Question 1

In the future value of an ordinary annuity,the last cash payment will not earn any interest.

Accepted Answer

The future value of an ordinary annuity assumes that each cash payment earns interest until the end of the annuity term, except for the last payment which does not earn any interest. This is because there is no time left for the last payment to accumulate interest before the end of the annuity term.

Question 2

With an ordinary annuity,a payment is made or received on the date the agreement begins.

Accepted Answer

With an ordinary annuity, payments are made or received at the end of each period (such as monthly or annually) after the agreement begins, not on the starting date.

Question 3

Use the following to answer questions 
Present and future value tables of $1 at 3% are presented below:
 
-Today,Thomas deposited $100,000 in a three-year,12% CD that compounds quarterly.What is the maturity value of the CD?
A)$109,270.
B)$119,410.
C)$142,576.
D)$309,090.

Accepted Answer

The formula for calculating the maturity value of a CD is:
Maturity value = Principal (1 + (interest rate/compounding frequency))^(compounding frequency x time period)
Here, Principal = $100,000, interest rate = 12%, compounding frequency = 4 (quarterly), and time period = 3 years.
Plugging in the values, we get:
Maturity value = $100,000 (1 + (0.12/4))^(4 x 3)
Maturity value = $142,575.98
Rounding off to the nearest dollar, we get the answer as C) $142,576.

Question 4

Use the following to answer questions 
Present and future value tables of $1 at 3% are presented below:
 
-Shane wants to invest money in a 6% CD account that compounds semiannually.Shane would like the account to have a balance of $100,000 four years from now.How much must Shane deposit to accomplish his goal?
A)$88,849.
B)$78,941.
C)$25,336.
D)$22,510.

Accepted Answer

To find out how much Shane must deposit to have a balance of $100,000 in four years, we need to use the future value table.

First, we need to find the factor for 6% interest compounded semiannually for four years. Using the formula FV = PV x (1 + r/n)^(n*t), where FV is the future value, PV is the present value, r is the interest rate, n is the number of times compounded per year, and t is the time in years, we get:

FV = PV x (1 + 0.06/2)^(2*4)
FV = PV x 1.26532 (from the future value table)

We want FV to be $100,000, so we can set up an equation and solve for PV:

$100,000 = PV x 1.26532
PV = $78,941 (rounded to the nearest dollar)

Therefore, Shane must deposit $78,941 to have a balance of $100,000 in four years. The answer is B.

Question 5

When interest is compounded,the stated rate of interest exceeds the effective rate of interest.

Accepted Answer

When interest is compounded, the effective rate of interest exceeds the stated rate of interest. This is because the interest earned on previous interest adds up and contributes to the overall effective rate of interest.

Question 6

Most,but not all,liabilities are monetary liabilities.

Accepted Answer

Most liabilities, such as accounts payable, loans, and bonds, are monetary in nature as they represent a financial obligation to pay a sum of money in the future. However, there are also non-monetary liabilities such as warranties, environmental liabilities, or provisions for restructuring.

Question 7

Compound interest includes interest earned on interest.

Accepted Answer

Compound interest includes interest earned not only on the initial principal amount, but also on the accumulated interest from previous periods.

Question 8

Use the following to answer questions 
Present and future value tables of $1 at 3% are presented below:
 
-Monica wants to sell her share of an investment to Barney for $50,000 in three years.If money is worth 6% compounded semiannually,what would Monica accept today?
A)$ 8,375.
B)$41,874.
C)$11,941.
D)$41,000.

Accepted Answer

Using the future value table, we find that the future value of $1 at 6% compounded semiannually for 6 periods (3 years) is 1.19102. Therefore, $50,000 in three years is equivalent to $50,000/1.19102 = $41,874.17 today.

Question 9

With an annuity due,a payment is made or received on the date the agreement begins.

Accepted Answer

With an annuity due, the payment is made or received at the beginning of the agreement, rather than at the end.

Question 10

An annuity consists of level principal payments plus interest on the unpaid balance.

Accepted Answer

The answer of An annuity consists of level principal payments...

Question 11

Other things being equal,the present value of an annuity due will be less than the present value of an ordinary annuity.

Accepted Answer

The answer of Other things being equal,the present value of...

Question 12

The company's credit-adjusted risk-free rate of interest is used when computing present value applying the expected cash flow approach.

Accepted Answer

The credit-adjusted risk-free rate of interest is used in the expected cash flow approach to account for the credit risk associated with the investment. It is used to discount the expected cash flows to their present values.

Question 13

Use the following to answer questions 
Present and future value tables of $1 at 3% are presented below:
 
-Carol wants to invest money in a 6% CD account that compounds semiannually.Carol would like the account to have a balance of $50,000 five years from now.How much must Carol deposit to accomplish her goal?
A)$35,069.
B)$43,131.
C)$37,220.
D)$35,000.

Accepted Answer

The answer of Use the following to answer questions 
Present...

Question 14

The calculation of future value requires the removal of interest.

Accepted Answer

The calculation of future value actually requires the inclusion of interest.

Question 15

A deferred annuity is one in which interest charges are deferred for a stated time period.

Accepted Answer

The answer of A deferred annuity is one in which...

Question 16

The calculation of present value eliminates interest from future cash flows.

Accepted Answer

Present value calculation discounts future cash flows to their current value by removing the effect of interest.

Question 17

Monetary assets include only cash and cash equivalents.

Accepted Answer

Monetary assets also include other liquid assets such as marketable securities and receivables that are expected to be collected within a year.

Question 18

Use the following to answer questions 
Present and future value tables of $1 at 3% are presented below:
 
-Bill wants to give Maria a $500,000 gift in seven years.If money is worth 6% compounded semiannually,what is Maria's gift worth today?
A)$ 66,110.
B)$ 81,309.
C)$406,545.
D)$330,560.

Accepted Answer

The answer of Use the following to answer questions 
Present...

Question 19

An annuity is a series of equal periodic payments.

Accepted Answer

An annuity is a financial product that involves a series of equal periodic payments made over a specified period of time. It can be used as a retirement savings tool or as a way to receive regular income payments.

Question 20

Given identical current amounts owed and identical interest rates,annual payments of an ordinary annuity will be greater than annual payments of an annuity due.

Accepted Answer

This is because in an annuity due, the payments occur at the beginning of each period, while in an ordinary annuity, the payments occur at the end of each period. Therefore, in an annuity due, each payment accrues interest for an additional period, resulting in a higher future value and lower present value. As a result, the annual payments of an ordinary annuity will be greater than annual payments of an annuity due.

Quiz 6: Time Value of Money Concepts