this amount at his credit union and earn 2.2 percent simple interest.Or, he can open an account at Compass Bank and earn 2.15 percent interest, compounded annually.If he decides to invest at Compass Bank for 5 years, he will:

Which one of the following is a correct statement, all else held constant?

Today, Charity wants to invest less than $3,000 with the goal of receiving $3,000 back some time in the future.Which one of the following statements is correct?

The present value of a lump-sum future amount:

When you were born, your parents opened an investment account in your name and deposited $1,500 into the account.The account has earned an average annual rate of return of 5.3percent.Today, the account is valued at $42,856.How old are you?

You just won $17,500 and deposited your winnings into an account that pays 6.7 percent interest, compounded annually.How long will you have to wait until your winnings are worth $50,000?

Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.

Your parents spent $7,800 to buy 200 shares of stock in a new company 12 years ago.The stock has appreciated 14.6 percent per year on average.What is the current value of those 200 shares?

What is the future value of $8,000 invested today and held for 15 years at 8.5 percent compounded annually?

Precision Engineering invested $95,000 at 5.5 percent interest, compounded annually for 2 years.How much interest did the company earn over this period of time?

Roberto just deposited $11,500 into his savings account at Security Savings Bank.The bank will pay ..55 percent interest, compounded annually, on this account.How much interest on interest will he earn over the next 6 years?

Your grandparents just gave you a gift of $3,000.You are investing this money for 10 years at 3 percent simple interest.How much money will you have at the end of the 6 years?

Theodoro has just received an insurance settlement of $18,500.She wants to save this money until her daughter goes to college.If she can earn an average of 5.2 percent, compounded annually, how much will she have saved when her daughter enters college 9 years from now?

Today, you deposit $2,500 in a bank account that pays 3.6 percent simple interest.How much interest will you earn over the next 5 years?