Question 1

The future value of $1,000 compounded annually for 8 years at 12% may be calculated with the following formula: FV = $1,000 * (1 + 12%)8
If the same $1,000 was compounded quarterly,what formula would you use to calculate the FV?

Accepted Answer

When compounding quarterly for 8 years, there are 8 x 4 = 32 compounding periods. Therefore, we need to use the formula FV = $1,000 * (1 + 3%)32. Option A uses the wrong interest rate and the wrong number of compounding periods. Option B uses the correct interest rate but uses the incorrect number of compounding periods. Option D uses the correct interest rate and the correct number of compounding periods but is not compounded quarterly, it is compounded bi-annually. So, the best choice is C.

Question 2

The future value compound factor given for period (n)at 15%:

Accepted Answer

The future value compound factor given for each period at 15% will increase as the number of periods (n) increases. Therefore, the factor for period (n+1) at 15% will be greater than the factor for period (n) at 15%.

Question 3

-Using only the information above,what would the IRR be for an investment that cost $500 in period 0 and was sold for $750 in period 5?

Accepted Answer

The IRR is the rate that makes the net present value of cash flows equal to zero. For an investment of $500 sold for $750 in 5 years, the IRR is calculated using the formula: $750 = $500 * (1 + IRR)^5. Solving this gives an IRR between 8% and 9%.

Question 4

Which of the following is not a basic component of any compounding problem?

Accepted Answer

A net present value is not a basic component of compounding problems. The basic components are an initial deposit or principal, an interest rate, and a period of time over which interest is being accrued. The net present value is typically used in evaluating investment opportunities and involves calculating the present value of future cash flows.

Question 5

If you saw a table containing the following factors,what kind of interest factor would you be looking at?

Accepted Answer

The answer of If you saw a table containing the...

Question 6

In order to solve a compounding problem,you must know all four of its basic parts.

Accepted Answer

The answer of In order to solve a compounding problem,you...

Question 7

You always see an ordinary annuity used in business and never see an annuity due used in business.

Accepted Answer

An annuity due is used in business, especially when dealing with leases or rental payments that are due at the beginning of each period instead of the end.

Question 8

At 6%,the present value of a $1 payment in 12 months is .941905.At 7%,the present value of a $1 payment in 12 months is .950342.

Accepted Answer

The answer of At 6%,the present value of a $1...

Question 9

-Using only the information above,approximately how much would you pay today for an investment that pays $0 annual interest,but earns 8% interest over the next four years and has a face value at maturity of $13,500?

Accepted Answer

To find the present value of the investment, we use the formula for the present value of a future sum: PV = FV / (1 + r)^n, where FV is the future value ($13,500), r is the interest rate (8% or 0.08), and n is the number of years (4). Calculating this gives PV = $13,500 / (1 + 0.08)^4 = $13,500 / 1.3605 ≈ $9,923. Therefore, approximately $10,000 is the closest choice.

Question 10

The future value of a $1 annuity compounded at 5% annually is greater than the future value of a $1 annuity compounded at 5% semi-annually.

Accepted Answer

The future value of a $1 annuity compounded at a higher frequency (such as semi-annually) will be higher than the future value of the same annuity compounded annually at the same interest rate. Therefore, the statement is false.

Question 11

One way to calculate the present value of a single payment is with the following formula:
PV = FV * (1+i)n.

Accepted Answer

The correct formula for calculating the present value (PV) of a single future payment (FV) is PV = FV / (1+i)^n, where i is the interest rate and n is the number of periods.

Question 12

The internal rate of return is the good feeling you get inside when you earn a return on your investment.

Accepted Answer

The internal rate of return (IRR) is a financial metric used to determine the profitability of an investment by calculating the rate of return that makes the net present value of all cash flows equal to zero. It is not a feeling or emotion, but rather a quantitative calculation.

Question 13

Begin with a single sum of money at period 0.First,calculate a future value of that sum at 12.01%.Then discount that future value back to period 0 at 11.99%.In relation to the initial single sum,the discounted future value:

Accepted Answer

The future value is calculated at a higher rate (12.01%) than the discount rate (11.99%), resulting in a discounted future value that is slightly greater than the original amount.

Question 14

An investment may have more than one internal rate of return.

Accepted Answer

This can happen if the cash flows of the investment change sign more than once. In such cases, there can be multiple values of discount rates for which the net present value of the investment is zero.

Question 15

The internal rate of return:

Accepted Answer

The internal rate of return represents the investment's yield as its compound rate of interest. It is calculated by setting the price of an investment equal to the stream of cash flows it generates and solving for the interest rate. All of the options given in the question are correct, hence the answer is D.

Question 16

Assume that an investment,with an single initial cost of $1,000 and a yield of $50 monthly for 10 years,had a 7% IRR in the 60th month and a 7.2% IRR five months later.The IRR can be 6.8% in the 62nd month.

Accepted Answer

The answer of Assume that an investment,with an single initial...

Question 17

The future value of $800 deposited today would be greater if that deposit earned 8% rather than 7.75%.

Accepted Answer

The higher the interest rate, the greater the future value of a deposit. Therefore, if the deposit earned 8% instead of 7.75%, the future value would be greater.

Question 18

The future value of a single deposit of $1,000 will be greater when this amount is compounded:

Accepted Answer

The more frequently compounding occurs, the higher the future value will be. Monthly compounding will result in the highest future value for a single deposit of $1,000.

Question 19

If an investment earns 12% annually,

Accepted Answer

The answer of If an investment earns 12% annually,
...

Question 20

You are able to calculate the present value of an annuity by understanding the following relationship: FV = PV (1+I)

Accepted Answer

The formula for calculating the future value of an annuity is FV = PV * (1 + I)^n, where PV is the present value, I is the interest rate, and n is the number of periods.

Quiz 3: Mortgage Loan Foundations: The Time Value of Money

The future value of $1,000 compounded annually for 8 years at 12% may be calculated with the following formula: FV = $1,000 * (1 + 12%) 8 If the same $1,000 was compounded quarterly,what formula would you use to calculate the FV?

The future value compound factor given for period (n) at 15%: