Question 1

ABC Bank offers term deposits with 7.8 percent compounded quarterly,while XYZ Bank offers term deposits with 8 percent compounded annually.We know that ABC Bank offers a higher effective rate of return.

Accepted Answer

Since ABC Bank offers quarterly compounding, the effective rate of return will be higher than XYZ Bank which offers only annual compounding.

Question 2

What is the highest effective rate attainable with a 12 percent nominal rate?

Accepted Answer

The answer of What is the highest effective rate attainable...

Question 3

Financial institutions quote rates with different compounding periods.What is the term for the actual interest rate paid or earned?

Accepted Answer

The effective interest rate is the actual interest rate paid or earned after all compounding periods have been taken into account. The nominal interest rate is the rate quoted by the financial institution, but it does not take into account the compounding periods. Real interest rate takes into account inflation and absolute interest rate is not a commonly used term.

Question 4

Mary wants to have $150 after six years by depositing $100 today and earning six percent interest compounded annually for the next six years.Can Mary attain her financial goal of having $150 lump sum six years later?

Accepted Answer

The future value of $100 compounded annually at 6% for six years is calculated as $100 * (1 + 0.06)^6, which is approximately $141.85. This is less than $150, so Mary will not reach her goal.

Question 5

Discount refers to the process of earning interest on interest.

Accepted Answer

Discount refers to the deduction of a certain percentage from the face value of a bill or a financial instrument, not the earning of interest on interest.

Question 6

What is the term for the interest rate financial institutions quote?

Accepted Answer

The term for the interest rate financial institutions quote is called the nominal rate. It is the rate that is stated upfront without taking into consideration other factors that may affect the real or effective rate.

Answer: A and C
 Both A and C are correct because the nominal rate is also known as the annual rate, which is the rate quoted for a whole year. The nominal rate does not take into consideration compounding, which makes the effective rate higher than the nominal rate.

Question 7

You make regular monthly rental payments at the beginning of each month.This is an example of an annuity due.

Accepted Answer

An annuity due is a type of payment where payments are made at the beginning of each period, rather than at the end. In this case, the rental payments are made at the beginning of each month, making it an example of an annuity due.

Question 8

Future value interest factor (FVIF)uses $1.00 to calculate the $1.00 over time with a given interest rate and the number of periods the $1.00 is compounded.

Accepted Answer

This statement accurately describes the use of the future value interest factor (FVIF).

Question 9

The present value interest factor is

Accepted Answer

The present value interest factor (PVIF) is a factor used to calculate the present value of a future sum of money. It is always less than 1.0 because it represents the discounting of a future value to its present value by applying a certain interest rate. If it were more than 1.0, it would mean that the future value is worth more than the present value, which is not possible.

Question 10

What is the future value of $200 deposited today at eight percent interest compounded annually for three years?

Accepted Answer

The future value of an investment is calculated using the formula FV = PV(1 + r)^n, where PV is the present value, r is the annual interest rate, and n is the number of years. Plugging in the given values, we get FV = $200(1 + 0.08)^3 = $200(1.259712) ≈ $252.

Question 11

Fred is 29 and just sold an antique for $29311 that he purchased at age nine for $17800 .Fred's annual rate of return on this antique is 7.2 percent.

Accepted Answer

The annual rate of return can be calculated using the formula for compound interest: $A = P(1 + r)^n$, where $A$ is the future value of the investment/loan, including interest, $P$ is the principal investment amount (the initial deposit or loan amount), $r$ is the annual interest rate (decimal), and $n$ is the number of years the money is invested or borrowed for. Given Fred's initial purchase price ($17,800) and the selling price ($29,311), and the time period of 20 years (from age 9 to 29), we can solve for $r$ to find the actual annual rate of return, which does not necessarily equal 7.2% without doing the specific calculation.

Question 12

ABC Bank offers term deposits with 8 percent compounded annually,while XYZ Bank offers term deposits with 7.8 percent compounded monthly.ABC Bank offers a higher effective yield.

Accepted Answer

When interest is compounded more frequently (e.g., monthly) at a slightly lower rate, it can lead to a higher effective yield than a higher rate compounded annually due to the effects of compounding interest more often.

Question 13

If you borrow money,you will receive interest.

Accepted Answer

When you borrow money, you pay interest to the lender for the privilege of using their money.

Question 14

The higher the interest rate,the higher the present value,other things being equal.

Accepted Answer

Higher interest rates result in lower present values because the amount of money today is worth more than the same amount in the future when discounted at a higher rate.

Question 15

You make regular monthly life insurance payments at the end of each month.This is an example of an annuity due.

Accepted Answer

An annuity due requires payments at the beginning of each period, while a regular monthly life insurance payment is made at the end of each month, making it an ordinary annuity.

Question 16

John wants to have a $10 000 down payment for his car in three years.If he puts away $7000 today and gets a 12.7% annual return,he will have the money he needs.

Accepted Answer

Using the formula for compound interest, we can calculate the future value of John's initial investment of $7000 after three years:

FV = PV x (1 + r)^n
FV = 7000 x (1 + 0.127)^3
FV = 7000 x 1.455
FV = 10,185

The future value of his investment is $10,185, which is more than the $10,000 down payment he needs for his car. Therefore, John will have the money he needs in three years if he puts away $7000 today and earns a 12.7% annual return.

Question 17

To calculate the present value,all you need is the amount of money in the future,the interest rate,and the number of years the money will be compounded.

Accepted Answer

To calculate the present value, you also need to know the frequency of compounding per year, as it significantly affects the calculation.

Question 18

You will receive $100 at the end of year one,$200 at the end of year two,and $300 at the end of year three.What is the present value of these cash flows today if the discount rate is 13 percent annually?

Accepted Answer

The present value (PV) of these cash flows can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods. For each cash flow: - Year 1: PV = $100 / (1 + 0.13)^1 = $88.50 - Year 2: PV = $200 / (1 + 0.13)^2 = $156.95 - Year 3: PV = $300 / (1 + 0.13)^3 = $207.58 Adding these together gives a total present value of $88.50 + $156.95 + $207.58 = $453.03, which rounds to $453.

Question 19

Mary deposits $4000 at the beginning of each year and the money will grow to $1081170 in 30 years with 12 percent compounded annually.

Accepted Answer

Using the formula for compound interest:
A = P(1+r/n)^(n*t)
where A is the total amount, P is the principal, r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the number of years.
Plugging in the given values:
A = 4000(1+0.12/1)^(1*30)
A = 4000(1.12)^30
A = $1079800.05
The value is slightly less than $1081170, possibly due to rounding. Therefore, option A is true.

Question 20

Approximately how much would you need to invest today,to receive $200 in ten years,if you received an annual interest rate of ten percent?

Accepted Answer

This problem can be solved using the formula for future value of a single sum: FV = PV x (1 + r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of periods. In this case, we know FV = $200, r = 0.10, and n = 10. Plugging these values into the formula and solving for PV, we get PV = $77. Therefore, you would need to invest $77 today to receive $200 in ten years at an annual interest rate of ten percent. Choice B is the best answer.

Quiz 1: Tools for Financial Planning - Applying Time Value Concepts