Deck 3: Applying Time Value Concepts

Question 1

An ordinary annuity can be defined as

A) a series of unequal payments received or paid at equal intervals at the beginning of each period.
B) a series of equal payments received or paid at equal intervals of time at the end of each period.
C) a lump sum.
D) intermittent payments for ordinary expenses.

Answer 1

a series of equal payments received or paid at equal intervals of time at the end of each period.

Question 2

Which stream of cash flows is not an example of an annuity?

A) Fixed rate mortgage payment
B) 360-month mortgage payment where the interest rate is reset annually
C) 48-month car payment
D) Interest payment on a 10-year Treasury bond

Answer 2

360-month mortgage payment where the interest rate is reset annually

Question 3

Your utility bill, which varies each month, is an example of an annuity.

Answer 3

False

Question 4

In general, a dollar can typically buy more today than it can in one year.

Question 5

The concept of time value of money is important to financial decision making because

A) it emphasizes earning a return of interest on the money you invested.
B) it recognizes that $1 today has more value than $1 received a year from now.
C) it can be applied to future cash flows in order to compare different streams of income.
D) All of these are correct.

Question 6

Time value of money calculations, such as present and future value amounts, can be applied to many day-to-day decisions.

Question 7

Time value of money is only applied to single dollar amounts.

Question 8

The time period over which you save money has very little impact on its growth.

Question 9

Money received today is worth more than the same amount of money received in the future. This is true because

A) money received today can grow at a compounded rate.
B) inflation will devalue future dollars.
C) generally, goods and services will cost more in the future.
D) All of these.

Question 10

The concept of the time value of money is based on

A) the level of unemployment.
B) taxes.
C) interest earned over time.
D) the Dow Jones Industrial Average.

Question 11

An annuity is a stream of equal payments that are received or paid at equal intervals in time.

Question 12

The time value of money implies that a dollar received today is worth ________ a dollar received tomorrow.

A) more than
B) less than
C) the same as
D) Insufficient data to determine the answer.

Question 13

The time value of money refers to

A) personal opportunity costs such as time lost on an activity.
B) financial decisions that require borrowing funds from a bank.
C) changes in interest rates due to changes in the supply and demand for money in the national economy.
D) the difference in the value of money depending on when it is received.

Question 14

A stream of equal payments either received or paid at equal time intervals is a(n) ________.

Question 15

The concept that a dollar received today has more value than a dollar received in the future because of the interest it can earn is called the ________.

Question 16

An annuity is a stream of equal payments such as a mortgage, social security payments or a pension.

Question 17

Which of the following it not an annuity?

A) Equal monthly payments to your investment account
B) Lottery winnings of $100 per month for life
C) Mortgage payments for a fixed-rate loan
D) Monthly utility bills

Question 18

The time value of money concept can help you determine how much money you need to save over a period of time to achieve a specific savings goal.

Question 19

Time value of money computations relate to the future value of lump-sum cash flows only.

Question 20

There are two sets of present and future value tables: one set for lump sums and one set for annuities.

Question 21

Compounding is the process of obtaining present values; discounting is the process of obtaining future values.

Question 22

Everything else being equal, the ________ the interest rate, the ________ the final accumulation of money.

A) higher; higher
B) lower; lower
C) higher; lower
D) Both A and B are correct.

Question 23

To determine how long it would take an investment to double at 10 percent, you could scan down the 10% column until you reach a factor of approximately 2.0 on the ________ table.

A) Present value of $1
B) Future value of $1
C) Present value of an annuity
D) Future value of an annuity

Question 24

When money accumulates interest, it is said to be discounting.

Question 25

Time value of money is important because

A) you do not want to wait a long time to get paid.
B) deflation eats away at the value of a dollar.
C) the present value of future cash flows is affected by inflation.
D) time value of money is not as important to a person's finances as budgeting.

Question 26

To determine how much you must save each year to have enough for your daughter's college education, you would use the present value of $1 tables.

Question 27

Which of the following decisions would involve the use of the future value of $1? Select all that apply.

A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years.
B) You win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years.
C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a cruise that will cost $7000 when you graduate from college in 4 years.
D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday.

Question 28

If you invest $12,000 today at an interest rate of 10%, how much will you have in 10 years?

A) $31,128
B) $25,940
C) $13,860
D) $40,712

Question 29

In order to take advantage of the time value of money you should do all of the following, except

A) pay bills electronically so you can delay payments and still ensure on-time payment.
B) pay bills a little later than the due dates to take advantage of month-ending interest on your savings account.
C) use settings on many bill-paying Web sites that allow you to set a future date for payment once you receive a bill.
D) make use of your money while you have it, but always make payments by the due dates.

Question 30

The process of earning ________ on interest is referred to as compounding.

A) dividends
B) interest
C) an annuity
D) cash outflows

Question 31

When money earns interest on interest, it is said to be compounding.

Question 32

If I deposit a sum of money today and want it to double in 10 years, I will need to receive an interest rate of slightly above ________.

Question 33

Which of the following is not an example of a future value?

A) The balance in your checking account today
B) A savings account balance in 5 years
C) A mortgage balance in 10 years
D) The value of a retirement account in 20 years

Question 34

Assuming constant inflation, the length of the period does not matter when computing future value of an amount today.

Question 35

The earning of interest on interest over time is called

A) an annuity.
B) an ordinary annuity.
C) compounding.
D) present value.

Question 36

The periodic interest rate, the number of periods in which your money will be invested, and the initial payment amount, must be known to estimate the future value using a financial calculator.

Question 37

Byron is investigating a mutual fund that claims that $1,000 today will be worth $5,000 in five years. What is he solving for?

A) Present value
B) Future value
C) Interest rate
D) Payment

Question 38

In order to maximize the use of your money, you may want to delay payment of your bills slightly beyond their due dates.

Question 39

In the tables for the future value of a single sum, the future value factors are all less than one.

Question 40

Mr. Berkey deposits $10,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much interest will he earn on his investment during this time period?

A) $17,140
B) $7,140
C) $17,180
D) $7,180

Question 41

The process of earning interest on accumulated interest or paying interest on accumulated interest due is called

A) simple interest.
B) compounding.
C) future value.
D) present value.

Question 42

If Jim wants $25,000 in five years and can earn an 8% interest rate, how much does he need to invest today?

A) $16,108
B) $17,025
C) $15,158
D) $17,829

Question 43

The process of obtaining present values is known as discounting.

Question 44

If Joe has $5,600 today and invests it at a 10% interest rate, how much will he have in 12 years?

A) $17,393.60
B) $17,572.80
C) $15,770.49
D) $12,320.00

Question 45

If you are presented with an offer to accept payment now or a greater amount in the future, you would use (assuming you can invest the money at a known rate)

A) present value of $1.
B) future value of $1.
C) present value of an annuity.
D) Both A and B can be used for this analysis.

Question 46

How much must you invest today at 8% interest in order to see your investment grow to $15,000 in 10 years?

A) $6,330
B) $6,945
C) $7,620
D) $7,500

Question 47

The present value interest factor (PVIF) becomes lower as the number of years increases.

Question 48

Sandy wants to know how much she needs to save today to have $5,000 in five years at a 7% interest rate. How much should she invest today?

A) $3500
B) $3946
C) $3565
D) Not enough information is provided.

Question 49

Use the following two columns of items to answer the matching questions below:
compounding

A)a business calculator that performs PV/FV calculations
B)the process of earning interest on interest
C)a series of equal payments received or paid at equal intervals
D)a factor multiplied by today's savings to determine how the savings will accumulate over time

Question 50

Assume you owe a large balance on your credit card and only pay the monthly minimum payment equal to 1% of the balance. If the annual interest rate on the credit card is 18%, how many years will it take you to pay off the balance assuming you do not make any additional charges to the card?

A) 7.8 years
B) 5 years
C) You will never pay off the balance.
D) Not enough information is provided to determine the time.

Question 51

The process of obtaining present values is known as compounding.

Question 52

Which of the following decisions would involve the use of the present value of $1?

A) Your brother buys your car and offers to pay you $500 per year for three years or $1,500 in two years.
B) You win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years.
C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a cruise that will cost $7,000 when you graduate from college in 4 years.
D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday.

Question 53

Use the following two columns of items to answer the matching questions below:
financial calculator

A)a business calculator that performs PV/FV calculations
B)the process of earning interest on interest
C)a series of equal payments received or paid at equal intervals
D)a factor multiplied by today's savings to determine how the savings will accumulate over time

Question 54

As the time period until receipt of an amount of money increases, the present value of the amount at a fixed interest rate

A) remains the same.
B) increases.
C) decreases.
D) Not enough information to make a decision.

Question 55

The process of obtaining ________ values is referred to as discounting.

A) present
B) future
C) current
D) inflated

Question 56

Use the following two columns of items to answer the matching questions below:
future value interest factor

A)a business calculator that performs PV/FV calculations
B)the process of earning interest on interest
C)a series of equal payments received or paid at equal intervals
D)a factor multiplied by today's savings to determine how the savings will accumulate over time

Question 57

The same tables can be used to figure future values and present values of $1.

Question 58

Susie wants to know how much she needs to save today to have $5,000 in five years. Which of the following tables should she use?

A) Present value of $1
B) Present value of an ordinary annuity
C) Future value of $1
D) Future value of an ordinary annuity

Question 59

Use the following two columns of items to answer the matching questions below:
annuity

A)a business calculator that performs PV/FV calculations
B)the process of earning interest on interest
C)a series of equal payments received or paid at equal intervals
D)a factor multiplied by today's savings to determine how the savings will accumulate over time

Question 60

Future and present values are dependent upon all of the following, except

A) time.
B) the interest rate.
C) a present or future value interest factor, depending on the problem.
D) annual income.

Question 61

The higher the rate used in determining the future value of an annuity,

A) the smaller the future value at the end of the period.
B) the greater the future value at the end of the period.
C) the greater the present value at the beginning of the period.
D) None of these-the interest rate has no effect on the future value of the annuity.

Question 62

Lisa wants to know how much savings she would accumulate in 15 years if she saves $2,000 per year and her savings earns 4% per year. She needs to determine the

A) present value of an annuity.
B) annuity amount.
C) future value of one specific dollar amount today.
D) future value of an annuity.

Question 63

If Lucky Louie won a lottery and chose to take $10,000,000 ten years from now (disregarding taxes), what would be the equivalent amount today, at 6% per annum?

A) $5,743,491
B) $5,583,948
C) $6,050,972
D) Not enough information is provided to solve the problem.

Question 64

Use the following two columns of items to answer the matching questions below:

-present value interest factor

A)the process of obtaining present values
B)a factor multiplied by a future value to get the present value of that amount

Question 65

The future value of an ordinary annuity assumes that the payments are received

A) at the beginning of the year and the last payment does not compound.
B) at the end of the year and the last payment does not compound.
C) at the beginning of the year and the last payment is compounded.
D) at the end of the year and the last payment is compounded.

Question 66

Which of the following decisions would involve the use of the future value of a $1 ordinary annuity table?

A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years.
B) You win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years.
C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a cruise that will cost $7,000 when you graduate from college in 4 years.
D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday.

Question 67

Using the Time Value of Money charts provided, answer the following question. (Note to Instructors: Provide the appropriate tables to students from Personal Finance, Seventh Edition, Appendix C: Financial Tables.)
Judy would like to have $200,000 saved in her retirement account in 20 years. Assuming an interest rate of 10%, how much should she contribute each year?

A) $3,491.92
B) $2,000.00
C) $2,576.11
D) $4,376.77

Question 68

Use the following two columns of items to answer the matching questions below:
discounting

A)the process of obtaining present values
B)a factor multiplied by a future value to get the present value of that amount

Question 69

The difference between an ordinary annuity and an annuity due is that with an annuity due the payments occur at the ________ of each period.

Question 70

If the payment in an ordinary annuity changes over time, you cannot determine the future value of the payment stream using annuity calculations.

Question 71

Which of the following decisions is not financially sound?

A) Defer your student loan payments with no interest accruing
B) Defer your student loan payments if the interest rate is 7% per annum
C) Take a 60-month zero interest rate car loan
D) Prioritize paying off the highest interest rate loans versus lower rate loan

Question 72

Aaron wants to put $200 per month into an individual retirement account at 15% for four years. What is he solving for using his financial calculator?

A) Present value
B) Future value
C) Interest rate
D) Payment

Question 73

Don wants to know how much he needs to save every year to amass $15,000 in five years at a 5% interest rate. What is he calculating using his financial calculator?

A) Present value
B) Future value
C) Interest rate
D) Payment

Question 74

An annuity due differs from an ordinary annuity in that the payments occur at the beginning of the period instead of at the end of the period.

Question 75

You wish to retire in 30 years and determine that you will need $1,000,000 to fund your retirement. If you can invest with a return of 8% you will need to invest ________ each year to reach your goal.

Question 76

To save for her newborn son's college education, Kelli Peterson will invest $1,500 at the end of each year for the next 18 years. The interest rate she expects to earn on her investment is 9%. How much money will she have saved by the time her son turns 18?

A) $55,461
B) $69,027
C) $61,952
D) $68,399

Question 77

Jerry wants to know how much he needs to save every year to accumulate $15,000 in five years at a 10% interest rate. Which of the following tables should he use?

A) Present value of $1
B) Present value of an ordinary annuity
C) Future value of $1
D) Future value of an ordinary annuity

Question 78

The ________ the interest rate, the ________ the present value of an annuity.

A) higher; lower
B) lower; lower
C) higher; higher
D) Interest rates do not affect the present value of an annuity.

Question 79

At what annual rate would $500 grow to $1,948 in 12 years?

A) 12.0 %
B) 13.0 %
C) 12.5 %
D) 11.0 %

Question 80

The cash flows of an annuity due occur at the beginning of each period.