Question 1

When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?

Accepted Answer

To find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly, we need to use the formula FV = PV x (1 + i)^n, where PV is the present value, i is the interest rate per compounding period, n is the total number of compounding periods, and FV is the future value.

In this case, PV = -$200, i = 2%/4 = 0.5% quarterly, and n = 4 x 4 = 16 quarters.

So, we need to solve for FV using the financial calculator by entering N = 16, I/Y = 0.5, PV = -200, PMT = 0, and then pressing the FV button. This gives us the future value of -$216.67, which means that the $200 deposited today would grow to -$216.67 after four years at a quarterly interest rate of 0.5%. Note that the negative sign indicates that the future value is a liability, not an asset.

Question 2

Earnings per share for XYZ, Inc.grew constantly from $7.99 in 1974 to $12.68 in 1980.What was the compound annual growth rate in earnings per share over the period?

Accepted Answer

The answer of Earnings per share for XYZ, Inc.grew constantly...

Question 3

The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest declines.

Accepted Answer

The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest increases.

Question 4

Assuming two investments have equal lives, a high discount rate tends to favour [blank].

Accepted Answer

A high discount rate means that more value is placed on cash flows that occur earlier in time. Therefore, the investment with large cash flow early will be favored over the investment with large cash flow late or even cash flow.

Question 5

If you invest $450 today and it increases to $6185 at the end of 20 years, what rate of return have you earned?

Accepted Answer

The answer of If you invest $450 today and it...

Question 6

If you plotted the future value of $1000 growing at any interest rate greater than 0 with dollars on the vertical axis and time on the horizontal axis, the resulting curve would [blank].

Accepted Answer

The future value of an investment growing at a positive interest rate compounds over time, meaning the amount of interest earned increases as the principal amount grows. This results in a curve that slopes upward at an increasing rate, reflecting the exponential growth of the investment.

Question 7

If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, during which we receive 4% interest each period.

Accepted Answer

This is correct. When interest is compounded semi-annually, the annual interest rate is divided by two and applied to the account twice a year. This means that over the course of 10 years, the investment is earning interest 20 times at a rate of 4% each period.

Question 8

When using Excel to find the future value of $2,000 invested in an account that would earn interest of 7.5% for 18 years, the correct entry would be

Accepted Answer

The correct formula for finding the future value in Excel is FV(rate, nper, pmt, pv), where 'rate' is the interest rate per period, 'nper' is the number of periods, 'pmt' is the payment made each period (0 in this case, as it's a one-time investment), and 'pv' is the present value (the initial investment, which should be entered as a negative number to indicate an outflow of cash). Therefore, the correct entry for a 7.5% annual interest rate, over 18 years, with a $2,000 initial investment is FV(.075,18,0,−2000), but since the exact option isn't listed, the closest correct option by structure is D) FV(.075,18,0,−1000), with the understanding that the actual amount should be -2000 instead of -1000 for the given question.

Question 9

What is the present value of $1000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).

Accepted Answer

The answer of What is the present value of $1000...

Question 10

If you deposit $1000 each year in a savings account earning 4%, compounded annually, how much will you have in 10 years?

Accepted Answer

The answer of If you deposit $1000 each year in...

Question 11

Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation.

Accepted Answer

Future value equations are used to calculate the value of an investment at a future date based on certain assumptions and inputs, such as the initial investment amount, interest rate, and time period. By using these inputs, the future value equation can determine the exact amount of money that will be received at maturity.

Question 12

Which of the following is the formula for present value?

Accepted Answer

The formula for present value is FVn = P/(1 + i)n, where FVn is the future value, P is the present value, i is the interest rate, and n is the number of periods. This formula helps calculate the current value of a future cash flow.

Question 13

When performing time value of money computations with a financial calculator or Excel, PV and FV must have opposite signs.

Accepted Answer

PV (Present Value) represents the current value of a future payment, while FV (Future Value) represents the value of an investment at some point in the future. Since they represent opposite cash flows, they must have opposite signs in order for time value of money calculations to be accurate.

Question 14

Briefly discuss how non-annual compounding (more than one compounding period per year)is preferable to annual compounding if you are an investor.

Accepted Answer

The answer of Briefly discuss how non-annual compounding (more than...

Question 15

High discount rates favour [blank].

Accepted Answer

High discount rates make future cash flows worth less in present terms, which means short-term investments with immediate returns are more favourable than long-term investments with delayed returns.

Question 16

Your bank has agreed to loan you $3000 if you agree to pay a lump sum of $5775 in five years.What annual rate of interest will you be paying?

Accepted Answer

The answer of Your bank has agreed to loan you...

Question 17

The present value of a single future sum [blank].

Accepted Answer

The present value of a single future sum depends on the number of discount periods because the more periods there are, the more times the future sum is discounted, affecting its present value.

Question 18

Three years from now, Ari will purchase a laptop computer that will cost $2250.Assume that Ari can earn 6.25% (compounded monthly)on her money.How much should she set aside today for the purchase? Round off to the nearest $1.

Accepted Answer

We need to use the formula for the future value of a present sum: FV = PV(1+r/n)^(nt), where FV is the future value, PV is the present value, r is the interest rate, n is the number of times compounded per year, and t is the number of years.

In this case, we have FV = $2250, r = 6.25%, n = 12 (since interest is compounded monthly), and t = 3. We need to solve for PV.

2250 = PV(1+0.0625/12)^(12*3)
2250 = PV(1.0052083333)^36
PV = 2250/1.0052083333^36
PV = $1865.88

So Ari should set aside $1866 today for the laptop purchase. The closest answer choice is C.

Question 19

What is the present value of $12 500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $1.00.

Accepted Answer

The present value (PV) can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($12,500), r is the annual discount rate (0.08), and n is the number of years (10). Plugging in the values, PV = $12,500 / (1 + 0.08)^10 ≈ $5,790.

Question 20

At 8%, compounded annually, how long will it take $750 to double?

Accepted Answer

The rule of 72 is a simple way to estimate the number of years required to double the invested money at a given annual rate of return. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself. In this case, 72 divided by 8% equals 9 years.

Quiz 5: Time Value of Moneythe Basics