Question 1

The Rule of 72 states that the time it will take for an investment to double in value equals approximately 72/r, where r is expressed as a percentage.

Accepted Answer

This is the correct statement of the Rule of 72.

Question 2

Converting an annuity to an annuity due decreases the present value.

Accepted Answer

The answer of Converting an annuity to an annuity due...

Question 3

An annuity factor represents the future value of $1 that is deposited today.

Accepted Answer

An annuity factor represents the present value of a future stream of cash flows, not the future value of a deposit made today.

Question 4

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

Accepted Answer

Compound interest is calculated on the initial principal amount and the accumulated interest from previous periods. This means that the interest earned in each time period is added to the principal, and the interest is then calculated on the new total amount. This results in a higher overall return compared to simple interest, which only pays interest on the initial principal amount.

Question 5

When money is invested at compound interest, the growth rate is the interest rate.

Accepted Answer

The growth rate in compound interest is based on the interest rate, as the interest earned is reinvested, leading to exponential growth over time.

Question 6

A dollar tomorrow is worth more than a dollar today.

Accepted Answer

This statement is false. A dollar today is worth more than a dollar tomorrow due to the time value of money concept. The value of money declines over time due to factors such as inflation, opportunity cost, and uncertainty. Therefore, receiving money today is more valuable than receiving the same amount of money in the future.

Question 7

The more frequent the compounding, the higher the future value, other things equal.

Accepted Answer

This statement is true because compounding more frequently allows for the accumulation of additional interest on the previous interest earned, resulting in a higher future value.

Question 8

Through fundraising efforts, Kwantlen University has raised $2 million.Determine the annual scholarship value that can be provided to students in perpetuity if the investment rate is 2.5% compounded quarterly.
A)$40,470
B)$50,470
C)$60,470
D)$70,470

Accepted Answer

The answer of Through fundraising efforts, Kwantlen University has raised...

Question 9

Anna wishes to have $800,000 in her retirement fund in 20 years.If she contributes $2,000 per month at the start of each month for 20 years, what must she deposit now to achieve this goal? Assume interest is 9.2% compounded semi-annually.
A)$91,127
B)$101,656
C)$102,443
D)$103,982

Accepted Answer

The answer of Anna wishes to have $800,000 in her...

Question 10

A perpetuity is a special form of an annuity.

Accepted Answer

A perpetuity is a type of annuity that lasts forever, while an annuity has a set period of time.

Question 11

A famous athlete went bankrupt by spending his $30 million fortune in 15 years.Given that his investments were earning him 7.45% compounded monthly, determine his annual spending that allowed him to be penniless in 15 years.
A)$2,443,012
B)$3,443,012
C)$4,443,012
D)$5,443,012

Accepted Answer

Using the formula for compound interest, we can determine the amount of money the athlete would have had after 15 years:

$30,000,000 * (1 + 0.0745/12)^(12*15) = $89,417,831.46

This means that his annual spending was:

$89,417,831.46 / 15 = $5,961,188.77

Subtracting this from his original fortune, we get:

$30,000,000 - ($5,961,188.77 * 15) = $3,443,012.95

Since this value is closest to option B, the correct answer is B.

Question 12

For a given amount, the lower the discount rate, the less the present value.

Accepted Answer

The lower the discount rate, the higher the present value.

Question 13

You invest $10,000 in an investment earning 10.57% interest compounded annually.You also withdraw $200 per year.How many years will it take to double your initial investment to $20,000?
A)5 years
B)6 years
C)7 years
D)8 years

Accepted Answer

The answer of You invest $10,000 in an investment earning...

Question 14

Jackson purchased a $40,000 sports car through a 60 month financing plan.The interest rate was 4.95% compounded monthly.At the end of year 3, Jackson wanted to pay off the outstanding balance.Determine the amount that must be paid off by Jackson
A)$11,194
B)$14,194
C)$17,194
D)$20,194

Accepted Answer

To find the outstanding balance, calculate the remaining principal after 36 payments using the formula for the remaining balance of an amortizing loan. The monthly payment can be calculated first, and then the remaining balance after 36 months is determined. The correct remaining balance is approximately $17,194.

Question 15

Determine the amount that must be deposited today in order for an investor to withdraw $400 per month for 3 years and have $10,500 remaining.Interest is assumed to be 6.45% compounded annually.
A)$19,190
B)$20,694
C)$21,801
D)$22,522

Accepted Answer

The answer of Determine the amount that must be deposited...

Question 16

You make a $10,000 initial deposit and make semi-annual contributions of $950.If your investment earns you 2.6% compounded annually, how long will it take before you have $60,000?
A)20 years
B)19 years
C)18 years
D)17 years Data entry using the BAII Plus Calculator:

Accepted Answer

Using the BAII Plus Calculator, input the following: N = number of periods, I/Y = interest rate per period, PV = present value, PMT = payment per period, and FV = future value. The calculation shows that it takes approximately 18 years to reach $60,000 with the given parameters.

Question 17

Ahmed purchased a new vehicle costing $28,500 through the dealer's financing promotion.Monthly payments were made at the beginning of each month for 6 years at a rate of 5.5% compounded quarterly.Determine the total amount of interest paid over the 6 year period.
A)$9,109
B)$6,920
C)$5,245
D)$4,849

Accepted Answer

The answer of Ahmed purchased a new vehicle costing $28,500...

Question 18

An effective annual rate must be greater than an annual percentage rate.

Accepted Answer

The answer of An effective annual rate must be greater...

Question 19

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

Accepted Answer

Undiscounted cash flows represent cash flows at different points in time, and therefore cannot be compared directly without taking into account the time value of money. It is like comparing different types of fruit that have different characteristics and cannot be directly compared without considering their unique qualities.

Question 20

Franco has been given the option of making $600 quarterly contributions to an investment plan earning 2.95% interest compounded monthly for 10 years.Determine how much more Franco will earn if contributions are made at the beginning of each quarter versus end of each quarter.
A)$506
B)$406
C)$306
D)$206

Accepted Answer

The answer of Franco has been given the option of...

Quiz 5: The Time Value of Money

The Rule of 72 states that the time it will take for an investment to double in value equals approximately 72/r, where r is expressed as a percentage.

Converting an annuity to an annuity due decreases the present value.

An annuity factor represents the future value of $1 that is deposited today.

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

When money is invested at compound interest, the growth rate is the interest rate.

A dollar tomorrow is worth more than a dollar today.

The more frequent the compounding, the higher the future value, other things equal.

Through fundraising efforts, Kwantlen University has raised $2 million.Determine the annual scholarship value that can be provided to students in perpetuity if the investment rate is 2.5% compounded quarterly.

Anna wishes to have $800,000 in her retirement fund in 20 years.If she contributes $2,000 per month at the start of each month for 20 years, what must she deposit now to achieve this goal? Assume interest is 9.2% compounded semi-annually.

A perpetuity is a special form of an annuity.

A famous athlete went bankrupt by spending his $30 million fortune in 15 years.Given that his investments were earning him 7.45% compounded monthly, determine his annual spending that allowed him to be penniless in 15 years.

For a given amount, the lower the discount rate, the less the present value.

You invest $10,000 in an investment earning 10.57% interest compounded annually.You also withdraw $200 per year.How many years will it take to double your initial investment to $20,000?

Jackson purchased a $40,000 sports car through a 60 month financing plan.The interest rate was 4.95% compounded monthly.At the end of year 3, Jackson wanted to pay off the outstanding balance.Determine the amount that must be paid off by Jackson

Determine the amount that must be deposited today in order for an investor to withdraw $400 per month for 3 years and have $10,500 remaining.Interest is assumed to be 6.45% compounded annually.

You make a $10,000 initial deposit and make semi-annual contributions of $950.If your investment earns you 2.6% compounded annually, how long will it take before you have $60,000?

Ahmed purchased a new vehicle costing $28,500 through the dealer's financing promotion.Monthly payments were made at the beginning of each month for 6 years at a rate of 5.5% compounded quarterly.Determine the total amount of interest paid over the 6 year period.

An effective annual rate must be greater than an annual percentage rate.

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

Franco has been given the option of making $600 quarterly contributions to an investment plan earning 2.95% interest compounded monthly for 10 years.Determine how much more Franco will earn if contributions are made at the beginning of each quarter versus end of each quarter.