Question 1

Consider the TVM equation: A decrease in the time period will increase the future value,other things remaining equal.

Accepted Answer

A decrease in the time period, with other factors remaining constant, will decrease the future value because there is less time for interest to accumulate.

Question 2

Your family plans to spend $25,000 on a car for you upon graduation from college.If you will graduate in three years and your family can earn 3.125% annually on their investment,how much money must they set aside today for your car?
A)$23,243.66
B)$23,009.21
C)$22,795.45
D)$21,387.36

Accepted Answer

Using the formula for present value of a future amount: 
Present Value = Future Value / (1 + interest rate)^number of years

PV = 25,000 / (1 + 0.03125)^3
PV = 25,000 / (1.1025)
PV = 22,659.09

Therefore, the family must set aside $22,659.09 today for the car. The closest answer choice is C) $22,795.45, which is off by a small amount due to rounding.

Question 3

You intend to buy a vacation home in eight years and plan to have saved $75,000 for a down payment.How much money would you have to place today into an investment that earns 9% per year to have enough for your desired down payment?
A)$37,640
B)$37,218
C)$35,335
D)$34,989

Accepted Answer

To find out how much money you need to invest today to reach a future sum, you can use the formula for the present value of a single sum, which is PV = FV / (1 + r)^n, where PV is the present value (the amount you need to invest today), FV is the future value (the amount you want to have in the future, in this case, $75,000), r is the annual interest rate (9%, or 0.09 as a decimal), and n is the number of years (8 years in this case). Plugging in the numbers: PV = $75,000 / (1 + 0.09)^8 = $75,000 / (1.09)^8 ≈ $37,640.

Question 4

Consider a two-year investment: Given a constant and positive interest rate,the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).

Accepted Answer

This statement is true because the interest earned in the second year will be calculated on the original investment plus the interest earned in the first year, leading to a higher amount of interest earned in the second year.

Question 5

If your bank offers a 5% annual rate of return compounded annually,then at the end of one year your $1,000.00 deposit would grow by $50.00 to $1,050.00.However,in the second year,your deposit would increase by $52.5025 to a total ending value of $1,102.50.Explain why the second year earns more interest on the investment than the first year.

Accepted Answer

The answer of If your bank offers a 5% annual...

Question 6

An investment promises a payoff of $995 two and one-half years from today.At a discount rate of 4.5% per year,what is the present value of this investment?
A)$914.67
B)$891.32
C)$808.44
D)There is not enough information to answer this question.

Accepted Answer

The answer of An investment promises a payoff of $995...

Question 7

Consider the TVM equation: A decrease in the interest rate will decrease the future value,other things remaining equal.

Accepted Answer

This statement is true according to the TVM formula. When the interest rate decreases, the compound interest earned on an investment will also decrease, leading to a smaller future value.

Question 8

Which of the following actions will DECREASE the present value of an investment?
A)Decrease the interest rate.
B)Decrease the future value.
C)Decrease the amount of time.
D)All of the above will decrease the present value.

Accepted Answer

Decreasing the future value will decrease the present value because the present value is directly proportional to the future value.

Question 9

You have purchased a zero coupon bond that will pay $15,000 to your newborn child in 21 years.If this bond is discounted at a rate of 2.875% per year,what is today's price (present value)for this bond?
A)$15,000
B)$9,348.25
C)$8,271.50
D)$5,654

Accepted Answer

The formula for calculating the present value of a zero coupon bond is:
PV = FV/(1+r)^n
Where PV is the present value, FV is the future value or maturity value, r is the discount rate, and n is the number of years until maturity.

Plugging in the given values:
PV = 15,000/(1+0.02875)^21
PV = 8,271.50

Therefore, the present value of the bond is $8,271.50, which is closest to option C.

Question 10

Your university is running a special offer on tuition.This year's tuition cost is $16,000.Next year's tuition cost is scheduled to be $16,640.The university offers to discount next year's tuition at a rate of 4% if you agree to pay both years' tuition in full today.How much is the total tuition bill today if you take the offer?
A)$33118
B)$32,981
C)$32,080
D)$32,000

Accepted Answer

The answer of Your university is running a special offer...

Question 11

A furniture store has a love seat on sale for $699.00,with the payment due one year from today.The store is willing to discount the price at an annual rate of 5% if you pay today.What is the amount if you pay today?
A)$665.71
B)$622.47
C)$608.21
D)$602.35

Accepted Answer

The amount if you pay today can be calculated using the formula for present value: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($699), r is the annual discount rate (5% or 0.05), and n is the number of years (1). Plugging in the values: PV = $699 / (1 + 0.05)^1 = $665.71.

Question 12

Which of the following formulas is CORRECT for finding the present value of an investment? A)FV = $\frac { \text { PV } } { ( 1 + r ) ^ { n } }$ B)PV = FV × (1 + r)ⁿ C)PV = FVⁿ × (1 + r) D)PV = FV × $\frac { 1 } { ( 1 + r ) ^ { n } }$

Accepted Answer

The correct formula for finding the present value (PV) of an investment is PV = FV × $\frac{1}{(1 + r)^n}$, where FV is the future value, r is the interest rate per period, and n is the number of periods. This formula discounts the future value back to the present value.

Question 13

Sam wishes to invest $8,000 into an account earning 6% compounded annually.If he invests the money today,how much will be in the account in 6 years? If he waits three years before investing his $8,000 and invests that money for three years,will he earn one-half of the interest earned in the first scenario since he had the same amount invested at the same rate but for only one-half of the time? Explain how you arrived at your answer.

Accepted Answer

The answer of Sam wishes to invest $8,000 into an...

Question 14

Consider the TVM equation: The future value is always greater than the present value,even if the interest rate is negative.

Accepted Answer

The future value can be less than the present value if the interest rate is negative, as negative interest rates would decrease the value of the investment over time.

Question 15

$100 invested at a rate of 5% for 10 years has the same future value as $100 invested at 10% compounded annually for 5 years.

Accepted Answer

The future value of an investment is calculated using the formula FV = PV(1 + r)^n, where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years. For the first scenario (5% for 10 years), the future value is $100(1 + 0.05)^10 = $162.89. For the second scenario (10% for 5 years), the future value is $100(1 + 0.10)^5 = $161.05. Therefore, the future values are not the same.

Question 16

The TVM equation FV = PV × (1 + r)ⁿ can be algebraically manipulated to solve for any of the variables EXCEPT for the time period n.

Accepted Answer

The TVM equation can be algebraically manipulated to solve for any of the variables, including the time period n.

Question 17

Which of the following actions will INCREASE the present value of an investment?
A)Decrease the interest rate.
B)Decrease the future value.
C)Increase the amount of time.
D)All of the above will increase the present value.

Accepted Answer

Decreasing the interest rate increases the present value of an investment because the present value is inversely related to the interest rate. Lower interest rates result in higher present values.

Question 18

In four years your oldest child will be in 10th grade,at which point you and your family plan to vacation in Europe.You estimate that you will need $25,000 for the trip.How much do you need to set aside today if you can place your money in an investment vehicle earning an average of 4.25% per year?
A)$20,215.55
B)$20,998.34
C)$21,165.85
D)$21,435.77

Accepted Answer

The answer of In four years your oldest child will...

Question 19

$5,000 invested at an annual rate of 6% for 3 years has a smaller future value than $5,000 invested at an annual rate of 3% for 6 years.

Accepted Answer

This is because the longer duration of the investment period compensates for the lower interest rate in the second option.

Question 20

Consider the TVM equation: An increase in the present value will decrease the future value,other things remaining equal.

Accepted Answer

The TVM (Time Value of Money) equation suggests that the future value increases with an increase in the present value, assuming the interest rate and time period remain constant.

Quiz 3: The Time Value of Money Part 1

Consider the TVM equation: A decrease in the time period will increase the future value,other things remaining equal.

Your family plans to spend $25,000 on a car for you upon graduation from college.If you will graduate in three years and your family can earn 3.125% annually on their investment,how much money must they set aside today for your car?

You intend to buy a vacation home in eight years and plan to have saved $75,000 for a down payment.How much money would you have to place today into an investment that earns 9% per year to have enough for your desired down payment?

Consider a two-year investment: Given a constant and positive interest rate,the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).

An investment promises a payoff of $995 two and one-half years from today.At a discount rate of 4.5% per year,what is the present value of this investment?

Consider the TVM equation: A decrease in the interest rate will decrease the future value,other things remaining equal.

Which of the following actions will DECREASE the present value of an investment?

You have purchased a zero coupon bond that will pay $15,000 to your newborn child in 21 years.If this bond is discounted at a rate of 2.875% per year,what is today's price (present value) for this bond?

A furniture store has a love seat on sale for $699.00,with the payment due one year from today.The store is willing to discount the price at an annual rate of 5% if you pay today.What is the amount if you pay today?

Which of the following formulas is CORRECT for finding the present value of an investment?

Consider the TVM equation: The future value is always greater than the present value,even if the interest rate is negative.

$100 invested at a rate of 5% for 10 years has the same future value as $100 invested at 10% compounded annually for 5 years.

The TVM equation FV = PV × (1 + r)ⁿ can be algebraically manipulated to solve for any of the variables EXCEPT for the time period n.

Which of the following actions will INCREASE the present value of an investment?

In four years your oldest child will be in 10th grade,at which point you and your family plan to vacation in Europe.You estimate that you will need $25,000 for the trip.How much do you need to set aside today if you can place your money in an investment vehicle earning an average of 4.25% per year?

$5,000 invested at an annual rate of 6% for 3 years has a smaller future value than $5,000 invested at an annual rate of 3% for 6 years.

Consider the TVM equation: An increase in the present value will decrease the future value,other things remaining equal.

Quiz 3: The Time Value of Money Part 1

Consider the TVM equation: A decrease in the time period will increase the future value,other things remaining equal.

Your family plans to spend $25,000 on a car for you upon graduation from college.If you will graduate in three years and your family can earn 3.125% annually on their investment,how much money must they set aside today for your car?

You intend to buy a vacation home in eight years and plan to have saved $75,000 for a down payment.How much money would you have to place today into an investment that earns 9% per year to have enough for your desired down payment?

Consider a two-year investment: Given a constant and positive interest rate,the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).

An investment promises a payoff of $995 two and one-half years from today.At a discount rate of 4.5% per year,what is the present value of this investment?

Consider the TVM equation: A decrease in the interest rate will decrease the future value,other things remaining equal.

Which of the following actions will DECREASE the present value of an investment?

You have purchased a zero coupon bond that will pay $15,000 to your newborn child in 21 years.If this bond is discounted at a rate of 2.875% per year,what is today's price (present value) for this bond?

A furniture store has a love seat on sale for $699.00,with the payment due one year from today.The store is willing to discount the price at an annual rate of 5% if you pay today.What is the amount if you pay today?

Which of the following formulas is CORRECT for finding the present value of an investment?

Consider the TVM equation: The future value is always greater than the present value,even if the interest rate is negative.

$100 invested at a rate of 5% for 10 years has the same future value as $100 invested at 10% compounded annually for 5 years.

The TVM equation FV = PV × (1 + r)n can be algebraically manipulated to solve for any of the variables EXCEPT for the time period n.

Which of the following actions will INCREASE the present value of an investment?

In four years your oldest child will be in 10th grade,at which point you and your family plan to vacation in Europe.You estimate that you will need $25,000 for the trip.How much do you need to set aside today if you can place your money in an investment vehicle earning an average of 4.25% per year?

$5,000 invested at an annual rate of 6% for 3 years has a smaller future value than $5,000 invested at an annual rate of 3% for 6 years.

Consider the TVM equation: An increase in the present value will decrease the future value,other things remaining equal.

The TVM equation FV = PV × (1 + r)ⁿ can be algebraically manipulated to solve for any of the variables EXCEPT for the time period n.