Question 1

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.

Accepted Answer

The future value of an annuity increases with the interest rate because each payment grows at a faster rate due to compounding, leading to a larger sum at the end of the period.

Question 2

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.

Accepted Answer

The future value of an annuity calculation is used to determine how much a series of equal annual savings (in this case, $2,000 per year) will grow to at a certain interest rate (4% per year) over a specific period of time (15 years).

Question 3

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.

Accepted Answer

The answer of If Lucky Louie won a lottery and...

Question 4

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

Accepted Answer

The PVIF is used in the process of discounting, which is option A) the process of obtaining present values. When you want to determine the present value of a future amount of money, you multiply that future amount by the present value interest factor. The PVIF takes into account the time value of money, which is the concept that money available today is worth more than the same amount in the future due to its potential earning capacity.
To calculate the PVIF, you need to know the discount rate (or interest rate) and the number of periods over which the money will be invested or borrowed. The formula for the PVIF is:
PVIF = 1 / (1 + r)^n
Where:
- r is the discount rate (or interest rate) per period
- n is the number of periods
Using the PVIF, you can determine the present value (PV) of a future sum of money (FV) by using the formula:
PV = FV * PVIF
This calculation helps in comparing the value of money received or paid at different times, making it a fundamental concept in finance for activities such as investment analysis, capital budgeting, and loan amortization.

Question 5

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.

Accepted Answer

The future value of an ordinary annuity assumes that payments are made at the end of each period (e.g., year), and since the last payment is made at the end of the last period, it does not have time to earn interest or compound within the annuity's timeframe.

Question 6

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.

Accepted Answer

The future value of a $1 ordinary annuity table is used to determine how much needs to be deposited annually to reach a specific future sum, as in option D.

Question 7

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

Accepted Answer

To calculate the annual contribution needed to reach a future value of $200,000 in 20 years at an interest rate of 10%, we can use the future value of an annuity formula:FV = PMT * [(1 + r)^n - 1] / rwhere:FV is the future value ($200,000)PMT is the annual contributionr is the annual interest rate (10%)n is the number of years (20)Solving for PMT, we get:PMT = FV * r / [(1 + r)^n - 1]Plugging in the values, we get:PMT = $200,000 * 0.10 / [(1 + 0.10)^20 - 1]PMT = $20,000 / 15.9374PMT = $3,491.92Therefore, Judy should contribute $3,491.92 each year to reach her retirement goal.

Question 8

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

Accepted Answer

The answer of Use the following two columns of items...

Question 9

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

Accepted Answer

The answer of The difference between an ordinary annuity and...

Question 10

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

Accepted Answer

An ordinary annuity assumes fixed, equal payments at regular intervals. If payments change, standard annuity formulas cannot be directly applied without adjustments.

Question 11

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

Accepted Answer

Defering student loan payments when interest is accruing at 7% per annum is not financially sound because the loan balance will continue to grow due to the accumulation of interest, making it more expensive over time.

Question 12

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

Accepted Answer

Aaron is solving for the future value of his investment, which is the amount his $200 monthly contributions will grow to at a 15% interest rate over four years.

Question 13

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

Accepted Answer

Don is calculating the annual savings amount (or payment) needed to reach a future value of $15,000 in five years at a 5% interest rate.

Question 14

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.

Accepted Answer

In an annuity due, payments are made at the beginning of each period, whereas in an ordinary annuity, payments are made at the end of each period.

Question 15

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.

Accepted Answer

The answer of You wish to retire in 30 years...

Question 16

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

Accepted Answer

The answer of To save for her newborn son's college...

Question 17

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

Accepted Answer

Jerry should use the "Future value of an ordinary annuity" table because he is making regular annual savings (an annuity) and wants to know how much these savings will grow to in the future at a given interest rate.

Question 18

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.

Accepted Answer

The present value of an annuity decreases as the interest rate increases because the discount factor (which is used to calculate present value) is inversely related to the interest rate.

Question 19

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 %

Accepted Answer

Using the formula for compound interest, $ A = P(1 + r)^n $, where $ A = 1948 $, $ P = 500 $, and $ n = 12 $, solving for $ r $ gives approximately 12.0%.

Question 20

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

Accepted Answer

In an annuity due, payments or cash flows occur at the beginning of each period, as opposed to an ordinary annuity where payments are made at the end of each period.

Quiz 3: Applying Time Value Concepts

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

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

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?

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

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

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

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

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

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

Which of the following decisions is not financially sound?

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?

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?

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.

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.

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?

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?

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

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

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