Question 1

When your investment compounds, your money will grow in a(n) __________ fashion.
A)linear
B)exponential
C)static
D)implied

Accepted Answer

When your investment compounds, your money will grow exponentially. This means that the amount of money you earn from interest will increase over time, as the interest is earned not only on the initial investment, but also on the interest earned in previous periods.

Question 2

You invested $1,000 for 5 years in an account that earns 5 percent. However, today you learn that you are able to move the account into an investment that earns 10 percent. Which of the following statements is correct?
A)If you select the investment earning 10 percent, you will double your profit.
B)If you select the investment earning 10 percent, you will more than double your profit.
C)If you select the investment earning 10 percent, your profit will be less than double.
D)None of these statements is correct.

Accepted Answer

If you keep your money in the 5 percent account for 5 years, the total amount you will have at the end is:

$1,000 × (1 + 0.05)^5 = $1,276.28

If you move your money to the 10 percent investment today, the total amount you will have at the end of 5 years is:

$1,000 × (1 + 0.10)^5 = $1,610.51

The difference between these two amounts is:

$1,610.51 - $1,276.28 = $334.23

This means that by choosing the 10 percent investment, you will earn an additional $334.23 over 5 years. This is more than double the amount you would earn in the 5 percent account, so the correct answer is B: "If you select the investment earning 10 percent, you will more than double your profit."

Question 3

You have $100,000 in your account. Assuming no additional deposits are made and your account earns 15 percent per year, how long will it take for the account to have a balance of $500,000?
A)10.28 years
B)11.09 years
C)11.52 years
D)12.64 years

Accepted Answer

The answer of You have $100,000 in your account. Assuming...

Question 4

You are considering an investment that is expected to pay 3 percent in year 1, 5 percent in years 2 and 3 and 7 percent in year 4. If you invest $1,000 today, what will this investment be worth at the end of the fourth year?
A)$1215.07
B)$1215.51
C)$1275.81
D)$1285.75

Accepted Answer

The answer of You are considering an investment that is...

Question 5

You have $50,000 in your account. Assuming no additional deposits are made and your account earns 8 percent per year, how long will it take for the account to have a balance of $500,000?
A)28.83 years
B)29.92 years
C)50.00 years
D)90.00 years

Accepted Answer

Using the formula for compound interest:
A = P(1 + r/n)^(nt)
Where:
A = final amount ($500,000)
P = initial principal ($50,000)
r = annual interest rate (8% or 0.08)
n = number of times interest is compounded per year (assuming annually)
t = time in years

Substituting the values,
500000 = 50000(1 + 0.08/1)^(1t)
Dividing both sides by 50000,
10 = (1.08)^t
Taking the logarithm of both sides,
t*log(1.08) = log(10)
t = log(10) / log(1.08)
t ≈ 29.92 years

Therefore, it will take about 29.92 years for the account to have a balance of $500,000. The best choice is B.

Question 6

Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?
A)12.00 percent
B)25.00 percent
C)49.33 percent
D)86.99 percent

Accepted Answer

The total cost of borrowing is $112 (repayment) + $25 (fee) = $137. 
The interest paid is $137 - $100 = $37. 
The implied interest rate can be calculated as interest paid divided by the amount borrowed times 100 percent: ($37/$100) x 100% = 37%. 
Therefore, the implied interest rate is 37%.

Question 7

Assume that you borrow $2,000 from your sister and that you will pay her back in one lump sum. She charges you 9 percent interest in year 1 and increases the rate by 1 percent per year until the loan is paid off. How much will you owe if you wait until year 3 to pay off the loan?
A)$2,467.91
B)$2,661.78
C)$2,775.23
D)$2,809.53

Accepted Answer

The answer of Assume that you borrow $2,000 from your...

Question 8

Your firm receives an offer from the supplier who provides computer chips used to manufacture cell phones. Due to poor planning, the supplier has an excess amount of chips and is willing to sell $600,000 worth of chips for only $500,000. You already have two years' supply on hand. It would cost you $7,500 today to store the chips until your firm needs them in two years. What implied interest rate would you be earning if you purchased and store the chips?
A)6.57 percent
B)8.73 percent
C)9.54 percent
D)18.23 percent

Accepted Answer

The answer of Your firm receives an offer from the...

Question 9

You borrow $3,500 and will pay back the entire amount in 5 years. You are charged 9 percent interest per year. How much interest do you pay on this loan?
A)$1,885.18
B)$1,907.35
C)$1,959.02
D)$2,106.81

Accepted Answer

The correct answer is A.The total amount of interest paid on the loan is $1,885.18. This is calculated by multiplying the principal amount of the loan ($3,500) by the annual interest rate (9%) and then multiplying that number by the number of years of the loan (5).

Question 10

Which of the following statements is incorrect with respect to time lines?
A)A helpful tool for organizing our analysis is the time line.
B)Cash flows we receive are called inflows and denoted with a positive number.
C)Cash flows we pay out are called outflows and designated with a negative number.
D)Interest rates are not included on our time lines.

Accepted Answer

Interest rates are included on time lines, usually in the form of discount rates or interest rates used to calculate present values or future values of cash flows.

Question 11

Five years ago, sales were $4 million. Today your company's sales are $10 million. What annual rate have sales been growing?
A)1.5 percent
B)12.65 percent
C)16.65 percent
D)20.11 percent

Accepted Answer

The answer of Five years ago, sales were $4 million....

Question 12

We call the process of earning interest on both the original deposit and on the earlier interest payments:
A)simple interest.
B)compounding.
C)future value.
D)discounting.

Accepted Answer

Compounding refers to the process of earning interest on both the original deposit and on the earlier interest payments. Simple interest refers to earning interest only on the original deposit, while future value refers to the amount that a current investment will be worth at a future date based on a specific interest rate. Discounting is the process of determining the present value of a future sum of money, taking into account a specific interest rate.

Question 13

Which of the following statements is correct?
A)$100 to be received in the future is worth more than that today since it could be invested and earn interest.
B)$100 to be received in the future is worth less than that today since it could be invested and earn interest.
C)The Rule of 72 calculates the compounded return on investments.
D)Discounting is finding the future value of an original investment.

Accepted Answer

$100 to be received in the future is worth less than that today due to the potential of current funds to be invested and earn interest, a concept known as the time value of money.

Question 14

Assume you borrow $500 from a payday lender. The terms are that you must pay a fee of $75 in advance (today) and one year from now you need to repay $750. What implied interest rate are you paying?
A)43.09 percent
B)55.78 percent
C)76.47 percent
D)81.03 percent

Accepted Answer

The total cost of borrowing is the sum of the upfront fee and the final payment, which is $75 + $750 = $825. The interest paid over the loan is $825 - $500 = $325. The implied interest rate is then (interest paid/amount borrowed) * 100 = (325/500) * 100 = 65 percent. However, this is only for one year, so we need to compound it annually. Using the formula for compounding interest, we get (1 + r)^1 = 1.65, where r is the annual interest rate. Solving for r gives an annual interest rate of 76.47 percent. Therefore, the answer is C.

Question 15

Suppose a U.S. Treasury bond promises to pay $9,780.13 in three years. If bonds of this type are generating a 4 percent annual return, how much would you pay for this bond today?
A)$8,429.71
B)$11,001.32
C)$8,694.50
D)$9,112.78

Accepted Answer

To calculate the present value of a bond, we use the formula:

PV = FV / (1 + r)^n

where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years.

Plugging in the given values, we get:

PV = 9,780.13 / (1 + 0.04)^3 
PV = 8,694.50

Therefore, you would pay $8,694.50 today for this bond.

Question 16

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?
A)$6,000.00
B)$7,715.61
C)$7,908.48
D)$11,193.97

Accepted Answer

To calculate the interest paid on the loan, we need to use the formula 
I = P*r*t 
Where I is the interest, P is the principal (loan amount), r is the annual interest rate as a decimal, and t is the time in years.

In this case, 
P = $10,000 
r = 6% = 0.06 
t = 10 years

So, 
I = $10,000 * 0.06 * 10 = $6,000

Therefore, the total interest paid on the loan is $6,000. Answer choice C ($7,908.48) and D ($11,193.97) are not correct as they represent higher interest rates than the given rate of 6%. Answer choice B ($7,715.61) is close to the correct answer but appears to be a miscalculation.

Question 17

You double your money in 5 years. The reason your return is not 20 percent per year is because:
A)it is probably a "fad" investment.
B)it does not reflect the effect of discounting.
C)it does not reflect the effect of the Rule of 72.
D)it does not reflect the effect of compounding.

Accepted Answer

The reason for doubling the money in 5 years is the effect of compounding. This means that the return on the investment is reinvested, and the interest is earned on both the original amount and the previously earned interest, leading to exponential growth. It is not due to a "fad" investment or the effect of discounting or the Rule of 72. Therefore, option D is the correct answer.

Question 18

You are considering an investment that is expected to pay 5 percent in year 1, 7 percent in years 2 and 3 and 9 percent in year 4. If you invest $2,000 today, what will this investment be worth at the end of the fourth year?
A)$2,501.42
B)$2,693.71
C)$2,713.04
D)$2,620.68

Accepted Answer

The answer of You are considering an investment that is...

Question 19

How long will it take for the purchasing power of $1 to be cut in half if inflation is 4 percent?
A)4.97 years
B)7.42 years
C)10.72 years
D)17.67 years

Accepted Answer

The answer of How long will it take for the...

Question 20

Which of the following will not increase a present value?
A)Increase the interest rate
B)Decrease the number of periods
C)Increase the future value
D)None of these answers is correct

Accepted Answer

Increasing the interest rate will decrease the present value, as the present value is inversely related to the interest rate.

Quiz 4: Time Value of Money 1: Analyzing Single Cash Flows

When your investment compounds, your money will grow in a(n) __________ fashion.

You invested $1,000 for 5 years in an account that earns 5 percent. However, today you learn that you are able to move the account into an investment that earns 10 percent. Which of the following statements is correct?

You have $100,000 in your account. Assuming no additional deposits are made and your account earns 15 percent per year, how long will it take for the account to have a balance of $500,000?

You are considering an investment that is expected to pay 3 percent in year 1, 5 percent in years 2 and 3 and 7 percent in year 4. If you invest $1,000 today, what will this investment be worth at the end of the fourth year?

You have $50,000 in your account. Assuming no additional deposits are made and your account earns 8 percent per year, how long will it take for the account to have a balance of $500,000?

Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?

Assume that you borrow $2,000 from your sister and that you will pay her back in one lump sum. She charges you 9 percent interest in year 1 and increases the rate by 1 percent per year until the loan is paid off. How much will you owe if you wait until year 3 to pay off the loan?

You borrow $3,500 and will pay back the entire amount in 5 years. You are charged 9 percent interest per year. How much interest do you pay on this loan?

Which of the following statements is incorrect with respect to time lines?

Five years ago, sales were $4 million. Today your company's sales are $10 million. What annual rate have sales been growing?

We call the process of earning interest on both the original deposit and on the earlier interest payments:

Which of the following statements is correct?

Assume you borrow $500 from a payday lender. The terms are that you must pay a fee of $75 in advance (today) and one year from now you need to repay $750. What implied interest rate are you paying?

Suppose a U.S. Treasury bond promises to pay $9,780.13 in three years. If bonds of this type are generating a 4 percent annual return, how much would you pay for this bond today?

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?

You double your money in 5 years. The reason your return is not 20 percent per year is because:

You are considering an investment that is expected to pay 5 percent in year 1, 7 percent in years 2 and 3 and 9 percent in year 4. If you invest $2,000 today, what will this investment be worth at the end of the fourth year?

How long will it take for the purchasing power of $1 to be cut in half if inflation is 4 percent?

Which of the following will not increase a present value?