Question 1

What is the present value of a $150,000 cash flow to be received at the end of each of the next 20 years from an account that earns an annual rate of 9%?
A)$3,000,000
B)$7,674,018
C)$1,369,282
D)$2,324,169

Accepted Answer

To calculate the present value of the cash flows, we need to use the formula PV = CF/(1+r)^n, where PV is the present value, CF is the cash flow, r is the annual interest rate, and n is the number of periods. Plugging in the values, we get:

PV = $150,000/(1+0.09)^1 + $150,000/(1+0.09)^2 + ... + $150,000/(1+0.09)^20
PV = $1,369,282. Therefore, the present value of the cash flows is $1,369,282. Therefore, the best choice is C.

Question 2

An annuity is a series of unequal dollar payments coming at the end of each time period for a specified number of time periods.

Accepted Answer

An annuity is a series of equal dollar payments coming at the end of each time period for a specified number of time periods.

Question 3

What is the present value of an IOU for $1,000 due to be paid in two years,if the discount rate is 8%?
A)$857.34
B)$766.40
C)$885.00
D)$683.26
E)$810.77

Accepted Answer

We can use the formula for present value of a future sum:

PV = FV / (1+r)^n

where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.

Substituting the given values:

PV = 1,000 / (1+0.08)^2
PV = 1,000 / 1.1664
PV = $857.34

Therefore, the best choice is A) $857.34.

Question 4

Someone has offered you the opportunity to purchase an IOU.The IOU will pay back a total of $500 in three years.How much would you be willing to pay for that IOU today if you want to earn an annual rate of return of 16%?
A)$320.33
B)$422.63
C)$292.63
D)$380.45

Accepted Answer

To find out how much you would be willing to pay for the IOU today, you can use the present value formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($500), r is the annual rate of return (16% or 0.16), and n is the number of years (3). Plugging in the numbers: PV = $500 / (1 + 0.16)^3 = $320.33.

Question 5

In an amortized loan the earlier payments have a larger portion of the payment going to pay interest and a smaller portion of the payment to pay down the principle.

Accepted Answer

This is true for most amortized loans, as the interest is calculated based on the outstanding balance of the loan. Therefore, when the outstanding balance is high, a larger portion of the payment will go towards interest. As the outstanding balance decreases, a larger portion of the payment will go towards paying down the principal.

Question 6

A series of equal dollar payments at the end of each period for "x" number of time periods is
A)an annuity.
B)a complex annuity.
C)an annuity due.
D)a deferred annuity.
E)an equal installment annuity.

Accepted Answer

An annuity is a series of equal dollar payments made at the end of each period for a set number of time periods.

Question 7

What is the present value of $500 received at the end of each of the next five years worth to you today at the appropriate discount rate of 6 percent?
A)$1,105
B)$1,850
C)$2,106
D)$2,778

Accepted Answer

To find the present value, we use the formula PV = FV/(1+i)^n, where PV is the present value, FV is the future value, i is the interest rate, and n is the number of periods. Plugging in the values, we get PV = 500/(1+0.06)^1 + 500/(1+0.06)^2 + 500/(1+0.06)^3 + 500/(1+0.06)^4 + 500/(1+0.06)^5 = $2,106.

Question 8

With a mortgage loan of $150,000 at an annual percentage rate of 6% for 30 years,you will pay over $150,000 in interest before your loan ends.

Accepted Answer

The total interest paid over the 30-year loan period with a 6% annual percentage rate will be more than $150,000.

Question 9

What is the maximum that you would be willing to loan your brother for a $100 IOU if he promises to pay you back at the end of the year? You want to earn an annual rate of return of 12%.
A)$82.00
B)$89.29
C)$92.73
D)$88.00

Accepted Answer

To achieve a 12% annual rate of return on a $100 IOU, you would use the formula for calculating the present value: Present Value = Future Value / (1 + rate of return)^n, where n is the number of years. Plugging in the numbers: $100 / (1 + 0.12)^1 = $89.29.

Question 10

Sam's uncle promised to give him $7,000 when he graduates from college three years from now.Assuming an interest rate of 8 percent compounded annually,what is the value of Sam's gift right now?
A)$5,504.22
B)$5,510.78
C)$5,556.83
D)$5,555.55

Accepted Answer

The answer of Sam's uncle promised to give him $7,000...

Question 11

A compound annuity uses the principles of
A)reinvesting and present value.
B)compound interest and future value.
C)reinvesting and compound interest.
D)compound interest and present value.
E)amortization and reinvesting.

Accepted Answer

A compound annuity involves investing a fixed amount of money at regular intervals, and allowing the interest earned on those investments to compound over time. This means that both reinvesting (investing the returns earned on the initial investment) and compound interest (earning interest on both the initial investment and the returns) are key principles involved in a compound annuity. Choice C correctly identifies both of these principles.

Question 12

Sam can afford to pay $450 a month for a new car.The bank will give her a 60 month,6% annual rate loan with no down payment.Approximately how much can she afford to borrow?
A)$23,276
B)$7,272
C)$17,015
D)$32,090

Accepted Answer

The amount Sam can afford to borrow can be calculated using the formula for the present value of an annuity: $P = \frac{PMT}{r} \left(1 - \left(1 + r\right)^{-n}\right)$, where PMT is the monthly payment, r is the monthly interest rate, and n is the total number of payments. With PMT = $450, r = 0.06/12 = 0.005, and n = 60, the calculation gives approximately $23,276.

Question 13

Rasheed can afford a monthly car payment of $550 for 72 months at an annual interest rate of 7.5 percent.Which of the following is closest to the amount he will be able to borrow for a new car?
A)$3,984
B)$6,550
C)$31,810
D)$49,818

Accepted Answer

The amount Rasheed can borrow can be calculated using the formula for the present value of an annuity because the car payment is an annuity (a series of equal payments at regular intervals). The formula is PV = P * [(1 - (1 + r)^-n) / r], where PV is the present value (amount he can borrow), P is the payment amount ($550), r is the monthly interest rate (7.5% annual rate divided by 12 months = 0.625% or 0.00625 as a decimal), and n is the total number of payments (72). Plugging in the values: PV = 550 * [(1 - (1 + 0.00625)^-72) / 0.00625], which gives a value close to $31,810. This calculation assumes the interest rate is compounded monthly, which is a common assumption for such calculations.

Question 14

What is the present value of a $100,000 cash flow to be received at the end of each of the next 15 years from an account that earns an annual rate of 10%?
A)$1,500,000
B)$760,608
C)$523,450
D)$976,455

Accepted Answer

The present value of a series of cash flows can be calculated using the formula:
PV = CF × [1 - (1 + r)-n] / r 
where CF is the cash flow amount, r is the annual discount rate, and n is the number of periods.

Applying this formula to the given problem, we get:
PV = $100,000 × [1 - (1 + 0.10)-15] / 0.10
= $100,000 × (7.60608)
= $760,608

Therefore, the present value of the cash flow is $760,608, so the best choice is B.

Question 15

A compound annuity involves depositing or investing an equal sum of money at the end of each time period for a certain number of time periods and allowing it to grow.

Accepted Answer

A compound annuity involves regular deposits or investments at the end of each time period, which allows for the growth of the total amount over time through the application of compound interest.

Question 16

A perpetuity is an annuity that continues forever.

Accepted Answer

A perpetuity is a type of annuity where the payments continue indefinitely, without an end date.

Question 17

At the end of each year for ten years you deposit $750 in an account that earns an annual rate of return of 12%.What is the present value of these deposits?
A)$4,329.39
B)$5,241.48
C)$3,161.55
D)$4,237.67
E)$4,482.63

Accepted Answer

The answer of At the end of each year for...

Question 18

With a 30-year mortgage loan of $100,000 at an annual interest rate of 7 percent,you will pay less $135,000 in interest before your loan ends.

Accepted Answer

With a 30-year mortgage loan of $100,000 at an annual interest rate of 7 percent, using the formula for calculating the total interest paid over the life of the loan, you will pay more than $135,000 in interest. Specifically, the monthly payment would be approximately $665.30, leading to a total payment of $239,508 over 30 years, of which $139,508 would be interest.

Question 19

What is the price you would be willing to pay today for an IOU for $500 due in one year if you want to earn at least 16%?
A)$480.00
B)$431.03
C)$450.00
D)$395.33
E)$418.23

Accepted Answer

To calculate the price we need to use the following formula:
Price = Face Value / (1 + interest rate)^time
Price = $500 / (1 + 0.16)^1
Price = $500 / 1.16
Price = $431.03
Therefore, the best choice is option B as it meets the requirement of earning at least 16%.

Question 20

What is the present value today of $150 that will be received in four years from now if the discount rate is 12%?
A)$76.03
B)$95.33
C)$116.90
D)$105.60
E)$83.39

Accepted Answer

The answer of What is the present value today of...

Quiz 3: Understanding and Appreciating the Time Value of Money

What is the present value of a $150,000 cash flow to be received at the end of each of the next 20 years from an account that earns an annual rate of 9%?

An annuity is a series of unequal dollar payments coming at the end of each time period for a specified number of time periods.

What is the present value of an IOU for $1,000 due to be paid in two years,if the discount rate is 8%?

Someone has offered you the opportunity to purchase an IOU.The IOU will pay back a total of $500 in three years.How much would you be willing to pay for that IOU today if you want to earn an annual rate of return of 16%?

In an amortized loan the earlier payments have a larger portion of the payment going to pay interest and a smaller portion of the payment to pay down the principle.

A series of equal dollar payments at the end of each period for "x" number of time periods is

What is the present value of $500 received at the end of each of the next five years worth to you today at the appropriate discount rate of 6 percent?

With a mortgage loan of $150,000 at an annual percentage rate of 6% for 30 years,you will pay over $150,000 in interest before your loan ends.

What is the maximum that you would be willing to loan your brother for a $100 IOU if he promises to pay you back at the end of the year? You want to earn an annual rate of return of 12%.

Sam's uncle promised to give him $7,000 when he graduates from college three years from now.Assuming an interest rate of 8 percent compounded annually,what is the value of Sam's gift right now?

A compound annuity uses the principles of

Sam can afford to pay $450 a month for a new car.The bank will give her a 60 month,6% annual rate loan with no down payment.Approximately how much can she afford to borrow?

Rasheed can afford a monthly car payment of $550 for 72 months at an annual interest rate of 7.5 percent.Which of the following is closest to the amount he will be able to borrow for a new car?

What is the present value of a $100,000 cash flow to be received at the end of each of the next 15 years from an account that earns an annual rate of 10%?

A compound annuity involves depositing or investing an equal sum of money at the end of each time period for a certain number of time periods and allowing it to grow.

A perpetuity is an annuity that continues forever.

At the end of each year for ten years you deposit $750 in an account that earns an annual rate of return of 12%.What is the present value of these deposits?

With a 30-year mortgage loan of $100,000 at an annual interest rate of 7 percent,you will pay less $135,000 in interest before your loan ends.

What is the price you would be willing to pay today for an IOU for $500 due in one year if you want to earn at least 16%?

What is the present value today of $150 that will be received in four years from now if the discount rate is 12%?