Question 1

Which of the following investments has a larger future value? A $100 investment earning 10% per year for 5 years or a $100 investment earning 5% per year for 10 years?

Accepted Answer

D

Question 2

An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment?

Accepted Answer

To find the interest earned in the first year, we use the simple interest formula: I = Prt. Here, P = $100, r = 8% (0.08), and t = 1 year. So, I = 100 x 0.08 x 1 = $8.
To find the interest earned in the second year, we first need to calculate the amount after one year. The amount after one year is given by A = P(1 + rt) = 100(1 + 0.08 x 1) = $108. 
Now, we can use this as the principal amount to find the interest earned in the second year: I = 108 x 0.08 x 1 = $8.64.
Therefore, the total interest earned over two years is $8 + $8.64 = $16.64, and the answer is B.

Question 3

________ is simply the interest earned in subsequent periods on the interest earned in prior periods.

Accepted Answer

Compound interest is the interest earned on both the principal and any previously earned interest. This means that each period's interest is added to the principal amount, and the next period's interest is calculated on the new total. This results in a higher return than simple interest, which only earns interest on the principal amount.

Question 4

A home improvement firm has quoted a price of $9,800 to fix up John's backyard. Five years ago, John put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does John have enough money in his account to pay for the backyard fix-up?

Accepted Answer

The answer of A home improvement firm has quoted a...

Question 5

The financial aid office at your university has offered to pay your full annual tuition cost of $22,000 this year, as long as you maintain a grade point average of 3.00. If tuition costs rise at a rate of 6% per year while you are in college, but the financial aid office continues to pay exactly $22,000 per year for your tuition, how much out-of-pocket tuition costs will you have your senior year? NOTE: Think carefully about this problem when figuring the number of years from the start of your freshman year to the start of your senior year, assuming normal progress toward graduation in four years. Further, be aware that while tuition costs are rising your tuition is covered up to only $22,000. You must pay any excess tuition costs.

Accepted Answer

The answer of The financial aid office at your university...

Question 6

Which of the following will result in a future value greater than $100?

Accepted Answer

The answer of Which of the following will result in...

Question 7

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?

Accepted Answer

Since the investment is for two years, the interest earned in each year can be calculated as:
Interest earned in year one = $200 x 6% = $12.00
Interest earned in year two = ($200 + $12.00) x 6% = $12.72
Therefore, option B is correct. Option A is incorrect because it shows the reverse order of interest earned in the two years. Option C is correct, as the future value after two years can be calculated as:
FV = $200 x (1 + 6%)^2 = $224.00.
Option D is incorrect because the future value would be greater if the interest rate were higher, not lower.

Question 8

Which of the following investments has a larger future value: Investment A--a $1,000 investment earning 5% per year for 6 years, or Investment B--a $500 investment earning 10% per year for 6 years, with a bonus of an extra $500 added at the end of the sixth year?

Accepted Answer

The answer of Which of the following investments has a...

Question 9

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?

Accepted Answer

The future value of an investment increases with increasing interest rates. This is because a higher interest rate means that the investment earns more interest over time. Therefore, statement A is true and the other statements are false.

Question 10

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?

Accepted Answer

The future value of the investment can be calculated as FV = PV x (1 + r)^n, where PV is the present value, r is the annual interest rate, and n is the number of years. Plugging in the values, we get FV = 200 x (1 + 0.06)^2 = $224.72. Therefore, option C is true. Option A and B are incorrect as they do not match the calculated FV. Option D is incorrect as it is a false statement.

Question 11

Jasmine and her spouse have saved $4,500 for a 12-day cruise vacation in Europe. The couple needs $5,000 for a "nice" cabin or $6,000 for a "luxury" cabin. If cabin prices are expected to remain constant for the next three years and Jasmine expects to earn 6% per year on her investments, will the couple's savings be enough to afford the "nice" cabin in three years? Can they afford the luxury cabin? Why or why not?

Accepted Answer

After three years at 6% interest, Jasmine's $4,500 investment will grow to:

$4,500 x (1 + 0.06)^3 = $5,361.54

This is enough to afford the "nice" cabin, which costs $5,000. However, it is not enough to afford the "luxury" cabin, which costs $6,000. Therefore, choice C is the correct answer.

Question 12

The one-time payment of money at a future date is often called a ________.

Accepted Answer

A one-time payment at a future date is referred to as a lump-sum payment. Present value refers to the current value of a future payment or income stream, principal amount refers to the original amount of a loan or investment, and perpetuity payment refers to a series of equal payments made indefinitely.

Question 13

The current price on a 60-inch flat panel LCD HD television is $2,300. Big screen HD television prices have dropped at an average rate of 9% per year in recent years. If you expect this trend to continue, how much will this style of television cost in three years?

Accepted Answer

The answer of The current price on a 60-inch flat...

Question 14

Your aunt places $13,000 into an account earning an interest rate of 7% per year. After 5 years the account will be valued at $18,233.17. Which of the following statements is correct?

Accepted Answer

The principal (amount initially invested) is $13,000, the time period is 5 years, the future value (amount at the end of 5 years) is $18,233.17, and the interest rate is 7%. Option C correctly matches all the values with their respective categories. The other options have incorrect values for one or more categories.

Question 15

If you invest $1,800 today, how much money will you have in 5 years?

Accepted Answer

Without knowing the annual rate of return or the type of investment, it is impossible to determine the amount of money that will be earned in 5 years.

Question 16

In two years Rocky plans to enroll at Whatsamatta U., a prestigious university in Frostbite Falls, MN. If the current tuition is $23,500 per year and is expected to increase at a rate of 6% per year, how much will Rocky pay in tuition his first year of school? (His first tuition payment is exactly two years from today.) In his fourth year? (His last tuition payment is exactly 5 years from today) (Rounded to the nearest dollar.)

Accepted Answer

In two years, the tuition will be $23,500 * (1.06)^2 = $26,405. In five years, the tuition will be $23,500 * (1.06)^5 = $31,448.

Question 17

Which of the following is the correct formula for calculating the future value?

Accepted Answer

The correct formula for calculating the future value is FV=PV x (1+r)^n, where PV is the present value, r is the interest rate, and n is the number of compounding periods. Option B represents the correct formula in a clear and concise manner.

Question 18

You wish to make a sizeable down payment on a house and you currently have $18,325 invested at an annual rate of 4.75%. How much money will be in the account in 2.5 years if it continues to earn at its present rate?

Accepted Answer

To find the future value of the investment, use the formula for compound interest: FV = P(1 + r/n)^(nt). Here, P = $18,325, r = 0.0475, n = 1 (compounded annually), and t = 2.5 years. Calculating gives FV = $18,325 * (1 + 0.0475)^2.5 ≈ $20,579.

Question 19

A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.

Accepted Answer

After the first year, the deposit will have earned $10 in interest, bringing the total to $110. If this entire amount is reinvested for the second year, it will earn an additional $11 in interest (10% of $110). Therefore, at the end of two years, the deposit will be worth $121.

Question 20

Steve would like to buy a new car but must complete a two-year commitment to the Peace Corp before he will drive the new car. The current price of the car Steve wants to buy is $22,000, and the dealer expects the price of a similar new car to be $24,000 in two years. If Steve can earn an annual interest rate of 3% on his money, should he buy the car now or wait for two years? Why? Note: Storage costs if Steve purchases the car are $0. Please limit your considerations to the factors offered in the answer choices.

Accepted Answer

If Steve invests $22,000 at an annual interest rate of 3%, it will grow to $23,340 in two years, which is less than the expected future price of $24,000. Therefore, he should buy the car now.

Quiz 3: The Time Value of Money Part 1

Which of the following investments has a larger future value? A $100 investment earning 10% per year for 5 years or a $100 investment earning 5% per year for 10 years?

An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment?

________ is simply the interest earned in subsequent periods on the interest earned in prior periods.

A home improvement firm has quoted a price of $9,800 to fix up John's backyard. Five years ago, John put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does John have enough money in his account to pay for the backyard fix-up?

Which of the following will result in a future value greater than $100?

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?

Which of the following investments has a larger future value: Investment A--a $1,000 investment earning 5% per year for 6 years, or Investment B--a $500 investment earning 10% per year for 6 years, with a bonus of an extra $500 added at the end of the sixth year?

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?

The one-time payment of money at a future date is often called a ________.

The current price on a 60-inch flat panel LCD HD television is $2,300. Big screen HD television prices have dropped at an average rate of 9% per year in recent years. If you expect this trend to continue, how much will this style of television cost in three years?

Your aunt places $13,000 into an account earning an interest rate of 7% per year. After 5 years the account will be valued at $18,233.17. Which of the following statements is correct?

If you invest $1,800 today, how much money will you have in 5 years?

Which of the following is the correct formula for calculating the future value?

You wish to make a sizeable down payment on a house and you currently have $18,325 invested at an annual rate of 4.75%. How much money will be in the account in 2.5 years if it continues to earn at its present rate?

A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.