Question 1

Consider the following timeline:  If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.
A) $0
B) $1000
C) $570
D) $68

Accepted Answer

D) Two part problem: FV = PV (1 + r)ⁿ = 500 11ea84dc_f584_e480_9a63_3b4431455413_TB1316_11_TB1316_11 = $535 PV = FV / (1 + r)ⁿ = -500 / 11ea84dc_f584_e481_9a63_ef5ac3192f0e_TB1316_11_TB1316_11 = -$467 So, the answer is $535 + -$467 = $68.

Question 2

Sara wants to have $600,000 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 $600,000 in 20 years?
A) $128,729
B) $180,221
C) $231,712
D) $139,541

Accepted Answer

A) Calculate the PV with 11ea84dc_f584_211e_9a63_213ab3cb84bf_TB1316_11_TB1316_11 11ea84dc_f584_211f_9a63_495538aa4588_TB1316_11_TB1316_11 and 11ea84dc_f584_2120_9a63_1f1f7f495daf_TB1316_00_TB1316_00 11ea84dc_f584_2121_9a63_018298e6da36_TB1316_11_TB1316_11

Question 3

An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows?
A) $304.91
B) $307.69
C) $300.29
D) $320.00

Accepted Answer

C) 11ea84dc_f584_e482_9a63_6b3183c91f67_TB1316_00_TB1316_00

Question 4

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 must compound it. This means that you must take the initial amount and add interest to it over time to calculate the future value. Discounting, doubling, and arbitraging are not methods used to compute future value.

Question 5

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 4% per year?
A) one that pays $900 now
B) one that pays $1080 in two years
C) one that pays $1350 in five years
D) one that pays $1620 in ten years

Accepted Answer

C) Calculate with 11ea84dc_f583_fa0a_9a63_71ff61d3b6b9_TB1316_11_TB1316_11 11ea84dc_f583_fa0b_9a63_d50555455cfc_TB1316_11_TB1316_11 and number of 11ea84dc_f583_fa0c_9a63_abc610c717ca_TB1316_11_TB1316_11 which gives 11ea84dc_f584_211d_9a63_4732f4d3136d_TB1316_11_TB1316_11

Question 6

On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21?
A) $3263
B) $4079
C) $8158
D) $3766

Accepted Answer

B) Calculate the FV with 11ea84dc_f584_4832_9a63_0f8ebbc131cb_TB1316_11_TB1316_11 11ea84dc_f584_4833_9a63_5fda6c192470_TB1316_00_TB1316_00 and 11ea84dc_f584_4834_9a63_711082e5e67c_TB1316_11_TB1316_11 11ea84dc_f584_4835_9a63_bf79641af974_TB1316_11_TB1316_11

Question 7

If an analyst incorrectly 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 incorrectly adds cash flows...

Question 8

Consider the following timeline:  If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________.
A) $502
B) $653
C) $600
D) $1004

Accepted Answer

A) PV = 11ea84dc_f584_6f47_9a63_5504505aa49c_TB1316_11_TB1316_11 100 / 11ea84dc_f584_9658_9a63_cf0f1cca8da6_TB1316_11_TB1316_11 = 92.59
200 / 11ea84dc_f584_9659_9a63_2dee7938b731_TB1316_11_TB1316_11 = 171.47
300 / 11ea84dc_f584_965a_9a63_4d1909e591bd_TB1316_11_TB1316_11 = 238.15
Sum = $502.21, which is approximately $502.

Question 9

Which of the following statements is FALSE about valuing cash at different points in time?
A) The process of moving forward along the timeline to determine a cash flow's value in the future 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

D) A dollar in the future is worth less than a dollar today.

Question 10

Consider the following timeline:  If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________.
A) $167.35
B) -$98.7
C) $98.7
D) -$70

Accepted Answer

B) This is a two part problem involving both present and future values.
FV of 11ea84dc_f584_bd6c_9a63_15a58f66439b_TB1316_11_TB1316_11 PV of 11ea84dc_f584_bd6d_9a63_bf598ba1370f_TB1316_11_TB1316_11 So, the answer is 11ea84dc_f584_bd6e_9a63_8de5bc21ad75_TB1316_11_TB1316_11

Question 11

Which of the following statements is FALSE about valuing cash at different points in time?
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

A) Finding the present value (PV) and discounting are the same.

Question 12

Why should interest rates be generally positive?

Accepted Answer

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

Quiz 3: Time Value of Money: an Introduction

Consider the following timeline: If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.

Sara wants to have $600,000 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 $600,000 in 20 years?

An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows?

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 4% per year?

On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21?

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

Consider the following timeline: If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________.

Which of the following statements is FALSE about valuing cash at different points in time?

Consider the following timeline: If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________.

Which of the following statements is FALSE about valuing cash at different points in time?

Why should interest rates be generally positive?