Question 1

What would be the future value of a CD of $1,000 for two years if the bank offered a 10% interest rate compounded semiannually?
A) $1,720
B) $1,960
C) $1,200
D) $1,216

Accepted Answer

The future value of a compound interest investment is calculated using the formula $A = P(1 + \frac{r}{n})^{nt}$, where $A$ is the amount of money accumulated after n years, including interest, $P$ is the principal amount (the initial amount of money), $r$ is the annual interest rate (decimal), $n$ is the number of times that interest is compounded per year, and $t$ is the time the money is invested for in years. For a $1,000 CD at a 10% interest rate compounded semiannually for two years, the calculation is $A = 1000(1 + \frac{0.10}{2})^{2*2} = 1000(1 + 0.05)^4 = 1000(1.21550625) = 1215.51$, which rounds to $1,216.

Question 2

The future value of a dollar ________ as the interest rate increases and ________ the farther in the future is the funds are to be received.
A) decreases; decreases.
B) decreases; increases.
C) increases; increases.
D) increases; decreases.

Accepted Answer

The answer of The future value of a dollar ________...

Question 3

Tracey deposits $5,000 in a five-year certificate of deposit paying 6% compounded semi-annually. How much will Tracey have at the end of the five-year period?
A) $6,720
B) $6,690
C) $6,596
D) $6,910

Accepted Answer

The correct answer is A because the future value of the deposit can be calculated using the formula:FV = PV * (1 + r/n)^(n*t)where:PV is the present value ($5,000)r is the annual interest rate (6%)n is the number of times per year that the interest is compounded (2)t is the number of years (5)Plugging these values into the formula, we get:FV = 5000 * (1 + 0.06/2)^(2*5)= 5000 * (1.03)^10= $6,720

Question 4

If the stated or nominal interest rate is 10 percent and the inflation rate is 5 percent, the net or differential compounding rate would be ________ percent
A) ten
B) five
C) two
D) fifteen

Accepted Answer

The real interest rate can be roughly calculated as the nominal interest rate minus the inflation rate, which in this case is 10% - 5% = 5%.

Question 5

You need to have $35,000 on hand to buy a new Lexus five years from today. To achieve that goal, you want to know how much you must invest today in a certificate of deposit guaranteed to return you 3% per year. To help determine how much to investment today, you will use:
A) present value factors
B) annuity value factors
C) present value factors of an annuity
D) future value factors of an annuity

Accepted Answer

To determine how much to invest today, we need to use present value factors which take into account the time value of money and adjust for inflation. An annuity isn't relevant in this scenario as we are only looking for a lump sum payment five years from now. Future value factors of an annuity would only come into play if we were looking to calculate the future value of regular investments over time. Therefore, the best choice is present value factors (A).

Question 6

If the present-value interest factor for i percent and n periods is 0.270, the future-value interest factor for the same i and n is
A) 0.730.
B) 3.797.
C) 3.704.
D) 3.777.

Accepted Answer

The answer of If the present-value interest factor for i...

Question 7

You put $2,000 in an IRA account at Northern Trust. This account pays a fixed interest rate of 8% compounded quarterly. How much money do you have in five years?
A) $2,914
B) $2,938
C) $2,972
D) $2,999

Accepted Answer

The formula for compound interest is A = P(1 + r/n)^(nt). Here, P = $2,000, r = 0.08, n = 4, t = 5. Plugging in these values gives A = 2000(1 + 0.08/4)^(4*5) = $2,972.

Question 8

For a given period of time until receipt of the funds, as the interest rate increases, the present value interest factor
A) changes proportionally.
B) increases.
C) decreases.
D) remains unchanged.

Accepted Answer

The present value interest factor is used to calculate the present value of an expected cash flow at a given interest rate. As the interest rate increases, each dollar received in the future is worth less in present value terms. Therefore, the present value interest factor decreases.

Question 9

__________ is the arithmetic process whereby an initial value increases or grows at a compound interest rate over time to reach a value in the future.
A) Discounting
B) Future value
C) Inflation
D) Compounding

Accepted Answer

Compounding involves the process of earning interest on both the principal amount and the interest earned. Over time, this leads to exponential growth in the value of the initial investment or principal. Therefore, compounding is the correct answer for the given description.

Question 10

The future value of $100 received today and deposited at 6 percent for four years is
A) $126.
B) $ 79.
C) $124.
D) $116.

Accepted Answer

The future value (FV) of an investment is calculated using the formula FV = PV(1 + r)^n, where PV is the present value, r is the annual interest rate, and n is the number of years. Substituting the given values, FV = $100(1 + 0.06)^4 = $126.25, which rounds to $126.

Question 11

$2,000 invested today at 6% in 3 years would result in a future value of:
A) $2,000
B) $2,382
C) $6,362
D) none of the above

Accepted Answer

Using the formula for future value of a single sum, FV = PV x (1 + r)^n, where PV is the present value, r is the interest rate, and n is the number of years, we can calculate the future value as $2,000 x (1 + 0.06)^3 = $2,382. Therefore, the correct choice is B.

Question 12

Sally would like to take an extra special trip in four years. She estimates she will need $10,000 for the trip. The best safe investment she can find currently pays 4% interest. How much must she invest today to have her $10,000 in four years? Round your answer to a while number.
A) $8,237
B) $8,548
C) $8,590
D) $11,841

Accepted Answer

To find out how much Sally needs to invest today, we can use the formula: 
Present Value = Future Value / (1 + r)^n 
where r is the interest rate and n is the number of years.

In this case, Sally wants a future value of $10,000 in four years, with an interest rate of 4%. Plugging in the numbers, we get: 
Present Value = 10,000 / (1 + 0.04)^4 = $8,548

Therefore, Sally must invest $8,548 today to have $10,000 in four years. Round this to the nearest whole number, and the answer is B: $8,548.

Question 13

If the interest rate is zero, the future value interest factor equals ________.
A) -1.0
B) 0.0
C) 1.0
D) 2.0

Accepted Answer

The future value interest factor formula is (1 + r)^n, where r is the interest rate and n is the number of periods. If the interest rate is zero, then the formula simplifies to (1 + 0)^n, which equals 1. Therefore, the future value interest factor is 1 when the interest rate is zero.

Question 14

For a given interest rate, as the length of time until receipt of the funds increases, the present value interest factor
A) changes proportionally.
B) increases.
C) decreases.
D) remains unchanged.

Accepted Answer

The present value interest factor is the reciprocal of the future value interest factor, and it is inversely proportional to the length of time until receipt of the funds. Therefore, as the length of time increases, the present value interest factor decreases.

Question 15

The future value of $200 received today and deposited at 8 percent for three years is
A) $248.
B) $252.
C) $158.
D) $200.

Accepted Answer

The future value can be calculated as: 
FV = PV x (1 + r)^n 
Where: 
PV = present value = $200 
r = interest rate per period = 8% = 0.08 
n = number of periods = 3

Plugging these values in the formula, we get: 
FV = $200 x (1 + 0.08)^3 
FV = $200 x 1.2597 
FV = $251.94

Rounding off to the nearest dollar, the future value of $200 after three years at 8% interest is $252 (Choice B).

Question 16

For positive interest rates, the present value interest factor is
A) between 2.0 and 0.0.
B) always negative.
C) always less than 1.0.
D) a discount rate.

Accepted Answer

The present value interest factor (PVIF) is the factor by which a future cash flow needs to be multiplied to obtain its present value. For positive interest rates, the PVIF will always be less than 1.0 as the cash flow is being discounted back to the present. Therefore, choice C is correct. Choices A and B are incorrect as the PVIF cannot be negative or greater than 2.0. Choice D is incorrect as the PVIF is not a discount rate, but rather a factor used in the present value calculation.

Question 17

The amount earned on a deposit becomes part of the principal at the end of a period and can earn a return in future periods is called
A) discount interest.
B) compound interest.
C) primary interest.
D) future value.

Accepted Answer

The description given in the question is of compound interest where the interest earned in one period is added to the principal amount, and the total amount becomes the principal for the next period, resulting in compounding of interest. Option A and C are incorrect because they do not describe the given situation accurately. Option D, future value, is related to compound interest but it is not a term used to describe the situation given in the question.

Question 18

The future value of $200 received today and deposited for three years in an account which earns semiannual interest of 8 percent is ________.
A) $253
B) $252
C) $158
D) $135

Accepted Answer

The formula to calculate future value of a present sum with semiannual compounding is:
FV = P(1 + r/n)^(nt)
where: 
P = present value 
r = annual interest rate 
n = number of compounding periods per year 
t = number of years

Here, 
P = 200 
r = 0.08 (8 percent annual interest rate) 
n = 2 (semiannual compounding) 
t = 3 years

Plugging in the values, we get: 
FV = 200(1 + 0.08/2)^(2*3) 
FV = 200(1.04)^6 
FV = 200(1.311) 
FV = 262.20

Rounding off to the nearest dollar, we get $253. Therefore, the answer is (A) $253.

Question 19

Joseph has just accepted a job as a stockbroker. He estimates his gross pay each year for the next three years is $35,000 in year 1, $21,000 in year 2, and $32,000 in year 3. The present value of these cash flows, if they are discounted at 4%, is closest to
A) $79,452.30
B) $80,294.50
C) $81,517.10
D) $88,000

Accepted Answer

The answer of Joseph has just accepted a job as...

Question 20

For positive interest rates, the future value interest factor is
A) always greater than 1.0.
B) sometimes negative.
C) always less than 0.
D) never greater than 25.

Accepted Answer

The future value interest factor (FVIF) represents the future value of a present sum of money at a given interest rate and time period. Since positive interest rates represent a return on investment, the FVIF will always be greater than 1.0 as the money will have increased in value over time with the interest earned.

Quiz 9: Time Value of Money

What would be the future value of a CD of $1,000 for two years if the bank offered a 10% interest rate compounded semiannually?

The future value of a dollar as the interest rate increases and the farther in the future is the funds are to be received.

Tracey deposits $5,000 in a five-year certificate of deposit paying 6% compounded semi-annually. How much will Tracey have at the end of the five-year period?

If the stated or nominal interest rate is 10 percent and the inflation rate is 5 percent, the net or differential compounding rate would be ________ percent

You need to have $35,000 on hand to buy a new Lexus five years from today. To achieve that goal, you want to know how much you must invest today in a certificate of deposit guaranteed to return you 3% per year. To help determine how much to investment today, you will use:

If the present-value interest factor for i percent and n periods is 0.270, the future-value interest factor for the same i and n is

You put $2,000 in an IRA account at Northern Trust. This account pays a fixed interest rate of 8% compounded quarterly. How much money do you have in five years?

For a given period of time until receipt of the funds, as the interest rate increases, the present value interest factor

__________ is the arithmetic process whereby an initial value increases or grows at a compound interest rate over time to reach a value in the future.

The future value of $100 received today and deposited at 6 percent for four years is

$2,000 invested today at 6% in 3 years would result in a future value of:

Sally would like to take an extra special trip in four years. She estimates she will need $10,000 for the trip. The best safe investment she can find currently pays 4% interest. How much must she invest today to have her $10,000 in four years? Round your answer to a while number.

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

For a given interest rate, as the length of time until receipt of the funds increases, the present value interest factor

The future value of $200 received today and deposited at 8 percent for three years is

For positive interest rates, the present value interest factor is

The amount earned on a deposit becomes part of the principal at the end of a period and can earn a return in future periods is called

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

Joseph has just accepted a job as a stockbroker. He estimates his gross pay each year for the next three years is $35,000 in year 1, $21,000 in year 2, and $32,000 in year 3. The present value of these cash flows, if they are discounted at 4%, is closest to

For positive interest rates, the future value interest factor is