Deck 3: Time Value of Money - Introduction

Question 1

A college received a contribution to its endowment fund of $2 million.They can never touch the principal,but they can use the earnings.At an assumed interest rate of 9.5 percent,how much can the college earn to help its operations each year?

A) $95,000
B) $19,000
C) $190,000
D) $18,000
E) $9,500

Answer 1

$190,000

Question 2

You plan to invest $2,500 in a money market account which will pay an annual stated (nominal)interest rate of 8.75%,but which compounds interest on a weekly basis.If you leave this money on deposit for one year (52 weeks),what will be your ending balance when you close the account?

A) $2,583.28
B) $2,611.72
C) $2,681.00
D) $2,703.46
E) $2,728.40

Answer 2

$2,728.40

Question 3

A bank pays a quoted annual (nominal)interest rate of 8%.However,it pays interest (compounded)daily using a 365-day year.What is the effective annual rate of return?

A) 7.86%
B) 7.54%
C) 8.57%
D) 8.33%
E) 9.21%

Answer 3

8.33%

Question 4

Compute the simple interest earned on a 1-year $200 deposit that earns 6% per year.

A) $6
B) $60
C) $120
D) $12
E) $200

Question 5

If the present value of a perpetual income stream is increasing,the discount rate must be:

A) Increasing
B) Decreasing
C) Changing unpredictably
D) Keeping pace with inflation

Question 6

The primary difference between simple and compound interest is that:

A) Simple interest is only paid at the end of the investment period.
B) Compound interest entails receiving interest payments on previously earned interest.
C) Compound interest is paid up front and not when the investment matures.
D) Simple interest is not taxed by the federal government.
E) Simple interest earns a higher interest rate on reinvested interest than compound interest.

Question 7

When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is called:

A) Discount interest
B) Compound interest
C) Primary interest
D) Future value

Question 8

The amount of money that would have to be invested today at a given interest rate over a specific period in order to equal a future amount is called:

A) Future value
B) Present value
C) Future value interest factor
D) Present value interest factor

Question 9

Most people prefer to receive money today rather than ten years from now because

A) U.S. prices have been falling recently and a dollar received today will buy more than one received in the future.
B) Future investment returns are expected to be less variable than current ones.
C) Receiving cash today enables one to take advantage of current investment opportunities.
D) People are unsure about their future employment prospects and wish to provide themselves with a source of future income.
E) Most people are afraid they will spend future cash payments foolishly.

Question 10

The future value of $200 received today and deposited at 8 percent compounded semi-annually for three years is:

A) $380
B) $158
C) $253
D) $252
E) $248

Question 11

Bank A offers a 2-year certificate of deposit (CD)that pays 10 percent compounded annually.Bank B offers a 2-year CD that is compounded semi-annually.The CDs have identical risk.What is the stated,or nominal,rate that Bank B would have to offer to make you indifferent between the two investments?

A) 9.67%
B) 9.76%
C) 9.83%
D) 9.87%
E) 9.93%

Question 12

$1,200 is deposited today into an account paying 6% interest compounded semiannually.How much interest will have been earned after 25 years?

A) $3,950.24
B) $1,312.53
C) $20,904.19
D) $5,260.69
E) $4,060.69

Question 13

You have just borrowed $20,000 to buy a new car.The loan agreement calls for 60 monthly payments of $444.89 each to begin one month from today.If the interest is compounded monthly,then what is the effective annual rate on this loan?

A) 12.68%
B) 14.12%
C) 12.00%
D) 13.25%
E) 15.08%

Question 14

If you presently have $6,000 invested at a rate of 15%,how many years will it take for you investment to triple? (Round up to obtain a whole number of years if necessary.)

A) 2
B) 4
C) 6
D) 8
E) 10

Question 15

The price of a Wendy's Bacon Cheeseburger is $.99,the same as it was five years ago.Had the price of this sandwich increased at the same 3% annual rate as U.S.consumer prices did over the last five years,what would its price be today?

A) $1.15
B) $1.02
C) $1.12
D) $1.22
E) $ .84

Question 16

Which of the following problems could not be addressed by using compounding or discounting techniques?

A) Finding an amount to be invested today to provide a given level of income during retirement
B) Determining how long it should take the population of China to double
C) Finding the growth rate in a firm's dividend payments
D) Calculating the length of time needed for the supply and demand for lendable funds to equate if interest rates are above the equilibrium level
E) Deciding whether a bank paying interest compounded annually is giving you a better deal than a rate that compounds daily

Question 17

What is the future value of $124.49 after earning simple interest for five years at an annual rate of 10%?

A) $162.25
B) $186.74
C) $200.49
D) $136.94
E) $175.00

Question 18

The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.

A) effective
B) nominal
C) discounted
D) continuous

Question 19

$1,200 is received at the beginning of year 1,$2,200 is received at the beginning of year 2,and $3,300 is received at the beginning of year 3.If these cash flows are deposited at 12 percent,their combined future value at the end of year 3 is:

A) $6,700
B) $17,000
C) $12,510
D) $7,504
E) $8,141

Question 20

At an effective annual interest rate of 20%,how many years will it take a given amount to triple in value? (Round to the closest year.)

A) 5
B) 8
C) 6
D) 10
E) 9

Question 21

You have some money on deposit in a bank account which pays a nominal (or quoted)rate of 8.0944 percent,but with interest compounded daily (using a 365 day year).Your friend owns a security which calls for the payment of $10,000 after 27 months.The security is just as safe as your bank deposit,and your friend offers to sell it to you for $8,000.If you buy the security,by how much will the effective annual rate of return on your investment change?

A) 1.87%
B) 1.53%
C) 2.00%
D) 0.96%
E) 0.44%

Question 22

Joe expects to receive a gift of $1,000 when he graduates one year from today.Joe can invest his gift at 6% compounded annually and he would like to use the funds in four years to purchase an engagement ring for Mabel.How much will he have in four years to spend on a ring?

A) $1,191.02
B) $1,180.00
C) $1,200.00
D) $1,262.48
E) $1,175.00

Question 23

The Vanguard Windsor II mutual fund had a net asset value of $15.07 at the beginning of 1992 and $24.04 at the beginning of 1997.What was the approximate average annual growth rate in this measure over this period? (Round to the nearest whole number)

A) 60%
B) 8%
C) 10%
D) 18%
E) 15%

Question 24

Casey has $1,000 to invest and would like to buy a $3,000 jet-ski in four years.If interest is compounded annually,what interest rate will she have to receive to reach her goal?

A) 300%
B) 16%
C) 32%
D) 3%
E) 7%

Question 25

Gary has $1,400 to invest with the goal of having $4,000 available to purchase a used car.If he can earn 12% compounded semiannually on his investment,how long will he have to wait to acquire his car?

A) Eighteen years
B) Nine years
C) Eighteen months
D) Nine months
E) Four years

Question 26

When you turned 20,you deposited $1,500 into an account paying interest that is compounded quarterly.You just turned 30,and there is now $2,233.30 in the account.What nominal annual interest rate is the account paying?

A) 1.00%
B) 4.00%
C) 4.06%
D) 16.24%
E) 3.75%

Question 27

If a US Saving bond can be purchased for $29.50 and has a maturity value at the end of 25 years of $100,what is the annual rate of return on the bond?

A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent
E) 4 percent

Question 28

How much will you need in 30 years to have the same purchasing power that $150 has today,if inflation averages 4% per year?

A) $486.51
B) $180.00
C) $120.00
D) $169.08
E) $330

Question 29

$100 is received at the beginning of year 1,$200 is received at the beginning of year 3.If these cash flows are deposited at 12 percent,their combined future value at the end of year three is: (Round to the nearest whole dollar)

A) $672
B) $536
C) $427
D) $364
E) $336

Question 30

A firm's stock price is $25 per share and is expected to grow at a 5% compound annual rate.What should the stock price per share be in five years?

A) $26.25
B) $125.00
C) $75.00
D) $31.91
E) $69.66

Question 31

What is the effective interest rate of 4% compounded quarterly?

A) 4.60%
B) 4.80%
C) 4.16%
D) 4.06%
E) 4.76%

Question 32

If interest rates are 5%,which of the following will produce the largest amount of money in four years?

A) $500 earning simple interest
B) $400 with interest compounded annually
C) $300 with interest compounded semiannually
D) $100 with interest compounded quarterly
E) $25 with interest compounded monthly

Question 33

If $100 is placed in an account that earns a nominal 4%,compounded quarterly,what will it be worth in 5 years?

A) $122.02
B) $105.10
C) $135.41
D) $120.90
E) $117.48

Question 34

The future value of $200 received today and deposited for three years in an account which pays semiannual interest of 8 percent is:

A) $253
B) $252
C) $158
D) $134
E) $248

Question 35

Kayla hopes to purchase a new car in five years.If she deposits $10,000 today in an account that pays 7% compounded quarterly,how much will she be able to spend on the new car in five years?

A) $14,025.52
B) $10,700.00
C) $14,147.78
D) $13,500.00
E) $15,000.00

Question 36

Molly Costner deposits $2,500 in her checking account today.Her checking account pays interest of 2.5% compounded annually.Assuming Molly does not withdraw any funds and does not deposit any additional funds,how much will be in her account in 25 years?

A) $4,096.54
B) $3,750.00
C) $4,102.52
D) $4,634.86
E) $4,062.50

Question 37

The future value of $100 received today and deposited in an account for four years paying semiannual interest of 6 percent is:

A) $450
B) $126
C) $889
D) $134
E) $124

Question 38

At 15% interest compounded annually,approximately how long will it take Walter to double his money?

A) About five years
B) About three years
C) About seven years
D) About fifteen years
E) About fifty years

Question 39

The future value of a dollar ________ as the interest rate increases and ________ the farther in the future an initial deposit is to be received.

A) decreases; decreases
B) decreases; increases
C) increases; increases
D) increases; decreases

Question 40

If a United States saving bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100,what is the annual rate of return on the bond?

A) 6 percent
B) 7 percent
C) 8 percent
D) 9 percent
E) 10 percent

Question 41

The future value of $100 received today and deposited at 6 percent for four years is: (Round to the nearest whole dollar)

A) $126
B) $79
C) $124
D) $116
E) $106

Question 42

Your current investment will mature in 2 years for $30,000,at which time you will reinvest the funds for 10 more years at 7% per year.What will be the value of your investment at the end of the 12th year?

A) $59,014.54
B) $55,153.78
C) $61,985.74
D) $67,565.75
E) $52,734.41

Question 43

In 1958 the average tuition for one year at an Ivy League school was $1,800.Thirty years later,in 1988,the average cost was $13,700.What was the growth rate in tuition over the 30-year period?

A) 12%
B) 9%
C) 6%
D) 7%
E) 8%

Question 44

A recent advertisement in the financial section of a magazine carried the following claim: "Invest your money with us at 14 percent,compounded annually,and we guarantee to double your money sooner than you imagine." Ignoring taxes,how long would it take to double your money at a nominal rate of 14 percent,compounded annually?

A) 3.66 years
B) 5.29 years
C) 7.00 years
D) 10.24 years
E) 14.00 years

Question 45

In its first year of operations,1980,the Gourmet Cheese Shoppe had earning per share of $0.26.Four years later,in 1984,EPS was up to $0.38,and 7 years after that,in 1991,EPS was up to $0.535.It appears that the first four years represented a supernormal growth situation and since then a more normal growth rate has been sustained.What are the rates of growth for the earlier period and for the later period? (Round to the nearest whole number)

A) 6%; 5%
B) 6%; 3%
C) 10%; 8%
D) 10%; 5%
E) 12%; 7%

Question 46

Drexel Corporation has been enjoying a phenomenal rate of growth since its inception one year ago.Currently,its assets total $100,000.If growth continues at the current rate of 12% compounded quarterly,what will total assets be in 2 1/2 years? (Round to the nearest whole dollar)

A) $142,571
B) $126,678
C) $148,016
D) $136,855
E) $134,392

Question 47

What is the future value of $16.54 after two years if these funds can be invested to earn 5.5%,compounded annually?

A) $18.24
B) $18.36
C) $18.58
D) $18.50
E) $18.41

Question 48

The future value of $200 received today and deposited at 8 percent for three years is: (Round to the nearest whole dollar)

A) $248
B) $252
C) $158
D) $200
E) $249

Question 49

You can deposit your savings at the Darlington National Bank,which offers to pay 12.6 percent interest compounded monthly,or at the Barlett Bank,which will pay interest of 11.5 percent compounded daily.(Assume 365 days in a year.)Which bank offers the higher effective annual rate?

A) Darlington National Bank
B) Barlett Bank
C) Both banks offer the same effective rate.
D) Cannot be determined from the information provided.
E) Workable only if the banks use the same compounding period.

Question 50

Given some amount to be received several years in the future,if the interest rate increases,the present value of the future amount will be:

A) Higher
B) Lower
C) Stay the same
D) Cannot tell
E) Variable

Question 51

You deposited ($1,000)in a savings account that pays 8 percent interest,compounded quarterly,planning to use it to finish your last year in college.Eighteen months later,you decide to go to the Roshy Mountains to become a ski instructor rather than continue in school,so you close out your account.How much money will you receive? (Round to the nearest whole dollar)

A) $1,171
B) $1,126
C) $1,082
D) $1,163
E) $1,008

Question 52

Charlene owns stock in a company which has consistently paid a growing dividend over the last five years.The first year Charlene owned the stock,she received $1.71 per share and in the fifth year,she received $2.89 per share.What is the growth rate of the dividends over the last five years? (Round to the nearest whole number)

A) 7 percent
B) 14 percent
C) 12 percent
D) 5 percent
E) 11 percent

Question 53

The rate of interest actually paid or earned,is the ________ interest rate

A) effective
B) nominal
C) discounted
D) continuous

Question 54

Julian was given a gold coin originally purchased for $1 by his great grandfather 50 years ago.Today the coin is worth $450.The rate of return realized on the sale of this coin is approximately equal to:

A) 7.5%
B) 13%
C) 50%
D) 10%
E) 15%

Question 55

At an inflation rate of 9 percent,the purchasing power of $1 would be cut in half in 8.04 years.How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4 percent?

A) 12 years
B) 15 years
C) 18 years
D) 20 years
E) 23 years

Question 56

Suppose you put $100 into a savings account today,the account pays a nominal annual interest rate of 6 percent,but compounded semiannually,and you withdraw $100 after 6 months.What would your ending balance be 20 years after the initial $100 deposit was made?

A) $226.20
B) $115.35
C) $62.91
D) $9.50
E) $3.00

Question 57

Young Sook owns stock in a company which has consistently paid a growing dividend over the last 10 years.The first year Young Sook owned the stock,she received $4.50 per share and in the 10th year,she received $4.92 per share.What is the growth rate of the dividends over last 10 years?

A) 5 percent
B) 4 percent
C) 2 percent
D) 1 percent
E) 3 percent

Question 58

Kathy deposited $100 in a savings account that paid 8% interest,compounded annually.How much compound interest did she earn after 2 years?

A) $15.64
B) $16.64
C) $8.08
D) $8.00
E) $8.64

Question 59

As the discount rate increases without limit,the present value of the future cash inflows:

A) Gets larger without limit.
B) Stays unchanged.
C) Approaches zero.
D) Gets smaller without limit, i.e. approaches minus infinity.

Question 60

Your grandparents bought their collection of one hundred silver dollars at face value in 1952.If they appreciated at a rate of 3% per year,how much were they worth in 2006?

A) $493.41
B) $262.00
C) $479.04
D) $508.21
E) $518.00

Question 61

Leon's has a "Don't Pay For One Year" event on right now at the store,so you purchase an Italian,hand-stitched leather sofa.You will pay $1,267.99 for the sofa in one year.Leon's charges 18% annual interest compounded monthly on overdue payments.If you forget and don't pay for the sofa until 6 months after payment is due,how much will you pay for the sofa at that time?

A) $1,386.48
B) $1,516.03
C) $1,657.70
D) $1,452.06
E) $1,377.39

Question 62

You have come across an investment opportunity that will give you $51,725.29 in 14 years if you put up $12,000 today.Calculate the annual return on this investment.

A) 11%
B) 10%
C) 12%
D) 13%
E) 9%

Question 63

Shylock Bank offers a savings account with a nominal rate of 7% and daily compounding.What is the effective rate of the account? (Assume a 365 day year.)

A) 7.25%
B) 7.00%
C) 7.50%
D) 7.10%
E) 7.05%

Question 64

Shylock Bank offers a savings account with an effective interest rate of 15% and weekly compounding.What is the nominal rate (APR)on the account?

A) 14.00%
B) 16.16%
C) 14.05%
D) 16.08%
E) 15.00%

Question 65

Jordan will need $20,000 at the end of 6 years to put a down payment on a house.What rate of return will he need to earn if he can invest $9,110 today?

A) 14.0%
B) 13.0%
C) 13.5%
D) 14.5%
E) 15.0%

Question 66

How long does it take for your money to double when invested at the rate of 3% (with annual compounding)?

A) Depends on how much money you start with.
B) 26 years
C) 23 years
D) 25 years
E) 24 years

Question 67

Jordan will need $20,000 at the end of 6 years to put a down payment on a house.What rate of return will he need to earn if he can invest $12,250 today?

A) 8.5%
B) 7.5%
C) 8.0%
D) 9.0%
E) 9.5%

Question 68

You currently have $48,000 in your bank account,which pays annual interest of 5%,and you are saving up to buy a brand new $150,000 Jaguar convertible.In how many years will you have enough money to buy the car?

A) 26.0 years
B) 25.0 years
C) 18.0 years
D) 20.0 years
E) 24.0 years

Question 69

Shylock Bank offers a savings account with an effective interest rate of 9% and quarterly compounding.What is the nominal rate (APR)on the account?

A) 8.71%
B) 8.00%
C) 7.55%
D) 6.00%
E) 7.70%

Question 70

You have $602.42 today.You want to accumulate $1,320 by investing your money.You have identified an investment that will generate a return of 4% per annum.How long will you have to invest (in years)in order to accumulate your desired total?

A) 20 years
B) 17 years
C) 19 years
D) 21 years
E) 22 years

Question 71

In order to open up your new business you need to take out a loan.First Bank charges 6% compounded quarterly,and Second Bank charges 6.5% compounded semi-annually.From which bank would you prefer to obtain your loan?

A) First Bank
B) Second Bank
C) Indifferent

Question 72

You have $253.05 today.A friend wants to borrow that money from you and pay you back $310 at the end of 3 years.What rate of return (per annum)will you earn from the loan?

A) 7.0%
B) 7.2%
C) 6.8%
D) 7.4%
E) 7.6%

Question 73

Henry purchased stock in Nortel Networks for $120 per share.Unfortunately the stock did not perform very well in the 3 years that Henry has owned it as it is now trading at $3.93 per share.Feeling that the value of the stock will only continue to drop,Henry sold his shares today.What annual rate of return did Henry make on his investment?

A) -68%
B) -66%
C) -67%
D) -69%
E) -70%

Question 74

You wish to deposit $7,000 in an account at the Shylock Bank.The bank pays interest at a nominal annual rate of 10% compounded quarterly.What is the effective interest rate offered by Shylock?

A) 10.38%
B) 10.00%
C) 9.65%
D) 11.21%
E) 10.47%

Question 75

If you could borrow at 9.5% compounded semi-annually or at 9.4% compounded monthly,which would you prefer?

A) 9.5% compounded semi-annually
B) Indifferent
C) 9.4% compounded monthly

Question 76

Shylock Bank offers a savings account with a nominal rate of 9% and quarterly compounding.What is the effective rate of the account?

A) 9.31%
B) 9.00%
C) 9.20%
D) 9.42%
E) 8.63%

Question 77

You put $100 in a bank for a fixed two year term.The interest rate on the loan is 8% per annum,compounded semi-annually.Because the term is fixed,you are not allowed to withdraw interest at any point.What is the total amount of interest earned in the final half-year of the term?

A) $4.00
B) $4.50
C) $4.67
D) $4.16
E) $4.33

Question 78

You invest $2,500 today at an interest rate of 20% compounded annually.How much will you accumulate after 35 years?

A) $1,476,670.57
B) $1,230,558.81
C) $1,506,203.98
D) $1,772,004.69
E) $1,974,367.39

Question 79

You deposit $100 in a bank for a fixed 7 year term.Interest on the deposit is calculated every half-year (m = 2)at the rate of 5% per half-year (i/m = 5%).Because the term is fixed,you are not allowed to withdraw interest at any point.You earn interest in the final compounding period of the term.How much of that interest is earned off of earlier interest (as opposed to earned off of the principal)?

A) $4.43
B) $9.43
C) $4.90
D) $5.00
E) $9.90

Question 80

Your Godmother established a $3,000 bank account for you when you were born.For the first 10 years the interest rate on the account was 10%.It has been 7.5% since then.You are now 25 years old and would like to withdraw the funds.How much money do you have?

A) $23,023.70
B) $18,295.02
C) $32,504.12
D) $25,828.32
E) $23,445.80