Question 1

Time Value of Money calculations can be made much easier through the use of a financial calculator.

Accepted Answer

A financial calculator can easily calculate the present value, future value, interest rate, and number of periods needed for time value of money calculations, making the process much faster and more accurate than manual calculations.

Question 2

Samantha Jee put $3,000 into a mutual fund yielding a 12 percent annual rate of return.Using the Rule of 72,calculate approximately how long it will take for the investment to double in value.
A) Two years
B) Two years and four months
C) Six years
D) Seven years and four months

Accepted Answer

The Rule of 72 is a simple way to estimate the number of years required to double the investment at a given annual rate of return. By dividing 72 by the annual rate of return (12 percent in this case), we get 72 / 12 = 6 years.

Question 3

The present value of a financial asset is what you should be willing to pay today for that financial asset.

Accepted Answer

The present value of a financial asset is the value of that asset today, taking into account the time value of money and expected future cash flows. It represents what an investor should be willing to pay today to receive the expected future cash flows from the asset.

Question 4

The ________ Principle states that a dollar today is worth more than a dollar in the future.
A) Future value of money
B) Discounted value of money
C) Adjusted value of money
D) Time value of money
E) Annuity value of money

Accepted Answer

This principle is known as the time value of money. It recognizes that the value of money changes over time due to inflation, interest rates, and other economic factors. Therefore, a dollar received today is worth more than the same dollar received in the future. Understanding the time value of money is crucial for making financial decisions such as investing or borrowing.

Question 5

Suppose that you invested $100 in a bank account that earned an annual rate of return of 10%.How much would you have in that bank account at the end of 10 years?
A) $259.37
B) $238.55
C) $293.74
D) $214.46
E) $279.23

Accepted Answer

The amount in the bank account at the end of 10 years can be calculated using the formula for compound interest: A = P(1 + r)^n, where A is the amount of money accumulated after n years, including interest, P is the principal amount (the initial amount of money), r is the annual interest rate (decimal), and n is the time the money is invested for in years. Here, P = $100, r = 10% or 0.10, and n = 10 years. Plugging these values into the formula gives A = 100(1 + 0.10)^10 = $259.37.

Question 6

If you set your calculator to the "end" mode your calculator will assume cash flows occur at the end of each time period.

Accepted Answer

In the "end" mode, cash flows are assumed to occur at the end of each time period. In contrast, the "begin" mode assumes cash flows occur at the beginning of each time period.

Question 7

A one-time investment of $1,500 at a 10 percent annual rate of return yields $2,196 in two years.The $2,196 is known as the
A) present value.
B) compound value.
C) principal plus interest.
D) future value.
E) annuity value

Accepted Answer

The $2,196 represents the amount that the initial investment has grown to after two years, which is known as the future value.

Question 8

Compounding is when the interest you have already earned on an investment earns interest.

Accepted Answer

Compounding is the process of reinvesting your earnings from an investment, including the interest earned, so that those earnings can also earn interest in future periods. This creates a compounding effect and can result in faster growth of your investment over time.

Question 9

The current value in today's dollars of a future sum of money is called
A) future value.
B) adjusted value.
C) compounded value.
D) present value.
E) discounted value.

Accepted Answer

The current value in today's dollars of a future sum of money is called the present value. It reflects the amount of money needed today to yield a specific future amount, assuming a certain interest rate or rate of return. Future value refers to the value of an investment at a future point in time, adjusted for interest or inflation. Adjusted value and compounded value are not commonly used terms in finance. Discounted value is another term for present value.

Question 10

You currently have $11,167 in your savings account.What interest rate do you need to earn in order to have $20,000 in the account in 10 years?
A) 6%
B) 8%
C) 10%
D) There is not enough information to solve this question.

Accepted Answer

To find the required interest rate, we can use the formula for compound interest: A = P(1 + r)^n, where A is the amount of money accumulated after n years, including interest, P is the principal amount (the initial amount of money), r is the annual interest rate (decimal), and n is the time the money is invested for in years. Rearranging the formula to solve for r gives us r = (A/P)^(1/n) - 1. Plugging in the given values: A = $20,000, P = $11,167, and n = 10 years, we can solve for r. This calculation shows that the interest rate needed is approximately 6%.

Question 11

The dollar value of an investment at some future point in time is also known as
A) future value.
B) present value.
C) compounded annuity.
D) the time value of money.
E) calculated value.

Accepted Answer

The dollar value of an investment at some future point in time is known as its future value.

Question 12

By the Rule of 72,what annual interest rate would be required to turn $100 into $200 in approximately six years?
A) 4%
B) 8%
C) 12%
D) 16%

Accepted Answer

The answer of By the Rule of 72,what annual interest...

Question 13

Your money grows faster as the compounding period becomes longer.

Accepted Answer

Your money grows faster with more frequent compounding periods because interest is calculated and added to the principal more often, leading to exponential growth.

Question 14

John Madrid put $1,000 into a mutual fund yielding an 18% annual rate of return.Using the Rule of 72,calculate approximately how long it will take for the investment to double in value.
A) Three years, four months
B) Three years and seven months
C) Four years
D) Four years and four months
E) Five years

Accepted Answer

The Rule of 72 is a simple way to estimate the number of years required to double the investment at a given annual rate of return. By dividing 72 by the annual rate of return (18% in this case), we get 72 / 18 = 4 years.

Question 15

An investment earning 12 percent interest per year should double in value in approximately four years.

Accepted Answer

Using the Rule of 72, which estimates the number of years required to double an investment at a given annual rate of return by dividing 72 by the interest rate, an investment earning 12 percent interest per year would double in approximately 6 years (72 divided by 12 equals 6).

Question 16

This helpful investment rule-of-thumb tells you approximately how many years it takes for a sum of money to double in size.
A) Rule of compound interest
B) Rule of 72
C) Rule of 100
D) Rule of future value
E) Rule of annuity doubling

Accepted Answer

The Rule of 72 states that if you divide 72 by the annual rate of return, the result is the approximate number of years it will take for the initial investment to double in value. For example, if you have an annual rate of return of 8%, it will take approximately 9 years (72/8) for your investment to double in value.

Question 17

You have just placed $500 in a bank account that earns an annual rate of return of 6%.How much will you have in that bank account after 6 years?
A) $652.48
B) $709.26
C) $787.66
D) $758.66
E) $801.68

Accepted Answer

The future value of an investment is calculated using the formula FV = PV(1 + r)^n, where FV is the future value, PV is the present value or initial investment, r is the annual interest rate (as a decimal), and n is the number of years. Plugging in the given values: FV = $500(1 + 0.06)^6 ≈ $709.26.

Question 18

As a future graduation present,you uncle has just placed $6,000 in a bank account that will earn an annual rate of return of 6%.How much will be in that account when you graduate in four years?
A) $7,731.55
B) $6,752.56
C) $6,247.70
D) $7,790.63
E) $7,574.86

Accepted Answer

The answer of As a future graduation present,you uncle has...

Question 19

Allowing the interest that you earn on an investment to stay in the investment and to earn interest on the interest you have already earned is called what?
A) The power of of present value
B) The power of compound interest
C) The power of simple interest
D) The power of time
E) The power of future value

Accepted Answer

This is the definition of compound interest, where the interest earned on an investment is added back to the principal and then earns interest again. This allows for exponential growth of the investment over time. Choices A, C, D, and E are not the correct definitions for this concept.

Question 20

The I/Y key on a financial calculator stores the information for the interest rate or the discount rate per period.

Accepted Answer

The I/Y key on a financial calculator is used to enter the interest rate or the discount rate per period, and the calculator stores this information for use in calculations.

Quiz 3: Understanding and Appreciating the Time Value of Money

Time Value of Money calculations can be made much easier through the use of a financial calculator.

Samantha Jee put $3,000 into a mutual fund yielding a 12 percent annual rate of return.Using the Rule of 72,calculate approximately how long it will take for the investment to double in value.

The present value of a financial asset is what you should be willing to pay today for that financial asset.

The ________ Principle states that a dollar today is worth more than a dollar in the future.

Suppose that you invested $100 in a bank account that earned an annual rate of return of 10%.How much would you have in that bank account at the end of 10 years?

If you set your calculator to the "end" mode your calculator will assume cash flows occur at the end of each time period.

A one-time investment of $1,500 at a 10 percent annual rate of return yields $2,196 in two years.The $2,196 is known as the

Compounding is when the interest you have already earned on an investment earns interest.

The current value in today's dollars of a future sum of money is called

You currently have $11,167 in your savings account.What interest rate do you need to earn in order to have $20,000 in the account in 10 years?

The dollar value of an investment at some future point in time is also known as

By the Rule of 72,what annual interest rate would be required to turn $100 into $200 in approximately six years?

Your money grows faster as the compounding period becomes longer.

John Madrid put $1,000 into a mutual fund yielding an 18% annual rate of return.Using the Rule of 72,calculate approximately how long it will take for the investment to double in value.

An investment earning 12 percent interest per year should double in value in approximately four years.

This helpful investment rule-of-thumb tells you approximately how many years it takes for a sum of money to double in size.

You have just placed $500 in a bank account that earns an annual rate of return of 6%.How much will you have in that bank account after 6 years?

As a future graduation present,you uncle has just placed $6,000 in a bank account that will earn an annual rate of return of 6%.How much will be in that account when you graduate in four years?

Allowing the interest that you earn on an investment to stay in the investment and to earn interest on the interest you have already earned is called what?

The I/Y key on a financial calculator stores the information for the interest rate or the discount rate per period.