Question 1

Your rental payment required at the beginning of each month is an annuity due.

Accepted Answer

An annuity due requires payments at the beginning of each period, which matches the requirement for rental payments at the beginning of the month.

Question 2

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

Accepted Answer

Higher interest rates result in lower present values because the amount of money today is worth more than the same amount in the future when discounted at a higher rate.

Question 3

Mary wants to have $150 after four 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,future value is more than $150.
B)Yes,present value is more than $150.
C)No,present value is less than $150.
D)No,future value is less than $150.

Accepted Answer

The future value of $100 compounded annually at 6% for six years is $100 * (1 + 0.06)^6 = $141.85, which is less than $150.

Question 4

Mary deposits $4000 at the beginning of each year and the money will grow to $1 081 170 in 30 years with 12 percent compounded annually.

Accepted Answer

We can use the formula for compound interest to confirm this:

A = P(1+r)^n

where A is the final amount, P is the principal (initial deposit), r is the interest rate per period (in this case, 12% per year), and n is the number of periods (30 years).

Plugging in the values given:

A = 4000(1+0.12)^30
A = 1 081 169.63

So the answer is A - Mary's deposit of $4000 per year for 30 years at 12% compounded annually will grow to $1 081 170, very close to the given value.

Question 5

Your monthly life insurance payments due at the beginning of each month are an annuity due.

Accepted Answer

The answer of Your monthly life insurance payments due at...

Question 6

Fred is 29 and just sold an antique for $29 311 that he purchased at age nine for $17 800.Fred's annual rate of return on this antique is 7.2 percent.

Accepted Answer

To calculate Fred's annual rate of return on the antique, we can use the formula:

Annual rate of return = (Ending value / Beginning value)^(1/number of years) - 1

Plugging in the numbers we know, we get:

Annual rate of return = (29,311 / 17,800)^(1/20) - 1
Annual rate of return = 0.04457 or 4.457%

Therefore, the statement that Fred's annual rate of return on the antique is 7.2 percent is false.

Question 7

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

Accepted Answer

The effective interest rate is the actual interest rate paid or earned, and it takes into account the compounding period. The nominal interest rate only represents the stated rate with no consideration for compounding. Real interest rate takes into account inflation and the absolute interest rate is the total amount of interest paid or earned without considering the time value of money. Hence, the best choice is A) Effective.

Question 8

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.

Accepted Answer

The present value interest factor (PVIF) is a factor that is used to calculate the present value of future cash flows. Since the PVIF formula includes the discount rate (i.e. the interest rate), the result is always less than 1.0. This is because the value of money decreases over time due to inflation and the opportunity cost of not investing it elsewhere.

Question 9

If you have an investment that 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 market value of this investment today if the discount rate is 13 percent annually?
A)$553
B)$453
C)$423
D)$383

Accepted Answer

To calculate the market value of the investment today, we need to discount each future cash flow to its present value using the given discount rate of 13%. We can use the present value formula for each cash flow:
PV = CF/(1+r)^n
where, PV is the present value, CF is the future cash flow, r is the discount rate, and n is the number of years.

PV of $100 at the end of year one:
PV = 100/(1+0.13)^1 = 88.50

PV of $200 at the end of year two:
PV = 200/(1+0.13)^2 = 137.81

PV of $300 at the end of year three:
PV = 300/(1+0.13)^3 = 226.78

Therefore, the total market value of the investment today is the sum of the present values of all cash flows:
Market Value = 88.50 + 137.81 + 226.78 = $453.09, which is closest to option B ($453).

Question 10

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

Accepted Answer

The answer of What is the highest effective rate attainable...

Question 11

If you borrow money,you will receive interest.

Accepted Answer

When you borrow money, you pay interest to the lender for the privilege of using their money.

Question 12

John wants to have a $10 000 down payment for his car in three years.If he puts away $7,000 today and gets a 12.6% annual return,he will have the money he needs.

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 periods.

PV = $7,000
r = 12.6% = 0.126
n = 3 years

FV = $7,000 x (1 + 0.126)^3
FV = $10,060.93

Therefore, John will have more than the $10,000 he needs, making the statement true.

Question 13

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.

Accepted Answer

This statement is true. The future value interest factor (FVIF) is a factor used to calculate the future value of a sum of money at a given interest rate and the number of compounding periods. It is calculated by dividing the future value (FV) by the present value (PV). If the present value is $1.00, then the FVIF represents the future value of that $1.00 over time at the given interest rate and compounding periods.

Question 14

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

Accepted Answer

The future value 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. Plugging in the given values, we get FV = $200(1 + 0.08)^3 = $200(1.259712) ≈ $252.

Question 15

Discount refers to the process of earning interest on interest.

Accepted Answer

Discount refers to the deduction or reduction from the face value of a financial instrument, such as a bond, bill of exchange, or promissory note. It is not related to earning interest on interest.

Question 16

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

Accepted Answer

We can use the formula FV = PV*(1+r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of years. Plugging in the given values, we get:
200 = PV*(1+0.1)^10
Solving for PV, we get:
PV = 200/(1.1^10)
PV = 76.92
Rounding up to the nearest dollar, we get $77. Therefore, the best choice is B.

Question 17

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.

Accepted Answer

To calculate the present value, you also need to know the future value, the compounding frequency, and any additional payments or withdrawals made during the time period.

Question 18

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.

Accepted Answer

Compounding more frequently (quarterly in this case) results in a higher effective rate of return compared to compounding annually, even if the stated interest rate is lower. Therefore, ABC Bank's term deposits offer a higher effective rate of return than XYZ Bank's term deposits.

Question 19

What is the term for the interest rate financial institutions quote?
A)Nominal
B)Effective
C)Annual
D)Real

Accepted Answer

The term for the interest rate financial institutions quote is the nominal interest rate.

Question 20

ABC Bank offers term deposits with 8 percent compounded annually,while XYZ Bank offers term deposits with 7.9 percent compounded monthly.ABC Bank offers a higher effective yield.

Accepted Answer

The effective yield for XYZ Bank, with monthly compounding, is higher than ABC Bank's annual compounding rate due to the effect of compounding frequency.

Quiz 2: Tools for Financial Planning - Applying Time Value Concepts

Your rental payment required at the beginning of each month is an annuity due.

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

Mary wants to have $150 after four 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?

Mary deposits $4000 at the beginning of each year and the money will grow to $1 081 170 in 30 years with 12 percent compounded annually.

Your monthly life insurance payments due at the beginning of each month are an annuity due.

Fred is 29 and just sold an antique for $29 311 that he purchased at age nine for $17 800.Fred's annual rate of return on this antique is 7.2 percent.

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

The present value interest factor is

If you have an investment that 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 market value of this investment today if the discount rate is 13 percent annually?

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