Deck 1: Tools for Financial Planning - Applying Time Value Concepts

Question 1

Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

Answer 1

False

Question 2

The nominal interest rate is the actual rate of interest you earn or pay.

Answer 2

False

Question 3

To convert the table from ordinary annuity to annuity due is to multiple the annuity payment by (1+ i).

Answer 3

True

Question 4

Present value of the first year is determined by the future value divided by (1 + i).

Question 5

Compound interest means earning interest on interest.

Question 6

The nominal interest rate is also called an annual percentage rate (APR).

Question 7

The effective interest rate is the stated or quoted interest rate by the financial institutions.

Question 8

Jill will have reached her goal of saving $23 000 to buy a car if she puts away $420 a month in a 7% annual interest savings account for four years.

Question 9

If you invested $10 000 when you turned 20 years of age and received a return of 11 percent annually,you would have over two million dollars when you turned 70.

Question 10

The effective rate of interest and compounding frequency have an inverse relation.

Question 11

The longer the time period,the higher the present value interest factor,other things being equal.

Question 12

The higher the interest rate,the lower the present value interest factor,other things being equal.

Question 13

The concept of time value of money only applies to rare financial planning problems.

Question 14

The shorter the time period,the lower the future value interest factor,other things being equal.

Question 15

The rent charged for the use of money is called a dividend.

Question 16

The higher the interest rate,the higher the future value interest factor,other things being equal.

Question 17

The process of obtaining a present value is called discounting.

Question 18

The present value of an annuity can be obtained by discounting the individual cash flows of an annuity and totalling them.

Question 19

Future value depends on the interest rate and number of years invested but is independent of the number of compounding periods.

Question 20

Ten percent compounded quarterly with 10 years' investment means 40 compounding periods.

Question 21

ABC Bank offers term deposits with 7.8 percent compounded quarterly,while XYZ Bank offers term deposits with 8 percent compounded annually.We know that ABC Bank offers a higher effective rate of return.

Question 22

What is the highest effective rate attainable with a 12 percent nominal rate?

A)12.85 percent
B)12.75 percent
C)12.65 percent
D)12.55 percent

Question 23

Financial institutions quote rates with different compounding periods.What is the term for the actual interest rate paid or earned?

A)Effective
B)Nominal
C)Real
D)Absolute

Question 24

Mary wants to have $150 after six years by depositing $100 today and earning six percent interest compounded annually for the next six years.Can Mary attain her financial goal of having $150 lump sum six years later?

A)Yes,the future value is more than $150.
B)Yes,the present value is more than $150.
C)No,the present value is less than $150.
D)No,the future value is less than $150.

Question 25

Discount refers to the process of earning interest on interest.

Question 26

What is the term for the interest rate financial institutions quote?

A)Nominal
B)Effective
C)Annual
D)Real

Question 27

You make regular monthly rental payments at the beginning of each month.This is an example of an annuity due.

Question 28

Future value interest factor (FVIF)uses $1.00 to calculate the $1.00 over time with a given interest rate and the number of periods the $1.00 is compounded.

Question 29

The present value interest factor is

A)always less than 1.0.
B)always more than 1.0.
C)assumes simple interest.
D)always between 1.0 to 2.0.

Question 30

What is the future value of $200 deposited today at eight percent interest compounded annually for three years?

A)$252
B)$250
C)$248
D)$249

Question 31

Fred is 29 and just sold an antique for $29311 that he purchased at age nine for $17800 .Fred's annual rate of return on this antique is 7.2 percent.

Question 32

ABC Bank offers term deposits with 8 percent compounded annually,while XYZ Bank offers term deposits with 7.8 percent compounded monthly.ABC Bank offers a higher effective yield.

Question 33

If you borrow money,you will receive interest.

Question 34

The higher the interest rate,the higher the present value,other things being equal.

Question 35

You make regular monthly life insurance payments at the end of each month.This is an example of an annuity due.

Question 36

John wants to have a $10 000 down payment for his car in three years.If he puts away $7000 today and gets a 12.7% annual return,he will have the money he needs.

Question 37

To calculate the present value,all you need is the amount of money in the future,the interest rate,and the number of years the money will be compounded.

Question 38

You will receive $100 at the end of year one,$200 at the end of year two,and $300 at the end of year three.What is the present value of these cash flows today if the discount rate is 13 percent annually?

A)$553
B)$453
C)$423
D)$383

Question 39

Mary deposits $4000 at the beginning of each year and the money will grow to $1081170 in 30 years with 12 percent compounded annually.

Question 40

Approximately how much would you need to invest today,to receive $200 in ten years,if you received an annual interest rate of ten percent?

A)$65
B)$77
C)$87
D)$97

Question 41

Hazel needs to plan the mortgage amount she can afford.How much would she need to pay at the end of each month on a mortgage of $200000 at six percent interest,calculated semi-annually and amortized over 30 years?

A)$555
B)$1211
C)$1199
D)$1190

Question 42

Raymond wants to save the college tuition fees his child will need in ten years by starting with a deposit of $6500 today and depositing another $500 at the end of each year.How much will Raymond have in ten years if he gets a rate of return of four percent?

A)$15 625
B)$11 960
C)$15 865
D)$17 023

Question 43

The future value of $676 deposited at 5.85 percent compounded annually for five years is closest to

A)$845.
B)$962.
C)$907.
D)$898.

Question 44

Nick invests $50 000 today and the fund guarantees an ordinary annuity of $12 345 for six years.What is the approximate rate of return?

A)11.6 percent
B)8)0 percent
C)12.5 percent
D)Insufficient information to calculate

Question 45

Raymond has an investment of $25 000 now,and in three years it will mature and pay Raymond $32 000.What is the approximate annual interest rate he will receive?

A)9)3 percent
B)8)6 percent
C)8)9 percent
D)Insufficient information to calculate this question

Question 46

What is the present value of an ordinary annuity paying $1550 each year for 15 years,with an interest rate of 6.6 percent per annum?

A)$19 589
B)$16 528
C)$14 481
D)$13 568

Question 47

If you want to have $10 000 for a down payment on a new car in three years' time,assuming an interest rate of 4.5 percent compounded annually,how much money do you need to deposit as a lump sum today?

A)$8650
B)$8712
C)$8112
D)$8763

Question 48

How long will it take Ivy's money to triple in value at 12 percent compounded quarterly?

A)9)5 years
B)9)7 years
C)9)3 years
D)Not enough information

Question 49

The amount to be invested today at a given interest rate over a specified period in order to equal a future amount is called the

A)present value interest factor.
B)future value.
C)present value.
D)future value interest factor.

Question 50

Danny invests $124 090 in a fund and expects to receive $10 000 per year,at the end of each year,for the next 30 years.What is the approximate interest rate provided on the annuity?

A)8 percent
B)6 percent
C)9 percent
D)7 percent

Question 51

The future value of today's $200 to be received 10 years later with an interest rate of 10 percent per annum is

A)$424.
B)$484.
C)$542.
D)$519.

Question 52

If John makes annual year-end payments of $8337.83 on a 20-year loan with an annual interest rate of 7.5 percent,what is the original principal amount for John's loan?

A)$82 000
B)$83 325
C)$85 700
D)$85 000

Question 53

If the interest rate is zero,the future value interest factor equals

A)0)0.
B)-1.0.
C)1)0.
D)Undefined

Question 54

What is the present value of $1000 to be received ten years from today,assuming an interest rate of nine percent per annum?

A)$402
B)$488
C)$470
D)$422

Question 55

Assuming an inflationary economy,the future value interest factor is

A)always equal to 1.0.
B)always less than 1.0.
C)always greater than 1.0.
D)always uncertain.

Question 56

The future value of $810 deposited today at 7.71 percent compounded annually for four years is closest to

A)$1620.
B)$1090.
C)$1060.
D)$1066.

Question 57

If you want to save $40 000 for a down payment on a home in five years,assuming an interest rate of 4.5 percent compounded annually,how much money do you need to save at the end of each month?

A)$666
B)$609
C)$622
D)$597

Question 58

An antique was originally purchased 50 years ago for $2 and today is worth $600.What is the approximate annual rate of return realized on the sale of this antique?

A)18 percent
B)12 percent
C)9 percent
D)13 percent

Question 59

Betty wants to accumulate $1 million by the end of 20 years by making equal annual year-end deposits over the next 20 years.Assuming Betty can earn 10 percent over this period,how much must she deposit at the end of each year?

A)$18 560
B)$22 480
C)$27 760
D)$17 460

Question 60

If you borrow $20 000 as a five-year loan from the bank and the bank requires you to make end-of-year payments of $4878.05,what is the annual interest rate on this loan?

A)8 percent
B)6 percent
C)7 percent
D)4 percent

Question 61

Ralph wants to know what he should be able to save in his child's RESP account if he contributes $2,500 per year and also gets the CES grant of $500 each year.He wants to assume a conservative investment return of four percent annual return and that he will only contribute until the child is 15 (assume 15 years of $3000 deposits made at the end of the year).

A)$46 500
B)$52 200
C)$65 500
D)$60 700

Question 62

Julian is a student relying on student loans.He feels he would like to borrow an extra $4000 each year for the next four years to take vacations to recover from studying.Assume that no interest accrues until he completes his education and begins paying off the loan.The interest rate for the loan amount will be seven percent per year compounded monthly and he will pay it off over five years by making end of month payments.What would his monthly payment be on this loan?

A)$374
B)$267
C)$271
D)$316

Question 63

Jessie won a lottery and was given the following choice.He could either take $5000 at the end of each month for 25 years,or a lump sum of $700 000.Assuming annual compounding at approximately what interest rate would he would be indifferent between the two choices?

A)12.3
B)6)7
C)7)0
D)7)3

Question 64

Tracey is buying a condo and will have a mortgage of $180 000 which she plans to pay off in 25 years.The interest rate is 5% compounded semi-annually.Her payments would be $1046 at the end of every month.She has heard she can reduce the time it would take to pay off her mortgage if she pays $523 every two weeks instead.How many years it would take her to pay off her mortgage if she chooses the second option.

A)10.2 years
B)21.7 years
C)25.0 years
D)21.5 years

Question 65

Ruby is expecting her first child next month and would like to have $80000 saved for university education when the child turns 17.If Ruby can get a 6.6 percent annual return on the education savings for her child,approximately how much does she need to start saving at the end of each month once the baby is born?

A)$2688
B)$392
C)$224
D)$218

Question 66

Alexis wants to have saved $600 000 by the time she retires at age 60.She is turning 46 in the next week and has accumulated $220000 in her RRSP accounts.Assuming she can continue to get a 6% annual return on her RRSP investments,how much does she need to keep saving at the end of each month to reach her goal?

A)$2262
B)$1467
C)$2102
D)$396

Question 67

Sally will not be making any investments for five years as she is paying off student loans.In five years,she will make regular monthly investments,at the beginning of every month,in the amount of $350.She will make these investments for 25 years.What is the present value of her investment account assuming she can earn an annual return of 8.5%?

A)$229,725
B)$345,428
C)$519,405
D)$313,250

Question 68

The most important thing to note about an annuity is

A)that the payment must not change over time.
B)that the payment increases according to the discount rate.
C)it reflects the growth of a single lump sum.
D)that it reflects the power of simple interest.

Question 69

How much interest would Aleem save if he paid off his mortgage over 15 years instead of 30 years? His mortgage is $100 000 at six percent interest calculated semi-annually.

A)$64 111
B)$107 069
C)$58 297
D)$62 959

Question 70

What is the effective interest rate for a car loan advertised at five percent compounded monthly?

A)5)1%
B)5)2%
C)5)3%
D)5)4%

Question 71

Ishan plans to retire at age 40 with a decent lifestyle.He assumes that he can safely earn a real return of 4% annually on his money and that he would need $4000 a month,paid to him at the end of each month,to last until he turned 90.How much money would he need to have accumulated at age 40 (to the nearest thousand)if he were going to retire and no longer earn any money?

A)$1 050 000
B)$2 980 000
C)$1 500 000
D)$2 400 000

Question 72

If Jenn could get a 10 percent annual return on her investment holdings,how long would it take for her to double her money?

A)7)3 years
B)6)9 years
C)10.0 years
D)83.5 years

Question 73

Selena wants to have enough funds to cover $13 000 per year for four years of her daughter's university expenses and will need the money at the beginning of each year.If her funds get an annual return of 4.3 percent,how much would she need to have in the account when her daughter starts university?

A)$48 764
B)$46 857
C)$52 000
D)$48 872

Question 74

In which situation is simple interest the most appropriate interest calculation to use?

A)When there is one compounding period
B)Never
C)Always
D)When there are two or less compounding periods

Question 75

Rebecca is retiring next month when she turns 65.She can select a pension that pays $1745 at the end of every month guaranteed for the rest of her life,but not indexed for inflation,or take a lump sum of $312 000.Assume she can invest the lump sum at five percent annually and draw the same income as the pension.What age must she reach for the monthly pension to be the better choice?

A)89
B)90
C)92
D)93

Question 76

Joe and Bill are the same age and starting their careers.Each plans to retire at age 65 and each wants to have $600000 in his RRSP account by then.If they both get seven percent annual return on their RRSP savings,which one will be closer to reaching his goal?

A)Bill if he starts saving $800 a month when he is 45 years old
B)Joe if he starts saving $200 a month when he is 25 years old
C)Bill if he starts saving $1000 a month when he is 45 years old
D)Joe if he starts saving $150 a month when he is 20 years old

Question 77

Naldo is considering selling a painting he inherited from his grandparents and which cost $200 when purchased 72 years ago.He accepted an offer for $22000 for it recently.What is the approximate annualized rate of return on this painting?

A)1)12%
B)2)75%
C)11.7%
D)6)75 %

Question 78

If your credit card says 28% interest compounded daily,what is the effective interest rate?

A)32.3%
B)29.8%
C)31.9%
D)28.9%

Question 79

Reza is trying to decide between to investment alternatives.Invest A allows her to invest $100 at the beginning of every month for 15 years at an interest of 9.0% per year.Investment B allows her to invest $1,350 at the end of every year for 15 years at 8.7% interest.Which of the following is true regarding these two alternatives?

A)Investment A will grow by $1,787 more than Investment B .
B)Investment B will grow by $1,787 less than Investment A.
C)Both Investment A and Investment B grow to exactly the same amount.
D)Investment A will always be better because it always better to invest small amounts monthly rather than one amount at the end of the year.

Question 80

Mortgages are annuities in that a fixed monthly payment is made to the lender (assume end of month payments and an interest rate that compounds semi-annually).Sara is planning to take on a mortgage of $100 000 and believes she can afford monthly payments up to $700.How much interest would she save if she decided to pay off her mortgage over 20 years,rather than over 25 years? Her mortgage is at five percent interest calculated semi-annually.

A)$42 000
B)$18 120
C)$34 896
D)$16 776