Question 1

If an analyst mistakenly adds cash flows occurring at different points in time,what is the implied assumption in the process?

Accepted Answer

The answer of If an analyst mistakenly adds cash flows...

Question 2

Which of the following statements is FALSE?
A)The process of moving a value or cash flow forward in time is known as compounding.
B)The effect of earning interest on interest is known as compound interest.
C)It is only possible to compare or combine values at the same point in time.
D)A dollar in the future is worth more than a dollar today.

Accepted Answer

The answer of Which of the following statements is FALSE?
A)The...

Question 3

Sara wants to have $500,000 in her savings account when she retires.How much must she put in the account now,if the account pays a fixed interest rate of 8%,to ensure that she has $500,000 in 20 years' time?
A)$107,274
B)$144,616
C)$180,884
D)$231,480

Accepted Answer

The correct answer is A because $107,274 invested at 8% interest for 20 years will grow to $500,000.

Question 4

An investment will pay you $100 in one year and $200 in two years.If the interest rate is 5%,what is the present value of these cash flows?
A)$305.00
B)$285.71
C)$276.65
D)258.32

Accepted Answer

The present value (PV) of future cash flows is calculated using the formula: PV = CF / (1 + r)^n, where CF is the cash flow, r is the interest rate, and n is the number of years. For $100 in one year: PV = 100 / (1 + 0.05)^1 = $95.24. For $200 in two years: PV = 200 / (1 + 0.05)^2 = $181.41. Adding these gives a total present value of $276.65.

Question 5

Which of the following statements is FALSE?
A)Finding the present value (PV)and compounding are the same.
B)A dollar today and a dollar in one year are not equivalent.
C)If you want to compare or combine cash flows that occur at different points in time,you first need to convert the cash flows into the same units or move them to the same point in time.
D)The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

Accepted Answer

Finding the present value (PV) and compounding are not the same. Compounding refers to the process of calculating the future value of an investment or loan by adding interest earned or charged over time. Present value is the current value of a future sum of money, discounted by a specified rate of return or interest rate to account for the time value of money.

Question 6

On the day Harry was born,his parents put $1000 into an investment account that promises to pay a fixed interest rate of 4 percent per year.How much money will Harry have in this account when he turns 18?
A)$1,720
B)$2,026
C)$2,804
D)$4,806

Accepted Answer

The future value of an investment can be calculated using the formula: FV = PV * (1 + r)^n, where PV is the present value ($1000), r is the annual interest rate (0.04), and n is the number of years (18). Plugging in the values: FV = 1000 * (1 + 0.04)^18 = 1000 * 2.0258 ≈ $2,026.

Question 7

To compute the future value of a cash flow,you must:
A)discount it.
B)compound it.
C)double it.
D)arbitrage it.

Accepted Answer

To compute the future value of a cash flow, you need to compound it using a certain interest rate over a period of time. Discounting it (A) would give you the present value of the cash flow. Doubling it (C) has no relevance to finding its future value. Arbitrage (D) involves taking advantage of price discrepancies in different markets, which is not applicable to finding the future value of a cash flow.

Question 8

Jeff has the opportunity to receive lump-sum payments either now or in the future.Which of the following opportunities is the best,given that the interest rate is 7% per year?
A)one that pays $1,000 now
B)one that pays $1,200 in two years
C)one that pays $1,500 in five years
D)one that pays $1,800 in ten years

Accepted Answer

The future value of $1,000 now at 7% for 5 years is $1,402.55. The future value of $1,200 in two years at 7% is $1,322.85. The future value of $1,500 in five years at 7% is $1,885.65. The future value of $1,800 in ten years at 7% is $2,732.05. Therefore, the best opportunity is the one that pays $1,500 in five years.

Question 9

Why should interest rates be generally positive?

Accepted Answer

The answer of Why should interest rates be generally positive?...

Question 10

Consider the following timeline: 
If the current market rate of interest is 8%,then the value as of year 1 is closest to:
A)$0
B)$1003
C)$540
D)$77

Accepted Answer

The answer of Consider the following timeline: 
If the current...

Question 11

Consider the following timeline: 
If the current market rate of interest is 9%,then the present value (PV)of this timeline as of year 0 is closest to:
A)$492
B)$637
C)$600
D)$400

Accepted Answer

The answer of Consider the following timeline: 
If the current...

Question 12

Consider the following timeline: 
If the current market rate of interest is 12%,then the value of the cash flows in year 0 and year 2 as of year 1 is closest to:
A)$257.29
B)-$78.71
C)$78.71
D)$1.29

Accepted Answer

The answer of Consider the following timeline: 
If the current...

Quiz 3: Time Value of Money: An Introduction

If an analyst mistakenly adds cash flows occurring at different points in time,what is the implied assumption in the process?

Which of the following statements is FALSE?

Sara wants to have $500,000 in her savings account when she retires.How much must she put in the account now,if the account pays a fixed interest rate of 8%,to ensure that she has $500,000 in 20 years' time?

An investment will pay you $100 in one year and $200 in two years.If the interest rate is 5%,what is the present value of these cash flows?

Which of the following statements is FALSE?

On the day Harry was born,his parents put $1000 into an investment account that promises to pay a fixed interest rate of 4 percent per year.How much money will Harry have in this account when he turns 18?

To compute the future value of a cash flow,you must:

Jeff has the opportunity to receive lump-sum payments either now or in the future.Which of the following opportunities is the best,given that the interest rate is 7% per year?

Why should interest rates be generally positive?

Consider the following timeline: If the current market rate of interest is 8%,then the value as of year 1 is closest to:

Consider the following timeline: If the current market rate of interest is 9%,then the present value (PV) of this timeline as of year 0 is closest to:

Consider the following timeline: If the current market rate of interest is 12%,then the value of the cash flows in year 0 and year 2 as of year 1 is closest to: