Question 1

Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13%, how much money does she need to have on hand today to meet her obligations?

Accepted Answer

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Question 2

The future value of a $1,000 investment today at 8% annual interest compounded semiannually for 5 years is:

Accepted Answer

We can use the formula for future value with compound interest:

FV = P(1+r/n)^(nt)

where:
P = starting principal (the initial investment)
r = annual interest rate (as a decimal)
n = number of times the interest is compounded per year
t = time (in years)

In this case, we have:

P = 1000
r = 0.08
n = 2 (semiannual compound interest)
t = 5

Plugging these values into the formula gives:

FV = 1000(1+0.08/2)^(2*5)
FV = 1000(1.04)^10
FV = $1,479.94

Therefore, the best choice is B, which is closest to the calculated value of $1,479.94.

Question 3

As the discount rate becomes higher and higher, the present value of inflows approaches:

Accepted Answer

As the discount rate becomes higher and higher, the present value of future inflows decreases. At a certain point, the present value will approach zero. This is because a higher discount rate means that future cash flows are being discounted more heavily due to the increased risk of those cash flows not being received. Therefore, the best choice is A) zero.

Question 4

Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years ago. What is the annual return on his investment?

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Question 5

If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be if we receive an interest rate of 10% on our investments? The first payment is made at the end of each year.

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Question 6

To find the yield on investments that require the payment of a single amount initially, and which then return a single amount sometime in the future, the correct table to use is:

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Question 7

Sharon Smith will receive $1,000,000 in 50 years. The discount rate is 14%. As an alternative she can receive $2,000 today. Which should she choose?

Accepted Answer

To determine the present value of the $1,000,000 received in 50 years, we need to discount it back to the present using the given discount rate of 14%. Using the formula for present value of a future lump sum, we get: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods. So, PV = $1,000,000 / (1 + 0.14)^50 = $5,859. Therefore, Sharon should choose the $2,000 today, as it is worth more than the discounted present value of the $1,000,000 received in 50 years.

Question 8

As the interest rate decreases, the present value of an amount to be received at the end of a fixed period:

Accepted Answer

As the interest rate decreases, the discount rate used to calculate present value also decreases. This means that less value is placed on money received in the future, making the present value of an amount to be received at the end of a fixed period increase.

Question 9

Janice Hardin sets aside $5,000 each year for 10 years. She then withdraws the funds on an equal annual basis for the next 10 years. The two tables she should use in the correct order are:

Accepted Answer

Janice is saving money for 10 years, which means she is accumulating money for future use. The first table she should use is the future value of an annuity of $1, which will tell her the value of the money she will have in the future. Then, when she is ready to withdraw the funds, she will need to know the present value of an annuity of $1, which will tell her the amount of money she needs to withdraw each year to exhaust the fund over 10 years. Therefore, the correct order of tables is future value of an annuity of $1 followed by present value of an annuity of $1.

Question 10

Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12^th year (10 payments). The discount rate is 10%. The present value today of this deferred annuity is:

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Question 11

The shorter the length of time between a present value and its corresponding future value:

Accepted Answer

When the length of time between a present value and its corresponding future value is shorter, the present value is considered to be closer in time to the future value. Therefore, the present value would be considered more valuable or "higher" relative to the future value. This is because the present value has less time to be affected by inflation, opportunity cost, or other factors that could decrease its value over time.

Question 12

A 20-year mortgage with monthly payments has a principal outstanding of $125,000. Interest is at 8% compounded semi-annually. What are the monthly payments?

Accepted Answer

First, we need to find the semi-annual interest rate:
r = annual interest rate/2 = 8%/2 = 0.04
Next, we need to find the number of monthly payments:
n = 20 years * 12 months/year = 240 months
Using the formula for monthly mortgage payments:
M = P [r(1+r)^n]/[(1+r)^n-1]
where M is the monthly payment, P is the principal outstanding, r is the monthly interest rate, and n is the number of payments.
Plugging in the values:
M = 125,000 [0.04(1+0.04)^240]/[(1+0.04)^240-1] = $1,035.24
Therefore, the best choice is B, with monthly payments of $1,035.24.

Question 13

You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be:

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Question 14

Lou Lewis borrows $10,000 to be repaid over 10 years with equal annual payments at 9 percent. Repayment of principal in the first year is:

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Question 15

Increasing the number of periods will increase all of the following except:

Accepted Answer

The present value of $1 decreases as the number of periods increases, because the value of $1 received in the future is worth less today the further into the future it is received. This is due to the time value of money principle, where a dollar today is worth more than a dollar in the future due to its potential earning capacity. Increasing the number of periods means the $1 is received further in the future, thus its present value decreases.

Question 16

Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years. The current yield is 8%. What is the future value?

Accepted Answer

This is a simple annuity problem where the formula for future value is FV = PMT x (((1 + r)^n) - 1) / r, where PMT is the annual payment, r is the interest rate, and n is the number of periods. Plugging in the numbers, we get FV = 5000 x (((1 + 0.08)^9) - 1) / 0.08 = $67,432.98, which rounds up to $67,433. Therefore, the correct answer is choice C.

Question 17

The higher the discount rate used in determining the future value of a $1 annuity:

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Question 18

Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

Accepted Answer

To find the present value of the contract, we need to use the present value of future cash flows. Therefore, we need to use the present value of an annuity of $1 and the present value of $1 tables.

Question 19

If you were to put $5,000 in the bank at 4% interest each year for the next 8 years, which table would you use to find the ending balance in your account?

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Question 20

Joe Nautilus has $120,000 and wants to retire. What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years?

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Quiz 9: The Time Value of Money

Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13%, how much money does she need to have on hand today to meet her obligations?

The future value of a $1,000 investment today at 8% annual interest compounded semiannually for 5 years is:

As the discount rate becomes higher and higher, the present value of inflows approaches:

Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years ago. What is the annual return on his investment?

If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be if we receive an interest rate of 10% on our investments? The first payment is made at the end of each year.

To find the yield on investments that require the payment of a single amount initially, and which then return a single amount sometime in the future, the correct table to use is:

Sharon Smith will receive $1,000,000 in 50 years. The discount rate is 14%. As an alternative she can receive $2,000 today. Which should she choose?

As the interest rate decreases, the present value of an amount to be received at the end of a fixed period:

Janice Hardin sets aside $5,000 each year for 10 years. She then withdraws the funds on an equal annual basis for the next 10 years. The two tables she should use in the correct order are:

Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12^th year (10 payments) . The discount rate is 10%. The present value today of this deferred annuity is:

The shorter the length of time between a present value and its corresponding future value:

A 20-year mortgage with monthly payments has a principal outstanding of $125,000. Interest is at 8% compounded semi-annually. What are the monthly payments?

You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be:

Lou Lewis borrows $10,000 to be repaid over 10 years with equal annual payments at 9 percent. Repayment of principal in the first year is:

Increasing the number of periods will increase all of the following except:

Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years. The current yield is 8%. What is the future value?

The higher the discount rate used in determining the future value of a $1 annuity:

Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

If you were to put $5,000 in the bank at 4% interest each year for the next 8 years, which table would you use to find the ending balance in your account?

Joe Nautilus has $120,000 and wants to retire. What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years?

Quiz 9: The Time Value of Money

Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13%, how much money does she need to have on hand today to meet her obligations?

The future value of a $1,000 investment today at 8% annual interest compounded semiannually for 5 years is:

As the discount rate becomes higher and higher, the present value of inflows approaches:

Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years ago. What is the annual return on his investment?

If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be if we receive an interest rate of 10% on our investments? The first payment is made at the end of each year.

To find the yield on investments that require the payment of a single amount initially, and which then return a single amount sometime in the future, the correct table to use is:

Sharon Smith will receive $1,000,000 in 50 years. The discount rate is 14%. As an alternative she can receive $2,000 today. Which should she choose?

As the interest rate decreases, the present value of an amount to be received at the end of a fixed period:

Janice Hardin sets aside $5,000 each year for 10 years. She then withdraws the funds on an equal annual basis for the next 10 years. The two tables she should use in the correct order are:

Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12th year (10 payments) . The discount rate is 10%. The present value today of this deferred annuity is:

The shorter the length of time between a present value and its corresponding future value:

A 20-year mortgage with monthly payments has a principal outstanding of $125,000. Interest is at 8% compounded semi-annually. What are the monthly payments?

You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be:

Lou Lewis borrows $10,000 to be repaid over 10 years with equal annual payments at 9 percent. Repayment of principal in the first year is:

Increasing the number of periods will increase all of the following except:

Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years. The current yield is 8%. What is the future value?

The higher the discount rate used in determining the future value of a $1 annuity:

Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

If you were to put $5,000 in the bank at 4% interest each year for the next 8 years, which table would you use to find the ending balance in your account?

Joe Nautilus has $120,000 and wants to retire. What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years?

Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12^th year (10 payments) . The discount rate is 10%. The present value today of this deferred annuity is: