Question 1

What is the present value of an annual payment of $1,500 discounted back 15 years at an annual rate of return of 3%?

Accepted Answer

The answer of What is the present value of an...

Question 2

Present value lets us compare dollar values from different time periods.

Accepted Answer

Present value is a financial concept that helps us compare dollar values from different time periods by accounting for the time value of money. It allows us to calculate the value today of an amount of money that is expected to be received in the future.

Question 3

List at least five common examples of annuities.

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The answer of List at least five common examples of...

Question 4

What is the future value of a series of $500 annual payments received at the end of each of the next 5 years' worth if they are invested at an annual rate of return of 6%?

Accepted Answer

We can use the formula for future value of an annuity to solve this problem:
FV = Pmt x [(1 + r)^n - 1] / r
where Pmt = $500, r = 6% = 0.06, and n = 5. Plugging in these values, we get:
FV = $500 x [(1 + 0.06)^5 - 1] / 0.06
FV = $2,818.50
Therefore, the answer is choice C, $2,818.50.

Question 5

What is the present value of $500 received at the end of each of the next 5 years worth to you today at the appropriate discount rate of 6%?

Accepted Answer

To find the present value of an annuity, we can use the formula: 
PV = C * [(1 - (1+i)^-n) / i], where PV is the present value, C is the amount of each payment, i is the discount rate, and n is the number of periods. 
Plugging in the values, we get: 
PV = 500 * [(1 - (1+0.06)^-5) / 0.06] 
PV = $2,106.26 (rounded to nearest cent) 
Therefore, the present value of the annuity is $2,106. Thus, the best choice is C.

Question 6

The discount rate is the interest rate used to bring ________ back to ________.

Accepted Answer

The discount rate is used to bring future dollars back to their present value. It is the rate at which future cash flows are discounted to find their present value.

Question 7

What is the present value of a $1,000 payment at the end of each of the next 10 years discounted back to the present at 5%?

Accepted Answer

We can use the formula for present value of an annuity:

PV = Payment x [(1 - (1 / (1 + r)^n)) / r]

where PV is present value, Payment is the amount of each payment, r is the discount rate, and n is the number of periods.

Plugging in the values, we get:

PV = $1,000 x [(1 - (1/(1+0.05)^10)) / 0.05] 
PV = $1,000 x [(1 - 0.61391) / 0.05]
PV = $1,000 x 12.77179
PV = $12,771.79

Therefore, the present value of the payments is $7,722 (rounded to the nearest dollar).

Question 8

Someone has offered you the opportunity to purchase an IOU. The IOU will pay back a total of $500 in three years. How much would you be willing to pay for that IOU today if you want to earn an annual rate of return of 16%?

Accepted Answer

To find out how much you would be willing to pay for the IOU today, you can use the present value formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($500), r is the annual rate of return (16% or 0.16), and n is the number of years (3). Plugging in the numbers: PV = $500 / (1 + 0.16)^3 = $320.33.

Question 9

What is the maximum that you would be willing to loan your brother for a $100 IOU if he promises to pay you back at the end of the year? You want to earn an annual rate of return of 12%.

Accepted Answer

To achieve a 12% annual rate of return on a $100 IOU, you would use the formula for calculating the present value: Present Value = Future Value / (1 + rate of return)^n, where n is the number of years. Plugging in the numbers: $100 / (1 + 0.12)^1 = $89.29.

Question 10

The future value of a current investment earning a positive rate of return is always greater than the present value of the investment.

Accepted Answer

This is because the investment will earn interest or returns over time, which will compound and increase the overall value of the investment. Therefore, the future value will always be higher than the present value.

Question 11

A compound annuity involves depositing or investing an equal sum of money at the end of each time period for a certain number of time periods and allowing it to grow.

Accepted Answer

A compound annuity involves making regular equal deposits and allowing it to grow over time with compound interest.

Question 12

A series of equal dollar payments at the end of each period for "x" number of time periods is

Accepted Answer

This describes the definition of an annuity, which is a series of equal dollar payments at the end of each period for a specified number of time periods. The other options either don't accurately describe the characteristics of an annuity or are not commonly used terminology in the context of finance.

Question 13

What is the price you would be willing to pay today for an IOU for $500 due in one year if you want to earn at least 16%?

Accepted Answer

To find the price we use the formula: 
Price = Face Value / (1 + interest rate)^time
where, 
Face value = $500 
Interest rate = 16% = 0.16 
Time = 1 year

Plugging in the values, we get:

Price = 500 / (1 + 0.16)^1 
Price = 500 / 1.16 
Price = $431.03

Therefore, the best choice is B.

Question 14

An annuity is a series of unequal dollar payments coming at the end of each time period for a specified number of time periods.

Accepted Answer

An annuity is a series of equal dollar payments coming at the end of each time period for a specified number of time periods.

Question 15

At the end of each year for ten years you deposit $750 in an account that earns an annual rate of return of 12%. What is the present value of these deposits?

Accepted Answer

The answer of At the end of each year for...

Question 16

What is the future value of a stream of $800 annual payments worth to the investor at the end of 10 years if these payments are invested at an annual rate of return of 8.5%?

Accepted Answer

The answer of What is the future value of a...

Question 17

What is the present value today of $150 that will be received in four years from now if the discount rate is 12%?

Accepted Answer

Using the present value formula:

PV = FV / (1 + r)^n

where: 
PV = present value 
FV = future value 
r = discount rate 
n = number of years

Substituting the given values:

PV = 150 / (1 + 0.12)^4 
PV = 95.33

Therefore, the present value today of $150 that will be received in four years from now at a discount rate of 12% is $95.33. The best choice is B.

Question 18

What is the present value of an IOU for $1,000 due to be paid in two years, if the discount rate is 8%?

Accepted Answer

The formula to calculate the present value of an IOU is: 
Present Value = Future Value / (1 + r)^n 
where r is the discount rate and n is the number of years. 
So, plugging in the values: 
Present Value = 1000 / (1 + 0.08)^2 
Present Value = 1000 / 1.1664 
Present Value = $857.34, rounded to the nearest cent. 
Therefore, the best choice is A.

Question 19

A compound annuity uses the principles of

Accepted Answer

A compound annuity involves reinvesting the earnings generated by compound interest, which leads to a higher future value. Thus, both reinvesting and compound interest are principles used in a compound annuity.

Question 20

Which one of the following is the "enemy" of compound interest and makes it very difficult to reach your financial goals?

Accepted Answer

Inflation is the enemy of compound interest. Inflation eats away at the purchasing power of your money over time, making it harder to reach your financial goals. Compound interest is the key to building wealth over time, and if inflation is high, it can cancel out the earning potential of compound interest.

Quiz 3: Understanding and Appreciating the Time Value of Money