Question 1

The process of finding present values is frequently called
A)annualizing
B)compounding
C)discounting
D)leasing

Accepted Answer

The process of finding present values involves discounting future cash flows back to their present value using a discount rate. Therefore, C) discounting is the best choice for the process of finding present values.

Question 2

The basic future value equation is given by A)FV_n = PV₀(PVIF_i,n) B)FV_n = ₀(FVIFA_i,n) C)FV_n= PV₀(1/(1 + i)ⁿ) D)FV_n = PV₀(FVIF_i,n)

Accepted Answer

D

Question 3

Annuity due calculations are especially important when dealing with
A)term loans
B)lease contracts
C)capital investments
D)capital recovery problems

Accepted Answer

Lease contracts often use annuity due calculations because payments are typically made at the beginning of each period, which is a characteristic of annuities due.

Question 4

Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the
A)future value of an annuity
B)present value of an annuity
C)future value of an annuity due
D)present value of an annuity due

Accepted Answer

The question specifically states that the $1,000 is to be received at the beginning of each year, which is an annuity due. Therefore, we need to calculate the future value of an annuity due. Choices A and B are incorrect because they refer to a regular annuity, which is not what is given in the question. Choice D is incorrect because it refers to the present value of an annuity due, which is not what we are trying to find.

Question 5

Using the "Rule of 72," about how long will it take a sum of money to double in value if the annual interest rate is 9 percent?
A)9 years
B)7 years
C)8 years
D)10 years

Accepted Answer

The "Rule of 72" states that to find the number of years required to double your money at a given interest rate, you divide 72 by the interest rate. So, 72 divided by 9 equals 8 years.

Question 6

Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the
A)future value of an annuity
B)future value of an annuity due
C)present value of an annuity
D)present value of an annuity due

Accepted Answer

To find the discounted current value of $1,000 to be received at the end of each of the next 5 years, we need to calculate the present value of an annuity. This is because we want to know the current value of a series of future payments. The present value of an annuity formula takes into account the time value of money, which means that money is worth more in the present than in the future. Therefore, we need to discount each future payment to its present value. The formula for the present value of an annuity is: PV = Pmt x [(1 - (1 / (1 + r)n)) / r], where PV is the present value, Pmt is the payment amount, r is the discount rate, and n is the number of payments.

Question 7

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000.What will happen to the present value of your winnings if the interest rate increases during the next 20 years?
A)it will be worth less
B)it will be worth more
C)it will not change
D)it will increase during the first ten years

Accepted Answer

The present value of the winnings is determined by discounting the future cash flows using the interest rate. If the interest rate increases, the discount rate will also increase, leading to a lower present value. Therefore, the winnings will be worth less if the interest rate increases during the next 20 years.

Question 8

The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the Annuity due form by the ordinary annuity interest factor by . A)dividing, (1 + i) B)dividing, (1 + i)ⁿ C)multiplying, (1 + i) D)multiplying, (1 + i)ⁿ

Accepted Answer

To adjust the values shown in ordinary annuity tables to the annuity due form, we need to consider the fact that in an annuity due, payments are made at the beginning of each period, whereas in an ordinary annuity, payments are made at the end of each period. This means that the first payment in an annuity due is made immediately, whereas the first payment in an ordinary annuity is made after one period. To account for this difference, we need to multiply the ordinary annuity interest factor by (1 + i), which reflects the interest earned on the first payment for one period. Therefore, the correct answer is C.

Question 9

When using a future value of an annuity table (e.g., Table III at the back of the book),
A)payments are assumed to be made at the end of each period
B)FVIFA factors increase with an increase in the interest rate
C)FVIFA factors increase with an increase in the number of periods
D)all of these

Accepted Answer

When using a future value of an annuity table, payments are assumed to be made at the end of each period. FVIFA factors increase with an increase in the interest rate and increase with an increase in the number of periods. Therefore, all of the options presented are correct.

Question 10

You have just calculated the present value of the expected cash flows of a potential investment.Management thinks your figures are too low.Which of the following actions would improve the present value of your cash flows?
A)extend the cash flows over a longer period of time
B)increase the discount rate
C)decrease the discount rate
D)extend the cash flows over a longer period of time, and decrease the discount rate

Accepted Answer

The answer of You have just calculated the present value...

Question 11

The present value of an ordinary annuity is the
A)sum of the present value of a series of equal periodic payments
B)future value of an equal series of payments
C)receipt of equal cash flows for a specified amount of time
D)sum of the future value of an equal series of payments

Accepted Answer

The present value of an ordinary annuity is found by summing up the present value of a series of equal periodic payments. This means that the total value of all the payments over time is calculated in today's dollars, taking into account the time value of money. The future value of an ordinary annuity is a different calculation that looks at the total value of the payments in the future, without taking into account the time value of money. The receipt of equal cash flows for a specified amount of time is a characteristic of an annuity, but it does not describe how the present value of the annuity is calculated.

Question 12

The amount of simple interest is equal to the product of the principal times times .
A)(1 + rate per time period), the number of time periods
B)(1 + rate per time period), (the number of time periods - 1)
C)rate per time period, the number of time periods
D)rate per time period, (the number of time periods - 1)

Accepted Answer

The formula for simple interest is I = Prt, where P is the principal (initial amount), r is the rate per time period, and t is the number of time periods. Multiplying the principal by rt gives us the product of rate per time period and the number of time periods, which is Choice C.

Question 13

The present value of a single amount can be represented as A)PV₀ = FV_n(PVIF_i,n) B)PV₀ = FV_n(PVIF_i,n) C)PV₀ = FV_n[1/(1 + i)ⁿ] D)a and c

Accepted Answer

The present value of a single amount can be represented as PV0 = FVn(PVIFi,n) or PV0 = FVn[1/(1 + i)n].

Question 14

If the present value of a given sum is equal to its future value, then
A)the discount rate must be very high
B)there is no inflation
C)the discount rate must be zero
D)none of the answers is correct

Accepted Answer

If the present value of a given sum is equal to its future value, it means that there is no discounting or interest rate applied to the sum. Therefore, the discount rate must be zero. If there was any discount rate (even a very small one), the present value would be lower than the future value (assuming no cash flows in between). So, options A and B are incorrect, and D is not applicable.

Question 15

An annuity due is one in which
A)payments or receipts occur at the end of each period.
B)payments or receipts occur at the beginning of each period.
C)payments or receipts occur forever.
D)cash flows occur continuously.

Accepted Answer

An annuity due is a type of annuity in which payments or receipts occur at the beginning of each period, rather than at the end. This can affect the calculation of the future value and present value of the annuity.

Question 16

When using a present value of an annuity table (e.g., Table IV at the back of the book),
A)payments are assumed to be made at the beginning of each period
B)PVIFA factors decrease with an increase in the interest rate
C)PVIFA factors increase with an increase in the number of periods
D)b and c only

Accepted Answer

Option A is incorrect because the table assumes payments are made at the end of each period. Option B is also incorrect because PVIFA factors increase with an increase in the interest rate. Option C is incorrect because PVIFA factors decrease with an increase in the number of periods. Therefore, Options B and C are incorrect while both b and c are correct.

Question 17

The effective rate of interest will always be the nominal rate.
A)greater than
B)equal to
C)less than
D)equal to or greater than

Accepted Answer

The effective rate of interest takes into account the compounding effect within a given period, which can make it equal to or greater than the nominal rate, depending on the frequency of compounding.

Question 18

A(n) is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e.forever).
A)annuity
B)annuity due
C)sinking fund
D)perpetuity

Accepted Answer

A perpetuity, unlike an annuity or sinking fund, does not have a fixed end date for payments and will continue to pay out indefinitely. An annuity due pays out at the beginning of each payment period, rather than at the end like a regular annuity, while a sinking fund is a fund set up to pay off a debt or fund a future expense.

Question 19

The more frequent the compounding the
A)greater the present value
B)greater the amount deposited
C)greater the effective interest rate
D)lesser the future value

Accepted Answer

The more frequent the compounding, the higher the effective interest rate will be. This is because interest is being earned on interest more frequently, which results in a greater return on investment. The present value, amount deposited, and future value will all be influenced by factors other than the frequency of compounding.

Question 20

When a loan is amortized over a five year term, the
A)rate of interest is reduced each year
B)amount of interest paid is reduced each year
C)payment is reduced each year
D)balance is paid as a balloon payment in the fifth year

Accepted Answer

When a loan is amortized over a five year term, the amount of interest paid is reduced each year. The payments remain the same each year, but the proportion of each payment that goes toward paying off the principal amount increases and the proportion that goes toward paying interest decreases.

Quiz 5: The Time Value of Money

The process of finding present values is frequently called

The basic future value equation is given by

Annuity due calculations are especially important when dealing with

Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the

Using the "Rule of 72," about how long will it take a sum of money to double in value if the annual interest rate is 9 percent?

Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000.What will happen to the present value of your winnings if the interest rate increases during the next 20 years?

The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the Annuity due form by the ordinary annuity interest factor by .

When using a future value of an annuity table (e.g., Table III at the back of the book) ,

You have just calculated the present value of the expected cash flows of a potential investment.Management thinks your figures are too low.Which of the following actions would improve the present value of your cash flows?

The present value of an ordinary annuity is the

The amount of simple interest is equal to the product of the principal times times .

The present value of a single amount can be represented as

If the present value of a given sum is equal to its future value, then

An annuity due is one in which

When using a present value of an annuity table (e.g., Table IV at the back of the book) ,

The effective rate of interest will always be the nominal rate.

A(n) is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e.forever) .

The more frequent the compounding the

When a loan is amortized over a five year term, the