Deck 3: Applying Time Value Concepts

Question 1

Money received today is worth more than the same amount of money received in the future.This is true because

A)money received today can grow at a compounded rate.
B)future inflation will devalue your current investments.
C)all goods and services are likely to cost more in the future.
D)unique investment opportunities exist today,which may not be available in the future.

Answer 1

money received today can grow at a compounded rate.

Question 2

There are two sets of present and future tables: one for lump sums and one for annuities.

Answer 2

True

Question 3

An ordinary annuity can be defined as

A)a series of unequal payments at the beginning of each period.
B)a series of equal payments at the end of each period.
C)a lump sum.
D)intermittent payments for ordinary expenses.

Answer 3

a series of equal payments at the end of each period.

Question 4

The time value of money concept can help you determine how much money you need to save over a period of time to achieve a specific goal.

Question 5

The concept of time value of money is based on

A)inflation.
B)taxes.
C)interest earned.
D)the Dow Jones Industrial Average.

Question 6

It is better to spend your money today than wait a year because you will be able to buy more with it today than in one year.

Question 7

When money accumulates interest,it is said to be discounting.

Question 8

Which of the following it not an annuity?

A)Equal monthly payments to your investment account
B)Lottery winnings of $100 per month for life
C)Mortgage payments for a fixed rate loan
D)Monthly utility bills

Question 9

Time value of money is only applied to single dollar amounts.

Question 10

A stream of equal payments either received or paid at equal time intervals is a(n)________.

Question 11

Your utility bill which varies each month is an example of an annuity.

Question 12

Time value of money computations relate to future value of lump sum cash flows only.

Question 13

Time value calculations such as present and future value amounts should be used regularly in your life.

Question 14

The time value of money refers to

A)personal opportunity costs such as time lost on an activity.
B)financial decisions that require borrowing funds from a bank.
C)changes in interest rates due to changes in the supply and demand for money in the national economy.
D)the difference in values of money as to when it is received.

Question 15

An annuity is a stream of equal payments that are received or paid at equal intervals in time.

Question 16

The concept that a dollar received today has more value than a dollar received in the future because of the interest it can earn is called the ________.

Question 17

An annuity is a stream of equal payments that are received or paid at random periods of time.

Question 18

When money earns interest on interest,it is said to be compounding.

Question 19

The time period over which you save money has very little impact on its growth.

Question 20

The time value of money implies that a dollar received today is worth ________ a dollar received tomorrow.

A)more than
B)less than
C)the same as
D)Insufficient data to answer.

Question 21

If I deposit a sum of money today and wish it to double in 10 years,I will need to receive an interest rate of slightly above ________.

Question 22

Which of the following decisions would involve the use of the future value of $1?

A)Your brother buys your car and offers to pay you $500 now or $1,500 in two years
B)You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years
C)Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years
D)You want to have $1,000,000 in order to retire at age 55,but need to know how much you will need to deposit each year from now until your 55th birthday

Question 23

The process of obtaining present values is also called compounding.

Question 24

In order to take advantage of the time value of money you should do all of the following except

A)pay bills electronically so you can delay payments and still ensure on-time payment.
B)pay bills a little later than the due dates to take advantage of month-ending interest on your savings account.
C)use settings on many bill-paying Web sites that allow you to set a future date for payment once you receive a bill.
D)make use of your money while you have it,but always make payments by the obligation dates.

Question 25

In order to maximize the use of your money,you may want to delay payment of your bills slightly beyond their due dates.

Question 26

Everything else being equal,the ________ the interest rate,the ________ the final accumulation of money.

A)higher; higher
B)lower; lower
C)higher; lower
D)A and B are both correct.

Question 27

Which of the following is not an example of a future value?

A)The balance in your checking account today
B)A savings account balance in five years
C)A mortgage balance in ten years
D)The value of a retirement account in 20 years

Question 28

Byron is investigating a mutual fund that claims that $1,000 today will be worth $5,000 in five years.What is he solving for?

A)Present value
B)Future value
C)Interest rate
D)Payment

Question 29

The periodic interest rate,the number of periods,and the payment amount must be known to calculate a present or future value using a financial calculator.

Question 30

To determine how much you must save each year to have enough for your daughter's college education,you would use the present value of $1 tables.

Question 31

The same tables can be used to figure future values and present values of $1.

Question 32

In the tables for the future value of a single sum,the future value factors are all less than one.

Question 33

The process of obtaining ________ values is referred to as discounting.

A)present
B)future
C)current
D)inflated

Question 34

To determine how long it would take an investment to double at 10 percent,you could scan down the 10 percent column until you reach a factor of approximately 2.0 on the ________ table.

A)Present Value of $1
B)Future Value of $1
C)Present Value of an annuity
D)Future Value of an annuity

Question 35

By paying bills electronically,you can delay payments and still ensure on-time payment.

Question 36

The process of obtaining ________ values is referred to as compounding.

A)present
B)future
C)current
D)inflated

Question 37

The accumulation of interest over time is called

A)an annuity.
B)an ordinary annuity.
C)compounding.
D)present value.

Question 38

Compounding is the process of obtaining present values; discounting is the process of obtaining future values.

Question 39

The Present Value Interest Factor (PVIF)becomes lower as the number of years increases.

Question 40

The process of obtaining present values is also called discounting.

Question 41

If Jim wants $25,000 in five years and can earn an 8 percent interest rate,how much does he need to invest today? (Note-Solve as a Present Value problem.)
(a)$16,108
(b)$17,025
(c)$15,158
(d)$17,829

Question 42

Time value concepts can be applied to lottery winnings.The winner can usually choose an annuity or a lump sum.

Question 43

Jerry wants to know how much he needs to save every year to accumulate $15,000 in five years at a 10 percent interest rate.Which of the following tables should he use?

A)Present value $1
B)Present value ordinary annuity
C)Future value $1
D)Future value ordinary annuity

Question 44

The difference between an ordinary annuity and an annuity due is with an annuity due the payments occur at the ________ of each period.

Question 45

Information can be easily found on Web sites that will assist you in determining all of the following except

A)proceeds you will receive when selling your house.
B)loan rates,length of loan,and principal.
C)stock quotes and company information.
D)credit card applications and information.

Question 46

At what annual rate would $500 grow to $1,948 in 12 years? (Note-Solve as a Present Value problem.)
(a)12.0 percent
(b)13.0 percent
(c)12.5 percent
(d)11.0 percent

Question 47

If Joe has $5,600 today and invests it at a 10 percent interest rate,how much will he have in 12 years? (Note-Solve as a Future Value problem.)
(a)$17,393.60
(b)$17,572.80
(c)$15,770.49
(d)$12,320.00

Question 48

Sandy wants to know how much she needs to save today to have $5,000 in five years at a 7 percent interest rate.Which of the following tables should she use?

A)Present value $1
B)Present value ordinary annuity
C)Future value $1
D)Future value ordinary annuity

Question 49

Which of the following decisions would involve the use of the present value of $1?

A)Your brother buys your car and offers to pay you $500 now or $1,500 in two years
B)You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years
C)Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years
D)You want to have $1,000,000 in order to retire at age 55,but need to know how much you will need to deposit each year from now until your 55th birthday

Question 50

If you are presented with an offer to accept payment now or a greater amount in the future,you would use (assuming you can invest the money at a known rate)

A)Present Value of $1.
B)Future Value of $1.
C)Present Value of an annuity.
D)Future Value of an annuity.

Question 51

You wish to retire in 30 years and determine that you will need $1,000,000 to fund your retirement.If you can invest with a return of 8% you will need to invest ________ each year to reach your goal.

Question 52

Don wants to know how much he needs to save every year to amass $15,000 in five years at a 5 percent interest rate.What is he calculating using his financial calculator?

A)Present value
B)Future value
C)Interest rate
D)Payment

Question 53

Susie wants to know how much she needs to save today to have $5,000 in five years.Which of the following tables should she use?

A)Present value $1
B)Present value ordinary annuity
C)Future value $1
D)Future value ordinary annuity

Question 54

Aaron wants to put $200 per month into an IRA account at 15 percent for four years.What is he solving for using his financial calculator?

A)Present value
B)Future value
C)Interest rate
D)Payment

Question 55

The cash flows of an annuity due occur at the beginning of each period.

Question 56

To determine how much money you would need to save to withdraw $10,000 a year for five years,you would use the present value of an annuity tables.

Question 57

Judy would like to have $200,000 saved in her retirement account in 20 years.At an interest rate of 10 percent,how much should she contribute each year?
(a)$3,491.92
(b)$2,000.00
(c)$2,576.11
(d)$4,376.77

Question 58

An annuity due differs from an ordinary annuity in that the payments occur at the beginning instead of the end of the period.

Question 59

Which of the following decisions would involve the use of the future value of a $1 ordinary annuity table?

A)Your brother buys your car and offers to pay you $500 now or $1,500 in two years
B)You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years
C)Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years
D)You want to have $1,000,000 in order to retire at age 55,but need to know how much you will need to deposit each year from now until your 55th birthday

Question 60

Future and present values are dependent upon all of the following except

A)time.
B)the interest rate.
C)a present or the future value interest factor,depending on the problem.
D)annual income.

Question 61

Carol would like to have $500,000 saved in her retirement account in 30 years at an interest rate of 10 percent.How much should she contribute each year?

A)$2,182.00
B)$2,000.00
C)$1,956.20
D)$3,039.62

Question 62

Present and future values concepts are applied to which of the following decisions except

A)purchase of a home.
B)calculation of withdrawals needed during retirement.
C)calculation of savings for a large purchase.
D)annual cash inflows.

Question 63

Which of the following decisions would involve the use of the present value of a $1 ordinary annuity table?

A)Your brother buys your car and offers to pay you $500 now or $1,500 in two years
B)You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years
C)Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college 4 years hence
D)You want to have $1,000,000 in order to retire at age 55,but need to know how much you will need to deposit each year from now until your 55th birthday

Question 64

If Sandy has $7,000 today and invests it for five years at a 5 percent interest rate,how much will she have in five years?

A)$8,750
B)$7,850
C)$8,932
D)$8,857

Question 65

The time value of money can be applied to all of the following except

A)bond valuation.
B)stock valuation.
C)current market value of your home.
D)investment valuation.

Question 66

Compare using the present value,future value,and annuity tables to using your financial calculator to solve problems.What are some of the advantages and disadvantages of each tool?

Question 67

Jack is 35 years old and is planning to retire at age 65.Based on a variety of factors,he is planning a retirement of 20 years.Jack determines that he will need $20,000 during his 20 years of retirement.If he can invest at 9 percent,how much will he need to save beginning today to reach his goal?
(a)$11,428.57
(b)$6,086.00
(c)$1,339.47
(d)$20,000.00

Question 68

To determine how much you would need to save each year to reach a specific goal,you would use

A)Present Value of $1.
B)Future Value of $1.
C)Present Value of an annuity.
D)Future Value of an annuity.

Question 69

You utilize present and future value concepts in investment,purchase,and retirement decisions.

Question 70

At what annual rate would $200.00 grow to $497.60 in five years?

A)19 percent
B)18 percent
C)20 percent
D)22 percent

Question 71

How many years will it take for $500 to grow to $1,039.50 if invested at 5 percent compounded annually?

A)15
B)14
C)13
D)12

Question 72

How many years will it take for $35 to grow to $53.87 if invested at 9 percent compounded annually?

A)6)0
B)5)5
C)5)0
D)4)0

Question 73

The time value of money can be used to estimate future savings with periodic drawing of funds.

Question 74

If you had just won $5,000,000 from a lottery,describe the advantages and disadvantages of receiving a lump sum today or a ten-year annuity.Discuss other factors that are relevant or needed to make this decision.No interest rate is given,however different interest rates can be assumed if necessary to answer this problem.

Question 75

To compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years,you would need to use the

A)Future Value of an annuity.
B)Present Value of an annuity.
C)both Future and Present Value of an annuity.
D)both Present and Future Value of $1.

Question 76

If Art wants $35,000 in 10 years and can earn a 12 percent interest rate,how much does he need to invest today?

A)$10,538
B)$10,310
C)$11,270
D)$14,375

Question 77

The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and then summing the resulting present values.

Question 78

It is always better to choose a lump sum rather than to choose periodic payments over time.This is why nearly all lottery winners choose the lump sum payment.

Question 79

Present and future values concepts are not applied to which of the following?

A)Payments on a home
B)Calculation of withdrawals needed during retirement
C)Calculation of savings for a large purchase
D)The balance of your checking account today

Question 80

Describe how present and future values concepts apply to your income and expenses and ultimately your personal budget,income statement,and balance sheet.