Question 1

If you wish to double your money in 6 years,you must earn an interest rate of about
A)8%.
B)24%.
C)12%.
D)36%.

Accepted Answer

To double your money in 6 years, you need an annual interest rate of 12%. This can be calculated using the rule of 72, which states that the number of years it takes to double your money is approximately 72 divided by the annual interest rate. In this case, 72 divided by 6 equals 12, and so an annual interest rate of 12% would be required to achieve this goal. Therefore, the best choice is C) 12%.

Question 2

An annuity is
A)a sum received in the future.
B)a sum earned in the future but received now.
C)a series of unequal payments.
D)a series of equal payments.

Accepted Answer

An annuity is a series of equal payments made at fixed intervals, such as monthly or annually. Therefore, the best choice is option D. Option A is incorrect because it refers to a lump sum payment received in the future, not a series of payments. Option B is also incorrect because it refers to a sum earned in the future but received now, which is not characteristic of an annuity. Option C is incorrect because an annuity consists of equal payments, not unequal payments.

Question 3

You expect a 3% rate of inflation to continue indefinitely into the future.A $10,000 vacation today will cost $________ twenty years from now.(Table or calculator required. )
A)10,300
B)14,988
C)18,061
D)42,944

Accepted Answer

Using the compound interest formula, we can calculate the future value of $10,000 after 20 years at a 3% inflation rate:

Future value = $10,000 * (1 + 0.03)^20
Future value = $10,000 * 1.8061
Future value = $18,061

Therefore, the cost of the vacation after 20 years would be $18,061, which is option C.

Question 4

You are deciding whether to start a 40-year retirement investing plan now,or ten years from now.You think rates of return will be about the same in the future as they are now.Discussion in the text of this decision shows
A)very little difference in the future value of an investment made now versus one made 10 years from now.
B)an investment made now will accumulate about 20% more (at a 10% rate of interest,compounded annually)than the investment made later.
C)the same facts as in response b,but the accumulation is only 10% greater.
D)that you will accumulate more in the additional 10 years than you do for the first 30 years.

Accepted Answer

Starting an investment plan earlier takes advantage of the power of compound interest, meaning the interest you earn generates its own interest over time. Over a long period, such as 40 years, the initial years of investment are crucial because the compound interest has more time to work, leading to significantly higher accumulation by the end. Therefore, the additional 10 years at the beginning of the investment period can result in the investment growing more than it does in the first 30 years, due to the exponential nature of compound growth.

Question 5

The future value of a $500 annuity due received for three years is $________,assuming an investment rate of 10%.
A)1,655.00
B)665.50
C)1,820.50
D)335.65

Accepted Answer

To find the future value of an annuity due, we use the formula:

FV = Pmt x (1 + r) x ((1 + r)^n - 1)/r

where Pmt = Payment amount, r = interest rate, and n = number of periods.

Plugging in the given values, we get:

FV = 500 x (1 + 0.10) x ((1 + 0.10)^3 - 1)/0.10
FV = 500 x 1.10 x (1.331 - 1)/0.10
FV = 500 x 1.10 x 0.331/0.10
FV = 1,820.50

Therefore, the answer is C, $1,820.50.

Question 6

The future value of $12,000 invested today at 6% interest compounded annually for 4 years is
A)$23,259.
B)$15,150.
C)$12,190.
D)$9,505.

Accepted Answer

The future value of an investment is calculated using the formula FV = PV(1 + r)^n, where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years. Plugging in the given values: FV = $12,000(1 + 0.06)^4 = $15,150.

Question 7

Compounding refers to the
A)mistake of confusing present values with future values.
B)process of accumulating value over time.
C)task of finding a present value.
D)projection of future payments.

Accepted Answer

Compounding refers to the process of accumulating value over time, typically through the use of interest rates. It can apply to investments or debts and involves calculating the impact of interest over a period of time.

Question 8

The future value of $5,000 invested today at 3% interest compounded annually for 5 years is
A)$5,255.
B)$5,520.
C)$5,628.
D)$5,796.

Accepted Answer

The answer of The future value of $5,000 invested today...

Question 9

The future value of a $500 ordinary annuity received for three years is $________ ,assuming an investment rate of 10%:
A)1,655.00
B)665.50
C)1,820.50
D)335.65

Accepted Answer

The future value of an ordinary annuity can be calculated using the formula FV = P * [(1 + r)^n - 1] / r, where P is the payment amount, r is the interest rate per period, and n is the number of periods. Plugging in the values ($500, 10% or 0.10, and 3 years), we get FV = 500 * [(1 + 0.10)^3 - 1] / 0.10 = $1,655.00.

Question 10

The text discusses the topic of compounding over a large number of compounding periods.To illustrate,it shows that $1,000 invested at 8% for 40 years (annual compounding)grows to $21,724.But if you could earn 10% instead of 8%,you would earn ________ more at the end of 40 years.
A)$4,431
B)25 percent
C)$23,535
D)$1,250

Accepted Answer

Using the formula for compounding interest, we can calculate that $1,000 invested at 10% annual interest for 40 years will grow to $45,259. This is $23,535 more than the $21,724 that would have been earned at 8% annual interest. Therefore, the correct answer is option C.

Question 11

With an interest rate of 9%,$5,000 will grow to $10,000 in approximately
A)8 years.
B)4 years.
C)12 years.
D)24 years.

Accepted Answer

Using the rule of 72, which is a simple way to estimate the number of years required to double the investment at a fixed annual rate of interest, you divide 72 by the interest rate. So, 72 divided by 9 equals 8 years.

Question 12

Given recent market experience a dollar today is worth
A)more than a dollar five years from now.
B)less than a dollar five years from now.
C)about the same as a dollar five years from now.
D)more or less than a dollar five years from now.

Accepted Answer

A dollar today is worth more than a dollar in the future due to the time value of money, which accounts for the potential earning capacity of money over time through interest or investment returns.

Question 13

You have just put $5,000 into an investment that offers a 10% annual yield,with interest compounded annually.Your total interest earned after two years will be
A)$550.
B)$1,000.
C)$1,050.
D)$1,100.

Accepted Answer

After one year, the investment will have earned 10% of $5,000, or $500. This brings the balance up to $5,500. After another year, the investment will have earned 10% of $5,500, or $550. Therefore, the total interest earned after two years will be $500 + $550 = $1,050.

Question 14

You have just put $1,000 in an investment that offers a 12% annual yield,using a simple interest calculation.At the end of two years your interest earned will be
A)$120.00.
B)$144.00.
C)$240.00.
D)$254.40.

Accepted Answer

Simple interest only calculates interest based on the initial amount invested, without taking into account any interest earned in previous periods. Therefore, the interest earned after two years can be calculated as follows: 
Interest = Principal x rate x time 
Interest = $1,000 x 0.12 x 2 
Interest = $240.00 
Therefore, the correct answer is choice C.

Question 15

At 12% interest (compounded annually),$20,000 invested today will grow to $________ in three years.
A)27,200
B)28,099
C)31,471
D)40,000

Accepted Answer

To solve the problem, we can use the formula:

A = P(1 + r/n)^nt

where:
A = the future value of the investment
P = the present value of the investment
r = the annual interest rate (as a decimal)
n = the number of times the interest is compounded per year
t = the number of years

Plugging in the given values, we get:

A = 20,000(1 + 0.12/1)^(1*3)
A = 20,000(1.12)^3
A = 20,000(1.404928)
A = 28,098.56

Therefore, the answer is B, $28,099.

Question 16

You have just put $500 in an investment that offers an 8% annual yield,with interest compounded annually.Your total interest earned after two years will be
A)$83.20.
B)$80.00.
C)$44.60.
D)$40.00.

Accepted Answer

The total amount after two years can be calculated using the formula for compound interest: A = P(1 + r)^n, where A is the amount after n years, P is the principal amount, r is the annual interest rate, and n is the number of years. Here, P = $500, r = 8% or 0.08, and n = 2. So, A = 500(1 + 0.08)^2 = 500(1.08)^2 = 500 * 1.1664 = $583.20. The total interest earned is the final amount minus the principal, which is $583.20 - $500 = $83.20.

Question 17

At an interest rate of 10% it will take approximately how many years to double your investment?
A)Less than five years
B)Between 7 and 8 years
C)Between 9 and 10 years
D)More than 10 years

Accepted Answer

To calculate the number of years it takes to double an investment using the rule of 72. Divide 72 by the annual interest rate. In this case, 72/10=7.2. Therefore, it will take approximately 7 to 8 years (option B) to double the investment.

Question 18

In relation to an ordinary annuity paid in any given year,an annuity due is
A)a larger amount.
B)a smaller amount.
C)an equal amount.
D)an unrelated amount.

Accepted Answer

An annuity due is a type of annuity where the payments are made at the beginning of each period instead of at the end, which means that in any given year the payment is made earlier and therefore is a larger amount than in an ordinary annuity where the payment is made at the end of each period.

Question 19

You have just put $5,000 into an investment that offers a 10% annual yield,using a simple interest calculation.At the end of two years your interest earned will be
A)$500.
B)$550.
C)$1,000.
D)$1,100.

Accepted Answer

Simple interest is calculated as principal times rate times time. Here, it's $5,000 * 10% * 2 = $1,000.

Question 20

Assuming positive interest rates,a present value of $1,000
A)is always more desirable to a future value of $1,000.
B)is always less desirable than a future value of $1,000.
C)is no more or no less desirable than a future value of $1,000.
D)You can't answer without more information.

Accepted Answer

Assuming positive interest rates, the present value of $1,000 is more desirable than a future value of $1,000 because the present value can be invested, earning interest, and potentially growing to a higher future value.

Quiz 2: The Time Value of Money: All Dollars Are Not Created Equal

If you wish to double your money in 6 years,you must earn an interest rate of about

An annuity is

You expect a 3% rate of inflation to continue indefinitely into the future.A $10,000 vacation today will cost $________ twenty years from now.(Table or calculator required. )

You are deciding whether to start a 40-year retirement investing plan now,or ten years from now.You think rates of return will be about the same in the future as they are now.Discussion in the text of this decision shows

The future value of a $500 annuity due received for three years is $________,assuming an investment rate of 10%.

The future value of $12,000 invested today at 6% interest compounded annually for 4 years is

Compounding refers to the

The future value of $5,000 invested today at 3% interest compounded annually for 5 years is

The future value of a $500 ordinary annuity received for three years is $________ ,assuming an investment rate of 10%:

The text discusses the topic of compounding over a large number of compounding periods.To illustrate,it shows that $1,000 invested at 8% for 40 years (annual compounding) grows to $21,724.But if you could earn 10% instead of 8%,you would earn ________ more at the end of 40 years.

With an interest rate of 9%,$5,000 will grow to $10,000 in approximately

Given recent market experience a dollar today is worth

You have just put $5,000 into an investment that offers a 10% annual yield,with interest compounded annually.Your total interest earned after two years will be

You have just put $1,000 in an investment that offers a 12% annual yield,using a simple interest calculation.At the end of two years your interest earned will be

At 12% interest (compounded annually) ,$20,000 invested today will grow to $________ in three years.

You have just put $500 in an investment that offers an 8% annual yield,with interest compounded annually.Your total interest earned after two years will be

At an interest rate of 10% it will take approximately how many years to double your investment?

In relation to an ordinary annuity paid in any given year,an annuity due is

You have just put $5,000 into an investment that offers a 10% annual yield,using a simple interest calculation.At the end of two years your interest earned will be

Assuming positive interest rates,a present value of $1,000