Question 1

Level cash flow amounts that occur at the end of each period, beginning starting at the end of the first period, form are an annuity due.

Accepted Answer

An annuity due involves cash flows that occur at the beginning of each period, not at the end.

Question 2

You need to have $35,000 on hand to buy a new Lexus five years from today.To achieve that goal, you want to know how much you must invest today in a certificate of deposit guaranteed to return you 93% per year.To help determine what how much today investment is sum must betoday, you will use:

Accepted Answer

To determine how much to invest today to reach a specific future goal, we need to use present value factors. Future annuity value factors, present value factors of an annuity, and future value factors of an annuity are not relevant to this specific problem.

Question 3

At very high interest rates the "Rule of 72" will result in a small estimation error for the estimate of the time for an investment to double.

Accepted Answer

The "Rule of 72" is less accurate at very high interest rates, leading to larger estimation errors for the time it takes an investment to double.

Question 4

A loan amortization schedule shows the breakdown of each payment between interest and principal, as well as the remaining balance after each payment.

Accepted Answer

This is correct. A loan amortization schedule provides a detailed breakdown of each loan payment, including the amount of principal and interest being paid, and the remaining balance on the loan after each payment.

Question 5

$1000 deposited in a bank that earns 7% per year will become approximately $7,600 in 30 years.

Accepted Answer

This is a compound interest calculation where the initial deposit of $1000 grows over 30 years at an interest rate of 7%. The formula for compound interest is A=P(1+r/n)^nt where A is the ending amount, P is the principal (initial deposit), r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years. Assuming interest is compounded annually (n=1), the calculation is A=1000(1+0.07/1)^(1*30) which equals approximately $7,613. Therefore, the statement is true.

Question 6

If I earn 3% on my deposit of $500, it will take 9 years before I have $550.

Accepted Answer

If you earn 3% annually on your deposit of $500, after one year you will have $515. After two years, you will have $531.45. It would actually take around 8 years to reach $550, assuming no additional deposits or withdrawals are made.

Question 7

The effective annual rate (EAR) is the true opportunity cost measure of the interest rate.

Accepted Answer

The effective annual rate (EAR) takes into account the compounding of interest over time, and therefore provides a more accurate measure of the true cost or return on an investment or loan. It is considered the most accurate and comprehensive way to express an interest rate, as it incorporates the effects of compounding, while nominal interest rates (such as APR) do not. Therefore, A is correct.

Question 8

Discounting Compounding means that interest earned each year, plus the principal, will be reinvested at the stated rate.
Changed as original answer incorrect.Discounting is the same as compounding but in different time order.(PV compounds to FV; FV discounts to PV)

Accepted Answer

Discounting and compounding are opposite processes. Compounding involves earning interest on the initial principal and all accumulated interest, while discounting involves calculating the present value of a future amount by reducing it to its equivalent value in today's dollars.

Question 9

The values of stocks and bonds are not affected by time value of money concepts.

Accepted Answer

The values of stocks and bonds are affected by time value of money concepts as they represent future cash flows, and the present value of those cash flows is impacted by the time value of money.

Question 10

In actual practice, most corporate bonds pay interest four times a year.
Not in chapter

Accepted Answer

Most corporate bonds pay interest semi-annually, meaning twice a year, not four times a year.

Question 11

With compound interest, interest is earned only on the investment's principal.

Accepted Answer

With compound interest, interest is earned not only on the investment's principal, but also on the accumulated interest from previous periods.

Question 12

The return provided by a $100 annuity deposited for 10 years that results in a future value of $614.46 is -11.45%.
Foolish question as r < 0

Accepted Answer

A negative return (r < 0) means that the investment did not yield a positive return, which is the case in this scenario where the annuity deposited for 10 years resulted in a future value of only $614.46. Therefore, option A is correct.

Question 13

The return provided by $100 deposited for 10 years that results in a future value of $614.46 is -11.45%.

Accepted Answer

To calculate the annual return we can use the formula:
Future Value = Present Value x (1 + Annual Return)^Number of Years
Plugging in the values:
$614.46 = $100 x (1 + Annual Return)^10
Solving for Annual Return:
(1 + Annual Return)^10 = 6.1446
1 + Annual Return = (6.1446)^(1/10)
1 + Annual Return = 1.1095
Annual Return = 1.1095 - 1 = 0.1095 = 10.95%
Therefore, the return provided is a positive 10.95% and not a negative 11.45%. Hence, the statement is false and the answer is B.

Question 14

The annual percentage rate (APR) overstates the true or effective interest cost.

Accepted Answer

The APR is designed to represent the actual yearly cost of borrowing over the term of a loan, including any fees or additional costs associated with the transaction. However, it may not always capture the compounding effects within the year, which is why the effective annual rate (EAR) might provide a more accurate reflection of the true cost of borrowing.

Question 15

If the interest rate is 0% for 10 years, then the present value will be less than the future value.

Accepted Answer

If the interest rate is 0%, the present value and future value will be the same.

Question 16

The interest portion increases and the principal portion decreases over time under a typical loan amortization schedule.

Accepted Answer

Under a typical loan amortization schedule, the interest portion decreases over time while the principal portion increases.

Question 17

At very low interest rates, the "Rule of 72" does not approximate the compounding process well.

Accepted Answer

The "Rule of 72" is based on the concept of compounding, but at very low interest rates, the compounding process is not significant enough to be accurately approximated by this rule.

Question 18

A famous athlete is awarded a $9 million contract that stipulates equal payments to be made monthly over a period of five years.To determine what such alump sum has the same value as the contract is worth today, you would need to use:

Accepted Answer

To find the lump sum equivalent of a series of equal payments made over time, you use the present value factors of an annuity. This helps determine the current worth of the future payment stream.

Question 19

The return provided by $100 deposited for 10 years that results in a future value of $614.46 is 19.91%.

Accepted Answer

The return provided by $100 deposited for 10 years that results in a future value of $614.46 is approximately 11.76%, not 19.91%.

Question 20

The effective annual rate (EAR) is sometimes called the annual effective yield.

Accepted Answer

The effective annual rate (EAR) can also be referred to as the annual effective yield.

Quiz 9: Time Value of Money