Question 1

The value today of future cash ﬂows discounted at the appropriate discount rate is called the _____ value.

Accepted Answer

The value of future cash flows discounted at the appropriate discount rate gives the present value. The present value is the current worth of a future sum of money or stream of cash flows given a specific rate of return. It is important in finance for determining the fair value of a proposed investment or evaluating the potential returns of any investment.

Question 2

Twenty years ago, Max invested $10,000. Thirty years ago, Julie invested $5,000. Today, both Max and Julie's investments are each worth $35,000. Which one of the following statements is correct
Concerning their investments? Assume that they will continue earning the same rate of return.

Accepted Answer

The answer of Twenty years ago, Max invested $10,000. Thirty...

Question 3

Kurt invests $1,000 at a 10% rate of return for twenty years. The return is based on simple interest that is paid at the end of each year. Which one of the following is correct?

Accepted Answer

In simple interest, the interest amount is calculated on the original principal only, so Kurt will receive the same amount of interest each year.

Question 4

Nadine invests $1,000 at 8% when she is 25 years old. Neal invests $1,000 at 8% when he is 40 years old. Both investments compound interest annually. Both Nadine and Neal retire at age 60.
Which one of the following statements is correct?

Accepted Answer

First, we need to find the value of each investment when they retire at age 60. Nadine's investment will become:
$1000(1 + 0.08)^{60-25} = $1000(1.08)^35 = $10,063.04
Neal's investment will become:
$1000(1 + 0.08)^{60-40} = $1000(1.08)^20 = $4,661.80
Therefore, Nadine will have more money when she retires than Neal. Choice A is incorrect.

Now, let's look at choice B and C. Both Nadine and Neal invested the same amount at the same interest rate, so they will earn the same interest on interest and compound interest. Therefore, both choice B and C are incorrect.

For choice D, if Neal waits to age 70 to retire, his investment will become:
$1000(1 + 0.08)^{70-40} = $1000(1.08)^30 = $9,646.56
This is still less than what Nadine will have at age 60, so choice D is also incorrect.

Therefore, the correct answer is E: Nadine will have more money when she retires than Neal.

Question 5

Compound interest is best deﬁned as the interest earned:

Accepted Answer

The answer of Compound interest is best deﬁned as the...

Question 6

All else being the same, which of the following statements is correct?

Accepted Answer

Present values are calculated by discounting future values back to the present using a discount rate (r). When both the discount rate (r) and the time period (t) are positive, the present value will indeed be smaller than the future value. This is because the process of discounting reduces the future value to account for the time value of money.

Question 7

Fred and Max each want to have $10,000 saved ﬁve years from now. Fred can earn 4.35%, compounded annually, on his savings and Max can earn 4.50%, compounded annually, on his
Savings. Both Fred and Max are going to deposit one lump sum today and will not add any
Additional funds to their accounts. Given this, Max _____ deposit _____ Fred to achieve the goal.

Accepted Answer

Max can deposit less than Fred because he earns a higher interest rate, allowing his savings to grow faster to reach the $10,000 goal in five years.

Question 8

Sun Lee has $500 today. Which one of the following statements is correct if she invests this money at a positive rate of interest for ﬁve years?

Accepted Answer

The higher the interest rate, the more money Sun Lee will have in the future. At 5%, she will have less money than at 7% after five years.

Question 9

The greater the number of years, the:

Accepted Answer

As time goes on, the compounding effect of interest increases, resulting in a higher future value of a single sum.

Question 10

Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today, both Joe and Marie's investments are each worth $8,500. Which one of the following statements is correct
Concerning their investments?

Accepted Answer

The answer of Ten years ago, Joe invested $5,000. Five...

Question 11

Twelve years ago, Jake invested $2,000. Six years ago, Tami invested $4,000. Today, both Jake's and Tami's investments are each worth $9,700. Assume that both Jake and Tami continue to earn
Their respective rates of return. Which one of the following statements is correct concerning these
Investments?

Accepted Answer

Tami has earned an average annual interest rate of 15.91%.

Question 12

Ito invested $4,350. After seven years he had an account value of $6,980.58. Maria invested $5,920. After six years she had an account value of $8,834.62. Which one of the following
Statements is correct?

Accepted Answer

The answer of Ito invested $4,350. After seven years he...

Question 13

Compound interest means that you earn:

Accepted Answer

Compound interest means that you earn interest on both the principal amount and the prior reinvested interest, which leads to exponential growth over time. This is different from simple interest, where you only earn interest on the initial principal amount.

Question 14

The current value of future cash ﬂows discounted at the appropriate discount rate is called the:

Accepted Answer

The current value of future cash flows discounted at the appropriate discount rate is called the present value. This is because it represents the current value or worth of future cash flows, taking into account the time value of money.

Question 15

You invest $1,000 in an account paying 5% simple interest. You do not add nor withdraw any funds from this account. Every year, your account balance will:

Accepted Answer

The answer of You invest $1,000 in an account paying...

Question 16

Suppose that r and t are greater than zero, which statement is correct?

Accepted Answer

Present value interest factors represent the present value of future cash flows and discount them by a certain interest rate. Since r and t are both positive, the discounting effect will always make the present value lower than the future value, resulting in present value interest factors that are less than one. Therefore, option A is correct. Option B is incorrect because future value interest factors can be greater or less than one, depending on the interest rate and time period. Option C is incorrect because present value interest factors are always less than future value interest factors, as discussed above. Option D is incorrect because present value interest factors decrease as r and t increase, not grow. Option E is incorrect because present value interest factors are always positive, representing the value of future cash flows in today's dollars.

Question 17

Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000 ﬁve years from now. Which one of the following statements is correct if both Katie and Wilt apply a 5%
Discount rate to these amounts?

Accepted Answer

The present value of money decreases as the time to receive it increases. Since Katie receives her money sooner than Wilt, her money is worth more today when discounted at the same rate.

Question 18

Isaac and Faith both want to have $5,000 in three years. Isaac expects to earn 8% on his investments and Faith expects a 7% rate of return. Which one of the following statements is correct
Concerning the amount of money they each need to invest today?

Accepted Answer

The answer of Isaac and Faith both want to have...

Question 19

Given a constant future value and discount rate, an increase in the number of time periods will _____ the present value.

Accepted Answer

An increase in the number of time periods will decrease the present value because the present value is inversely proportional to the number of time periods. As the number of time periods increase, the value of the cash flow at present decreases as the discount rate reduces the value of future cash flows.

Question 20

The current value of future cash ﬂows discounted at the appropriate discount rate to current time is called the _____ value.

Accepted Answer

The current value of future cash flows discounted at the appropriate discount rate to current time is called the present value. This is because it reflects the value of the cash flows in today's dollars, taking into account the time value of money.

Quiz 5: Introduction to Valuation: the Time Value of Money

The value today of future cash ﬂows discounted at the appropriate discount rate is called the _____ value.

Twenty years ago, Max invested $10,000. Thirty years ago, Julie invested $5,000. Today, both Max and Julie's investments are each worth $35,000. Which one of the following statements is correct Concerning their investments? Assume that they will continue earning the same rate of return.

Kurt invests $1,000 at a 10% rate of return for twenty years. The return is based on simple interest that is paid at the end of each year. Which one of the following is correct?

Nadine invests $1,000 at 8% when she is 25 years old. Neal invests $1,000 at 8% when he is 40 years old. Both investments compound interest annually. Both Nadine and Neal retire at age 60. Which one of the following statements is correct?