Question 1

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, which means calculating the value of the cash flow at a future point in time based on the interest it will earn over that period. Discounting involves calculating the present value of a cash flow, while doubling and arbitraging do not apply to computing future value.

Question 2

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 3

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 11eaabab_c0c5_ff6a_b90e_95fe6c8065e4_TB5536_00 PV of 11eaabab_c0c5_ff6b_b90e_83f39873a2a9_TB5536_11 So, the answer is 11eaabab_c0c5_ff6c_b90e_172ecff8270e_TB5536_11

Question 4

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 11eaabab_c0c5_8a30_b90e_69747e8578d9_TB5536_11 11eaabab_c0c5_8a31_b90e_c122e9d6a297_TB5536_11 and 11eaabab_c0c5_8a32_b90e_ed78e4a5a979_TB5536_11 11eaabab_c0c5_8a33_b90e_0769a82e2db1_TB5536_11

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 11eaabab_c0c5_3c08_b90e_fd9273e8c0b5_TB5536_11 11eaabab_c0c5_3c09_b90e_d13c7fbed203_TB5536_11 and number of 11eaabab_c0c5_3c0a_b90e_bd4d34520675_TB5536_11 which gives 11eaabab_c0c5_3c0b_b90e_0b7348bae7b4_TB5536_11

Question 6

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 7

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 = 11eaabab_c0c5_b145_b90e_f723dd9d6f9a_TB5536_11 100 / 11eaabab_c0c5_d856_b90e_791676d3bb93_TB5536_11 = 92.59
200 / 11eaabab_c0c5_d857_b90e_21a5b511ecc7_TB5536_11 = 171.47
300 / 11eaabab_c0c5_d858_b90e_7f1dc625ea68_TB5536_11 = 238.15
Sum = $502.21, which is approximately $502.

Question 8

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 11eaabab_c0c5_631c_b90e_1d9e4b63afb4_TB5536_11 11eaabab_c0c5_631d_b90e_9d32dd03f449_TB5536_11 and 11eaabab_c0c5_631e_b90e_0b3a3ee38abd_TB5536_11 11eaabab_c0c5_631f_b90e_b916cee31262_TB5536_11

Question 9

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) 11eaabab_c0c6_2680_b90e_8fa159ac1e6b_TB5536_11

Question 10

Why should interest rates be generally positive?

Accepted Answer

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

Question 11

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 11eaabab_c0c6_267e_b90e_15ce6df7ea00_TB5536_11 = $535
PV = FV / (1 + r)n = -500 / 11eaabab_c0c6_267f_b90e_957e1d665acd_TB5536_11 = -$467
So, the answer is $535 + -$467 = $68.

Question 12

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.

Quiz 3: Time Value of Money: an Introduction

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

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 ________.

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?

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?

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 ________.

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?

Why should interest rates be generally positive?

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

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