Deck 2: The Time Value of Money: All Dollars Are Not Created Equal

Question 1

If you wish to double your money in 6 years,you must earn an interest rate of about

A)8%.
B)24%.
C)12%.
D)36%.

Answer 1

12%.

Question 2

An annuity is

A)a sum received in the future.
B)a sum earned in the future but received now.
C)a series of unequal payments.
D)a series of equal payments.

Answer 2

a series of equal payments.

Question 3

You expect a 3% rate of inflation to continue indefinitely into the future.A $10,000 vacation today will cost $________ twenty years from now.(Table or calculator required. )

A)10,300
B)14,988
C)18,061
D)42,944

Answer 3

18,061

Question 4

You are deciding whether to start a 40-year retirement investing plan now,or ten years from now.You think rates of return will be about the same in the future as they are now.Discussion in the text of this decision shows

A)very little difference in the future value of an investment made now versus one made 10 years from now.
B)an investment made now will accumulate about 20% more (at a 10% rate of interest,compounded annually)than the investment made later.
C)the same facts as in response b,but the accumulation is only 10% greater.
D)that you will accumulate more in the additional 10 years than you do for the first 30 years.

Question 5

The future value of a $500 annuity due received for three years is $________,assuming an investment rate of 10%.

A)1,655.00
B)665.50
C)1,820.50
D)335.65

Question 6

The future value of $12,000 invested today at 6% interest compounded annually for 4 years is

A)$23,259.
B)$15,150.
C)$12,190.
D)$9,505.

Question 7

Compounding refers to the

A)mistake of confusing present values with future values.
B)process of accumulating value over time.
C)task of finding a present value.
D)projection of future payments.

Question 8

The future value of $5,000 invested today at 3% interest compounded annually for 5 years is

A)$5,255.
B)$5,520.
C)$5,628.
D)$5,796.

Question 9

The future value of a $500 ordinary annuity received for three years is $________ ,assuming an investment rate of 10%:

A)1,655.00
B)665.50
C)1,820.50
D)335.65

Question 10

The text discusses the topic of compounding over a large number of compounding periods.To illustrate,it shows that $1,000 invested at 8% for 40 years (annual compounding)grows to $21,724.But if you could earn 10% instead of 8%,you would earn ________ more at the end of 40 years.

A)$4,431
B)25 percent
C)$23,535
D)$1,250

Question 11

With an interest rate of 9%,$5,000 will grow to $10,000 in approximately

A)8 years.
B)4 years.
C)12 years.
D)24 years.

Question 12

Given recent market experience a dollar today is worth

A)more than a dollar five years from now.
B)less than a dollar five years from now.
C)about the same as a dollar five years from now.
D)more or less than a dollar five years from now.

Question 13

You have just put $5,000 into an investment that offers a 10% annual yield,with interest compounded annually.Your total interest earned after two years will be

A)$550.
B)$1,000.
C)$1,050.
D)$1,100.

Question 14

You have just put $1,000 in an investment that offers a 12% annual yield,using a simple interest calculation.At the end of two years your interest earned will be

A)$120.00.
B)$144.00.
C)$240.00.
D)$254.40.

Question 15

At 12% interest (compounded annually),$20,000 invested today will grow to $________ in three years.

A)27,200
B)28,099
C)31,471
D)40,000

Question 16

You have just put $500 in an investment that offers an 8% annual yield,with interest compounded annually.Your total interest earned after two years will be

A)$83.20.
B)$80.00.
C)$44.60.
D)$40.00.

Question 17

At an interest rate of 10% it will take approximately how many years to double your investment?

A)Less than five years
B)Between 7 and 8 years
C)Between 9 and 10 years
D)More than 10 years

Question 18

In relation to an ordinary annuity paid in any given year,an annuity due is

A)a larger amount.
B)a smaller amount.
C)an equal amount.
D)an unrelated amount.

Question 19

You have just put $5,000 into an investment that offers a 10% annual yield,using a simple interest calculation.At the end of two years your interest earned will be

A)$500.
B)$550.
C)$1,000.
D)$1,100.

Question 20

Assuming positive interest rates,a present value of $1,000

A)is always more desirable to a future value of $1,000.
B)is always less desirable than a future value of $1,000.
C)is no more or no less desirable than a future value of $1,000.
D)You can't answer without more information.

Question 21

An ordinary annuity assumes ________-of-period payments,while an annuity due assumes ________-of-period payments.

A)end;beginning
B)beginning;end
C)end;middle
D)beginning;middle

Question 22

A simple interest calculation assumes you reinvest all interest earned in the investment.

Question 23

Assuming a discount rate of 10%,the present value of $1,000 received two years from now is

A)$800.00.
B)$826.45.
C)$899.90
D)$900.00

Question 24

Looking at a future value of $1 table,you find the number 4.661 for 20 years and 8%.This means that a dollar invested today will grow to $4.661 at the end of 20 years.

Question 25

You invest $100 today in a two-year certificate of deposit that pays a 10% annual interest rate compounded annually.At maturity,your CD will give you $120.

Question 26

Compounding is the process of increasing present value to future values.

Question 27

The present value of $500 received at the end of each of the next three years is $1,243 (assuming a 10% interest rate).

Question 28

Compounding is the process of increasing present value to future value.

Question 29

Which item below is not associated with goal planning?

A)Constructing a budget
B)Adjusting for inflation
C)Making goals concrete
D)Determining a savings schedule

Question 30

At an 8% rate,you must invest $5,000 to have $10,000 in about 6 years.

Question 31

Assuming a discount rate of 10%,the present value of $1,000 received one year from now is

A)$1,100.00.
B)$1,900.00.
C)$909.09.
D)$990.00.

Question 32

You can double your investment in 6 years if you can earn 12% on your investments.

Question 33

Discounting is the process of reducing future values to present values.

Question 34

Young people most likely prefer a savings schedule with

A)a zero ending balance.
B)increasing annual deposits.
C)decreasing annual deposits.
D)negative balances in the early years.

Question 35

You will buy a lottery ticket.If you win,you have a choice of receiving $995,000 now or three equal end-of-year payments of $400,000.You should take the payments

A)because $1,200,000 is greater than $995,000.
B)if you earn 20% or more on your investments.
C)if you earn 11% or more on your investments.
D)if you earn less than 10% on your investments.

Question 36

Generally speaking,planners can usually seek higher return investments to meet

A)short-term goals.
B)long-term goals.
C)goals of any term.
D)dreams,but not goals.

Question 37

At a 12% interest rate,$2,000 invested today will be worth approximately $8,000 in about 12 years.

Question 38

A savings schedule with a zero ending balance means that

A)annual deposits are sufficient to meet all goals.
B)more savings are needed each year.
C)the most desirable schedule has been determined.
D)some goals will not be achieved.

Question 39

An annuity contract will pay you $4,000 a year (end of year)for the next three years.Or,you can choose to receive $12,610 at the end of the third.Assuming that you can earn 8% on investments,you should

A)choose to receive the $4,000 annuity payments.
B)choose to receive the $12,610 payment.
C)flip a coin to make the choice;each is equally attractive.
D)flip a coin to make the choice;each is equally unattractive.

Question 40

You will need $228,790 in 28 years to supplement your retirement funds.If you can earn 8% interest,you must save $________ each year.(Table or calculator required. )

A)8,100
B)6,300
C)3,600
D)2,400

Question 41

With a 10% interest rate,the present value of $100 received one year from today is $90.91.

Question 42

You can earn 10%.If you hope to accumulate $20,000 in 4 years,you must make annual investments (end of period)of $3,918.

Question 43

An annual required savings amount confirms our computational accuracy but does not necessarily imply that our savings plan will use that amount each year.

Question 44

In goal planning,you generally match the savings vehicle to the time when the money is needed;for example,short-range goals are funded with low-risk investments.

Question 45

Given identical data,the future value of an ordinary annuity is greater than the future value of an annuity due.

Question 46

If the future value of an ordinary annuity is $8,000,the future value of an annuity due is $7,200 given a 10% interest rate.

Question 47

The future value of $500 invested at the end of each of the next three years is $1,555 (assuming a 10% interest rate).

Question 48

At any positive rate of interest,a future value will be greater than a present value.

Question 49

$500 invested at 8% at the beginning of each of the next four years will grow to approximately $2,433.

Question 50

An important part of goal planning is adjusting present values for expected inflation.

Question 51

John cashed in an annuity contract and received $10,000.John bought the contract 24 years ago for $5,000.These amounts indicate a contract rate of approximately 3%.

Question 52

Most young people prefer a savings schedule with decreasing annual deposits to the savings account.

Question 53

Given identical data,the future value of annuity due is always greater than the future value of an ordinary annuity.

Question 54

Discounting is the process of reducing future values to present values.

Question 55

The first step in goal planning is setting up a budget.

Question 56

Making goals concrete begins by determining their costs if they were undertaken today.

Question 57

Years with negative balances in the savings schedule implies that loans would be needed to achieve the goals.

Question 58

Discounting is the reverse process of compounding.

Question 59

Discounting is the process of reducing future values to present values.

Question 60

The higher the interest (discount)rate,the greater the present value of a future payment.

Question 61

Highly volatile inflation rates and earning rates make goal planning a useless activity.

Question 62

If actual inflation rates exceed the rates assumed in our goal planning,the required annual savings amount can be reduced.

Question 63

Inflation decreases the purchasing power of money.

Question 64

Unplanned for inflation makes it easier to reach our financial goals.

Question 65

Generally,you can invest in higher-return assets for goals that are further out in the future.

Question 66

Ideally,the ending balance in our savings plan is zero.