Question 1

Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside beginning a year from now?
A)$879
B)$627
C)$924
D)$1,243

Accepted Answer

The answer of Dr. J. wants to buy a Dell...

Question 2

A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement, you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given the following information, how much will your annual benefits be? Present value of $1 PV_IF = .178 Future value of $1 FV_IF = 5.604 Present value of annuity PV_IFA = 9.129 Future value of annuity FV_IFA = 51.16 A)$1,435 B)$13,070 C)$8,043 D)$13,102

Accepted Answer

The formula for calculating the annual benefits of a fixed-term annuity is: Annual benefits = (PV of annuity * interest rate) / PV of $1 PV of annuity = $73,425 / PV_IFA = $8,043.16 (rounded to the nearest cent) Interest rate = 9% PV of $1 = 1 / (1 + interest rate)^number of years = 1 / (1 + 0.09)^20 = 0.2065 (rounded to four decimal places) Annual benefits = ($8,043.16 * 0.09) / 0.2065 = $3,505.90 (rounded to the nearest cent) Therefore, the annual benefits will be $8,043.

Question 3

Increasing the number of periods will increase all of the following except
A)the present value of an annuity.
B)the present value of $1.
C)the future value of $1.
D)the future value of an annuity.

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 4

A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be? Present value of $1 PV_IF = .215 Future value of $1 FV_IF = 4.661 Present value of annuity PV_IFA = 9.818 Future value of annuity FV_IFA = 45.762 A)$1,584 B)$7,384 C)$15,555 D)$15,588

Accepted Answer

The answer of A home buyer signed a 20-year, 8%...

Question 5

The future value of a $500 investment today at 10% annual interest compounded semiannually for five years is ______.
A)$805
B)$814
C)$750
D)$923

Accepted Answer

Using the formula for compound interest, we have:

Future Value = P*(1 + r/n)^(n*t)
where P is the principal (initial investment), r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the time period in years.

Plugging in the given values, we get:

Future Value = 500*(1 + 0.1/2)^(2*5)
Future Value = $814.45

Therefore, the closest answer choice is B, $814.

Question 6

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment?
A)$143,555
B)$134,560
C)$141,200
D)None of these options

Accepted Answer

The correct answer is A because the principal outstanding after the first loan payment is $143,555. This is because the first loan payment is $11,250, which is calculated as follows: $150,000 x 6% = $9,000 (interest) + $150,000 / 15 = $10,000 (principal) = $11,250 (total payment). The principal outstanding after the first loan payment is $150,000 - $11,250 = $143,555.

Question 7

The shorter the length of time between a present value and its corresponding future value,
A)the lower the present value, relative to the future value.
B)the higher the present value, relative to the future value.
C)the higher the interest rate used in the discounting to the present value.
D)None of these options

Accepted Answer

The shorter the time period, the less time there is for interest to accrue, resulting in a higher present value relative to the future value.

Question 8

You will deposit $2,000 today. It will grow for six years at 10% interest compounded semi-annually. You will then withdraw the funds annually over the next four years at the end of each year. The annual interest rate is 8%. Your annual withdrawal will be approximately ______.
A)$2,340
B)$4,332
C)$797
D)$1,085

Accepted Answer

First, calculate the future value of the deposit after 6 years with semi-annual compounding: FV = $2,000 * (1 + 0.10/2)^(6*2) = $3,596.57. Then, use this amount as the present value for a 4-year annuity with an 8% annual interest rate to find the annual withdrawal: PMT = $3,596.57 / [(1 - (1 + 0.08)^-4) / 0.08] = $1,085.

Question 9

Mr. Fish wants to build a house in eight years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?
A)Between 17% and 18%
B)Between 15% and 16%
C)12%
D)None of these options

Accepted Answer

The correct answer is A because the rate of return must be between 17% and 18% in order to have the amount needed.

Question 10

Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now and then continue for five more years. To find the present value of this contract, which table or tables should you use?
A)The future value of $1
B)The future value of an annuity of $1 and the future value of $1
C)The present value of an annuity of $1 and the present value of $1
D)None of these options

Accepted Answer

To find the present value of a contract involving payments that start in the future and continue for a certain period, we need to use the present value of an annuity of $1 (to calculate the value of the payments) and the present value of $1 (to account for the time value of money). Therefore, option C is the best choice. The other options involve future values or do not include all the necessary components for this situation.

Question 11

Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?
A)Present value of an annuity
B)Present value of a single amount
C)Future value of an annuity
D)None of these options

Accepted Answer

The present value of an annuity table would be the best choice to calculate the value of this contract in today's dollars as it involves a periodic payment (annual) for a specified number of years (10). The present value of an annuity table helps to determine the current value of a series of equal payments made in the future by discounting them back to the present at a specified interest rate.

Question 12

The higher the interest rate used in determining the future value of a $1 annuity,
A)the smaller the future value at the end of the period.
B)the greater the future value at the end of a period.
C)the greater the present value at the beginning of a period.
D)None of these options.The interest has no effect on the future value of an annuity.

Accepted Answer

The higher the interest rate, the more interest earned on each payment in the annuity, leading to a larger future value at the end of the period.

Question 13

After 10 years, 100 shares of stock originally purchased for $500 were sold for $900. What was the yield on the investment? Choose the closest answer.
A)19%
B)2.5%
C)8.5%
D)6%

Accepted Answer

The answer of After 10 years, 100 shares of stock...

Question 14

Carol Thomas will pay out $6,000 at the end of 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%, what is the net value of the payments versus receipts in today's dollars?
A)$7,326
B)$10,242
C)$16,372
D)$4,112

Accepted Answer

The net present value (NPV) is calculated by discounting each cash flow to its present value and summing them up. The NPV is $4,112.

Question 15

Joe Nautilus has $210,000 and wants to retire. What approximate return must his money earn so he may receive annual benefits of $30,000 for the next 10 years?
A)12%
B)Between 12% and 13%
C)About 7%
D)Greater than 15%

Accepted Answer

The answer of Joe Nautilus has $210,000 and wants to...

Question 16

Mr. Darden is selling his house for $200,000. He bought it for $164,000 10 years ago. What is the annual return on his investment?
A)2%
B)Between 3% and 5%
C)10%
D)None of these options

Accepted Answer

The answer of Mr. Darden is selling his house for...

Question 17

A dollar today is worth more than a dollar to be received in the future because
A)a stated rate of return is guaranteed on all investment opportunities.
B)the dollar can be invested today and earn interest.
C)inflation will increase the purchasing power of a future dollar.
D)None of these options

Accepted Answer

A dollar received today can be invested immediately and earn interest, whereas a dollar received in the future cannot be invested until then. This means that the present value of a future dollar is less than a dollar received today.

Question 18

Mike Carlson will receive $12,000 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 ______. A)$61,450 B)$42,185 C)$55,379 D)$60,909

Accepted Answer

The answer of Mike Carlson will receive $12,000 a year...

Question 19

Dr. Stein has just invested $10,000 for his son (age 7). The money will be used for his son's education 15 years from now. He calculates that he will need $100,000 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal?
A)Between 9% and 10%
B)Between 16% and 17%
C)Between 10% and 11%
D)Between 15% and 16%

Accepted Answer

We can use the formula for future value of a single sum to solve the problem:

FV = PV x (1+r)^n

where: 
FV = future value 
PV = present value (or the amount invested now) 
r = rate of return 
n = number of periods (in this case, 15 years)

We are given PV, FV, and n, so we can solve for r:

$100,000 = $10,000 x (1+r)^15

Divide both sides by $10,000:

10 = (1+r)^15

Take the 15th root of both sides:

1.1618 = 1+r

Subtract 1 from both sides:

r = 0.1618 or 16.18%

Therefore, Dr. Stein will need to achieve a rate of return of approximately 16% to reach his goal of $100,000 in 15 years. The closest choice is B.

Question 20

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?
A)$3,633
B)$9,250
C)$13,113
D)$15,445

Accepted Answer

The answer of John Doeber borrowed $150,000 to buy a...

Quiz 9: The Time Value of Money

Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside beginning a year from now?

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

A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be? Present value of $1 PV_IF = .215 Future value of $1 FV_IF = 4.661 Present value of annuity PV_IFA = 9.818 Future value of annuity FV_IFA = 45.762

The future value of a $500 investment today at 10% annual interest compounded semiannually for five years is ______.

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment?

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

You will deposit $2,000 today. It will grow for six years at 10% interest compounded semi-annually. You will then withdraw the funds annually over the next four years at the end of each year. The annual interest rate is 8%. Your annual withdrawal will be approximately ______.

Mr. Fish wants to build a house in eight years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now and then continue for five more years. To find the present value of this contract, which table or tables should you use?

Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?

The higher the interest rate used in determining the future value of a $1 annuity,

After 10 years, 100 shares of stock originally purchased for $500 were sold for $900. What was the yield on the investment? Choose the closest answer.

Carol Thomas will pay out $6,000 at the end of 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%, what is the net value of the payments versus receipts in today's dollars?

Joe Nautilus has $210,000 and wants to retire. What approximate return must his money earn so he may receive annual benefits of $30,000 for the next 10 years?

Mr. Darden is selling his house for $200,000. He bought it for $164,000 10 years ago. What is the annual return on his investment?

A dollar today is worth more than a dollar to be received in the future because

Mike Carlson will receive $12,000 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 ______.

Dr. Stein has just invested $10,000 for his son (age 7) . The money will be used for his son's education 15 years from now. He calculates that he will need $100,000 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal?

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?