Question 1

Which of the following statements is INCORRECT? A)In general,money toady is worth more than money in one year. B)We define the risk-free interest rate (r_f)for a given period as the interest rate at which money can be borrowed or lent without risk over that period. C)We refer to (1 - r_f)as the interest rate factor for risk-free cash flows. D)For most financial decisions,costs and benefits occur at different points in time.

Accepted Answer

The correct interest rate factor for risk-free cash flows is (1 + r_f). Option C states the incorrect interest rate factor by subtracting the risk-free interest rate from one.

Question 2

The one-year discount factor is the discount at which we can purchase money in the future.

Accepted Answer

The one-year discount factor is a measure of the present value of one unit of currency to be received in one year, expressed as a fraction of the future currency value. It represents the discount at which we can purchase money in the future.

Question 3

Why is it usually necessary to use the time value of money when performing a cost benefit analysis?
A)For an investment project to be considered,costs must have a higher dollar value from benefits.
B)In most investment projects costs are incurred up front,but benefits are provided in the future.
C)For practical purposes,a dollar today may be considered to be equal to a dollar at some future time.
D)Although costs and benefits generally occur concurrently,the benefits will accrue value over time,due to interest.

Accepted Answer

The time value of money is used because costs are often incurred upfront, while benefits are realized in the future, necessitating the comparison of present and future values.

Question 4

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one year's time.The investor decides to make the investment as there is a net difference between the cost and benefit.Which of the following is NOT a reason that the investor's decision may be flawed?
A)It does not consider the current market interest rate.
B)It ignores the fact that the costs are incurred today,but the benefits occur in one year's time.
C)It does not consider the value of the $10,000 in one year's time if invested elsewhere.
D)It does not consider whether the $10,000 will be needed elsewhere.

Accepted Answer

The answer of An investor has the opportunity to buy...

Question 5

A lender lends $10,000,which is to be repaid in annual payments of $2,000 for 6 years.Which of the following shows the timeline of the loan from the lender's perspective?
A) 
B) 
C) 
D)

Accepted Answer

The answer of A lender lends $10,000,which is to be...

Question 6

In order to distinguish between inflows and outflows,different colors are assigned to each of these cash flows when constructing a timeline.

Accepted Answer

The answer of In order to distinguish between inflows and...

Question 7

How can we convert the value of money from one point in time to another?
A)using the current exchange rate
B)using a cost benefit analysis
C)using the Valuation Principle
D)using the current interest rate

Accepted Answer

The current interest rate can be used to convert the value of money from one point in time to another through the process of discounting or compounding.

Question 8

Why should you approach every problem by drawing a timeline?
A)Timelines allow you to quickly sum cash flows over time.
B)Timelines eliminate the majority of flawed financial decisions.
C)Timelines can be used to schedule events which are yet to occur.
D)Timelines identify events in a transaction or investment which might otherwise be easily overlooked.

Accepted Answer

Timelines help to visualize the sequence of events in a transaction or investment, making it easier to identify key dates and potential issues that may be overlooked.

Question 9

What is one of the prerequisite conditions for the Valuation Principle to work?

Accepted Answer

The answer of What is one of the prerequisite conditions...

Question 10

Stella deposits $5,000 in a savings account at a bank that offers interest of 5.5% on such accounts.What is the value of the money in her savings account in one year's time?
A)$4739
B)$5135
C)$5275
D)$7750

Accepted Answer

To calculate the value of the savings account after one year, we need to use the formula:

FV = PV x (1 + r)n

where:
FV = future value (or value after one year)
PV = present value (or initial deposit)
r = interest rate expressed as a decimal
n = number of compounding periods (in this case, one year)

Substituting the given values, we get:

FV = 5000 x (1 + 0.055)^1
FV = 5000 x 1.055
FV = 5275

Therefore, the value of the money in Stella's savings account after one year is $5275.

Option C is the correct answer.

Question 11

Samantha enters a rent-to-own agreement for living room furniture.She will pay $60 per month for one year.Which of the following shows the timeline for her payments if the first payment is one month from now?
A) 
B) 
C) 
D)

Accepted Answer

The answer of Samantha enters a rent-to-own agreement for living...

Question 12

If $476 invested today yields $500 in one year's time,what is the discount factor?
A)0.05
B)0.95
C)1.05
D)1.50

Accepted Answer

Discount factor is the factor by which the future value is reduced to get the present value.
In this case, the present value is $476 and the future value is $500, so the discount factor is:
Discount factor = Present value/Future value = 476/500 = 0.952
So, the best choice is B, which is 0.95 (rounded to two decimal places).

Question 13

The timeline shown below best describes which of the following situations?

A)You make payments of $250 per month for six months.
B)You receive payments of $250 per month for six months.
C)You make payments of $250 per month for five months.
D)You receive payments of $250 per month for five months.

Accepted Answer

The answer of The timeline shown below best describes which...

Question 14

Owen expects to receive $20,000 at the end of next year from a trust fund.If a bank loans money at an interest rate of 7.5%,how much money can he borrow from the bank on the basis of this information?
A)$11,428
B)$15,000
C)$18,605
D)$21,500

Accepted Answer

We can use the present value formula to determine how much money Owen can borrow from the bank.

PV = FV / (1 + r)^(n)

where PV is the present value (amount that Owen can borrow), FV is the future value ($20,000), r is the interest rate (7.5% or 0.075), and n is the number of periods (1 year).

Plugging in the values, we get:

PV = $20,000 / (1 + 0.075)^1
PV = $18,605.04

Therefore, Owen can borrow up to $18,605.04 from the bank, which is closest to choice C ($18,605).

Question 15

Dollar amounts received at different points in time cannot be compared in absolute terms.

Accepted Answer

Dollar amounts received at different points in time are affected by inflation and changes in the value of currency, therefore they cannot be directly compared in absolute terms.

Question 16

The timeline shown below best describes the cash flow of which of the following people?

A)Joe,who puts down $3500 to buy a car,and then makes annual payments of $1000
B)Harry,who borrows $3500,and then receives an annual payment of $1000
C)Karen,who loans a friend $3500,which friend then pays back the loan in four annual installments of $1000
D)Leo,who borrows $3500,and then pays back the loan in four annual payments of $1000

Accepted Answer

The answer of The timeline shown below best describes the...

Question 17

An investment will pay $205,000 at the end of next year for an investment of $183,000 at the start of the year.If the market interest rate is 8% over the same period,should this investment be made?
A)No,because the investment will yield $6240 less than putting the money in a bank.
B)Yes,because the investment will yield $2360 more than putting the money in a bank.
C)Yes,because the investment will yield $4280 more than putting the money in a bank.
D)Yes,because the investment will yield $7360 more than putting the money in a bank.

Accepted Answer

The answer of An investment will pay $205,000 at the...

Question 18

If the risk-free rate of interest (r_f)is 6%,then you should be indifferent between receiving $250 in one year or A)$235.85 today. B)$250.00 today. C)$265.00 today. D)none of the above

Accepted Answer

To determine the present value of the $250 to be received in one year, we need to discount it by the risk-free rate of interest. Using the formula: Present Value = Future Value / (1+rate)^time, we get:

Present Value = $250 / (1 + 0.06)^1
Present Value = $235.85

Therefore, receiving $235.85 today is equivalent to receiving $250 in one year, given the 6% risk-free rate of interest.

Question 19

A tenant wants to lease a building for $48,000 per year.She signs a five-year rental agreement that states that she will pay $24,000 every six months for the next five years.Which of the following is the timeline for her rental payments,assuming she makes the first payment immediately?
A) 
B) 
C) 
D)

Accepted Answer

The answer of A tenant wants to lease a building...

Question 20

If the risk-free rate of interest (r_f)is 6%,then you should be indifferent between receiving $250 today or A)$235.85 in one year. B)$250.00 in one year. C)$265.00 in one year. D)none of the above

Accepted Answer

C) $250.00 × (1.06) = $265.00

Quiz 3: Time Value of Money: An Introduction

Which of the following statements is INCORRECT?

The one-year discount factor is the discount at which we can purchase money in the future.

Why is it usually necessary to use the time value of money when performing a cost benefit analysis?

A lender lends $10,000,which is to be repaid in annual payments of $2,000 for 6 years.Which of the following shows the timeline of the loan from the lender's perspective?

In order to distinguish between inflows and outflows,different colors are assigned to each of these cash flows when constructing a timeline.

How can we convert the value of money from one point in time to another?

Why should you approach every problem by drawing a timeline?

What is one of the prerequisite conditions for the Valuation Principle to work?

Stella deposits $5,000 in a savings account at a bank that offers interest of 5.5% on such accounts.What is the value of the money in her savings account in one year's time?

Samantha enters a rent-to-own agreement for living room furniture.She will pay $60 per month for one year.Which of the following shows the timeline for her payments if the first payment is one month from now?

If $476 invested today yields $500 in one year's time,what is the discount factor?

The timeline shown below best describes which of the following situations?

Owen expects to receive $20,000 at the end of next year from a trust fund.If a bank loans money at an interest rate of 7.5%,how much money can he borrow from the bank on the basis of this information?

Dollar amounts received at different points in time cannot be compared in absolute terms.

The timeline shown below best describes the cash flow of which of the following people?

An investment will pay $205,000 at the end of next year for an investment of $183,000 at the start of the year.If the market interest rate is 8% over the same period,should this investment be made?

If the risk-free rate of interest (r_f) is 6%,then you should be indifferent between receiving $250 in one year or

A tenant wants to lease a building for $48,000 per year.She signs a five-year rental agreement that states that she will pay $24,000 every six months for the next five years.Which of the following is the timeline for her rental payments,assuming she makes the first payment immediately?

If the risk-free rate of interest (r_f) is 6%,then you should be indifferent between receiving $250 today or

Quiz 3: Time Value of Money: An Introduction

Which of the following statements is INCORRECT?

The one-year discount factor is the discount at which we can purchase money in the future.

Why is it usually necessary to use the time value of money when performing a cost benefit analysis?

A lender lends $10,000,which is to be repaid in annual payments of $2,000 for 6 years.Which of the following shows the timeline of the loan from the lender's perspective?

In order to distinguish between inflows and outflows,different colors are assigned to each of these cash flows when constructing a timeline.

How can we convert the value of money from one point in time to another?

Why should you approach every problem by drawing a timeline?

What is one of the prerequisite conditions for the Valuation Principle to work?

Stella deposits $5,000 in a savings account at a bank that offers interest of 5.5% on such accounts.What is the value of the money in her savings account in one year's time?

Samantha enters a rent-to-own agreement for living room furniture.She will pay $60 per month for one year.Which of the following shows the timeline for her payments if the first payment is one month from now?

If $476 invested today yields $500 in one year's time,what is the discount factor?

The timeline shown below best describes which of the following situations?

Owen expects to receive $20,000 at the end of next year from a trust fund.If a bank loans money at an interest rate of 7.5%,how much money can he borrow from the bank on the basis of this information?

Dollar amounts received at different points in time cannot be compared in absolute terms.

The timeline shown below best describes the cash flow of which of the following people?

An investment will pay $205,000 at the end of next year for an investment of $183,000 at the start of the year.If the market interest rate is 8% over the same period,should this investment be made?

If the risk-free rate of interest (rf) is 6%,then you should be indifferent between receiving $250 in one year or

A tenant wants to lease a building for $48,000 per year.She signs a five-year rental agreement that states that she will pay $24,000 every six months for the next five years.Which of the following is the timeline for her rental payments,assuming she makes the first payment immediately?

If the risk-free rate of interest (rf) is 6%,then you should be indifferent between receiving $250 today or

If the risk-free rate of interest (r_f) is 6%,then you should be indifferent between receiving $250 in one year or

If the risk-free rate of interest (r_f) is 6%,then you should be indifferent between receiving $250 today or