Question 1

Arnold learned something very valuable as a teenager from his dad. He was told to invest $1,000 at 12% interest at age 20 and leave it alone until age 65. Arnold's dad knew that one strategy that wealthy people use is to exercise self-discipline to never touch this long-term plan. Arnold is very happy he applied his dad's advice.
-If his savings account had earned a more conservative 9% annual rate of return,Arnold's savings would be approximately ________ less by age 68.
A) $4,132
B) $62,585
C) $167,805
D) $1,871,663

Accepted Answer

To calculate the difference, we need to use the future value formula: 
FV = PV x (1 + r)^n

Where PV is the present value (Arnold's savings at age 40), r is the annual interest rate, and n is the number of years.

Using a calculator, we can find that Arnold's savings at age 68 with a 9% annual rate of return would be: 
FV = 200,000 x (1 + 0.09)^28 
FV = 1,852,195

The difference between this and the original amount ($2,020,000) is: 
2,020,000 - 1,852,195 = 167,805

Therefore, Choice C is the correct answer as it represents the approximate amount that Arnold's savings would be less by age 68.

Question 2

As a teenager, Enrique learned a valuable lesson from his dad, who told him to invest $1,000 at 8 percent interest at age 20 and leave the money alone until age 65. Enrique's dad knew that one strategy used by wealthy people is to exercise self-discipline and never touch a long-term savings plan. Enrique is happy to apply his dad's advice.
-Suppose the annual rate of return is 15 percent.At this rate,when will Enrique reach the $500,000 mark?
A) Age 45
B) Age 58
C) Age 65
D) Age 70

Accepted Answer

The answer of As a teenager, Enrique learned a valuable...

Question 3

What is the price you would be willing to pay today for an IOU for $500 due in one year if you want to earn at least 16%?
A) $480.00
B) $431.03
C) $450.00
D) $395.33
E) $418.23

Accepted Answer

The present value of the IOU can be calculated using the formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. Plugging in the given values, we get:
PV = 500 / (1 + 0.16)^1
PV = 431.03
This means that you would be willing to pay $431.03 today to receive $500 one year from now if you want to earn at least 16%. Therefore, the best choice is B.

Question 4

What is the present value today of $150 that will be received in four years from now if the discount rate is 12%?
A) $76.03
B) $95.33
C) $116.90
D) $105.60
E) $83.39

Accepted Answer

The answer of What is the present value today of...

Question 5

As a teenager, Enrique learned a valuable lesson from his dad, who told him to invest $1,000 at 8 percent interest at age 20 and leave the money alone until age 65. Enrique's dad knew that one strategy used by wealthy people is to exercise self-discipline and never touch a long-term savings plan. Enrique is happy to apply his dad's advice.
-If Enrique leaves the money in the account until he is 68,by approximately what amount would the balance increase between his 62nd and 68th years?
A) $14,872
B) $108,569
C) $8,291
D) $35,551

Accepted Answer

The answer of As a teenager, Enrique learned a valuable...

Question 6

List four reasons why you should care about the power of compounding and the time value of money.

Accepted Answer

The answer of List four reasons why you should care...

Question 7

As a teenager, Enrique learned a valuable lesson from his dad, who told him to invest $1,000 at 8 percent interest at age 20 and leave the money alone until age 65. Enrique's dad knew that one strategy used by wealthy people is to exercise self-discipline and never touch a long-term savings plan. Enrique is happy to apply his dad's advice.
-Approximately how long will it take Enrique's investment to grow into $2,000?
A) Seventy-two months
B) Six years
C) Nine years
D) Twelve years

Accepted Answer

This question requires the use of the compound interest formula:
A = P(1 + r/n)^(nt)
Where:
A = the ending amount
P = the principal (initial amount invested)
r = the annual interest rate (as a decimal)
n = the number of times the interest is compounded per year
t = the number of years

Using the information given in the question, we can plug in the values:
A = 2,000
P = 1,000
r = 0.08
n = 1 (compounded annually)
t = unknown

2,000 = 1,000(1 + 0.08/1)^(t)
2 = (1.08)^t
t = log(2)/log(1.08)
t ≈ 9.006

Therefore, it will take approximately 9 years for Enrique's investment to grow into $2,000. The best choice is C.

Question 8

Arnold learned something very valuable as a teenager from his dad. He was told to invest $1,000 at 12% interest at age 20 and leave it alone until age 65. Arnold's dad knew that one strategy that wealthy people use is to exercise self-discipline to never touch this long-term plan. Arnold is very happy he applied his dad's advice.
-Suppose the investment rate of return were 18%.At this rate,when would Arnold reach the $1,000,000 mark?
A) at age 42
B) at age 54
C) at age 62
D) at age 68

Accepted Answer

The answer of Arnold learned something very valuable as a...

Question 9

Rasheed can afford a monthly car payment of $550 for 72 months at an annual interest rate of 7.5 percent.Which of the following is closest to the amount he will be able to borrow for a new car?
A) $3,984
B) $6,550
C) $31,810
D) $49,818

Accepted Answer

Using a loan calculator, we can determine that with a monthly payment of $550 for 72 months at an annual interest rate of 7.5 percent, Rasheed can borrow approximately $31,810. Choices A, B, and D are either too low or too high to be the correct answer.

Question 10

Sam's uncle promised to give him $7,000 when he graduates from college three years from now.Assuming an interest rate of 8 percent compounded annually,what is the value of Sam's gift right now?
A) $5,504.22
B) $5,510.78
C) $5,556.83
D) $5,555.55

Accepted Answer

The answer of Sam's uncle promised to give him $7,000...

Question 11

Describe the two factors that affect how much we need to save to achieve financial goals.

Accepted Answer

The answer of Describe the two factors that affect how...

Question 12

As a teenager, Enrique learned a valuable lesson from his dad, who told him to invest $1,000 at 8 percent interest at age 20 and leave the money alone until age 65. Enrique's dad knew that one strategy used by wealthy people is to exercise self-discipline and never touch a long-term savings plan. Enrique is happy to apply his dad's advice.
-If he sticks to the plan,Enrique's savings will grow to approximately ________ by age 62.
A) $25,339
B) $31,920
C) $4,660
D) $148,780

Accepted Answer

The answer of As a teenager, Enrique learned a valuable...

Question 13

The discount rate is the interest rate used to bring ________ back to ________.
A) current dollars; present dollars
B) future dollars; present dollars
C) current interest rate; present present interest rate
D) future interest rate; present interest rate

Accepted Answer

The discount rate is used to calculate the present value of future cash flows. Therefore, the interest rate is used to bring future dollars back to present dollars.

Question 14

As a teenager, Enrique learned a valuable lesson from his dad, who told him to invest $1,000 at 8 percent interest at age 20 and leave the money alone until age 65. Enrique's dad knew that one strategy used by wealthy people is to exercise self-discipline and never touch a long-term savings plan. Enrique is happy to apply his dad's advice.
-If his savings account earns a more aggressive 14 percent annual rate of return,Enrique's savings will be worth approximately ________ more by age 68.
A) $4,145
B) $245,473
C) $498,596
D) $538,807

Accepted Answer

The answer of As a teenager, Enrique learned a valuable...

Question 15

Present value lets us compare dollar values from different time periods.

Accepted Answer

Present value takes into account the time value of money, allowing us to compare dollar values from different time periods.

Question 16

What is the present value of an IOU for $1,000 due to be paid in two years,if the discount rate is 8%?
A) $857.34
B) $766.40
C) $885.00
D) $683.26
E) $810.77

Accepted Answer

To find the present value of the IOU, we need to use the formula: Present Value = Future Value / (1 + discount rate)^number of periods. Plugging in the values, we get Present Value = 1000/(1+0.08)^2 = $857.34. Therefore, the best choice is A).

Question 17

At the end of each year for ten years you deposit $750 in an account that earns an annual rate of return of 12%.What is the present value of these deposits?
A) $4,329.39
B) $5,241.48
C) $3,161.55
D) $4,237.67
E) $4,482.63

Accepted Answer

The answer of At the end of each year for...

Question 18

The present value interest factor is the inverse of the corresponding future value interest factor.

Accepted Answer

This statement is true. The present value interest factor (PVIF) is calculated as 1 / (1 + r)^n, while the future value interest factor (FVIF) is calculated as (1 + r)^n. Therefore, the PVIF is the inverse of the FVIF.

Question 19

The future value of a current investment earning a positive rate of return is always greater than the present value of the investment.

Accepted Answer

This is a basic concept of finance known as compounding. Over time, the positive rate of return on an investment will earn additional interest or growth, resulting in a higher future value than the initial present value.

Question 20

Which one of the following is the "enemy" of compound interest and makes it very difficult to reach your financial goals?
A) Inflation
B) Annuity factor
C) Simple interest
D) Compound frequency
E) None of the above

Accepted Answer

Inflation reduces the purchasing power of money over time, which means that even if you earn interest on your savings, its real value may still decrease. This makes it difficult to reach financial goals as you may need more money than anticipated in the future due to the effects of inflation.

Quiz 3: Understanding and Appreciating the Time Value of Money

What is the price you would be willing to pay today for an IOU for $500 due in one year if you want to earn at least 16%?

What is the present value today of $150 that will be received in four years from now if the discount rate is 12%?

List four reasons why you should care about the power of compounding and the time value of money.

Rasheed can afford a monthly car payment of $550 for 72 months at an annual interest rate of 7.5 percent.Which of the following is closest to the amount he will be able to borrow for a new car?

Sam's uncle promised to give him $7,000 when he graduates from college three years from now.Assuming an interest rate of 8 percent compounded annually,what is the value of Sam's gift right now?

Describe the two factors that affect how much we need to save to achieve financial goals.

The discount rate is the interest rate used to bring back to .

Present value lets us compare dollar values from different time periods.

What is the present value of an IOU for $1,000 due to be paid in two years,if the discount rate is 8%?

At the end of each year for ten years you deposit $750 in an account that earns an annual rate of return of 12%.What is the present value of these deposits?

The present value interest factor is the inverse of the corresponding future value interest factor.

The future value of a current investment earning a positive rate of return is always greater than the present value of the investment.

Which one of the following is the "enemy" of compound interest and makes it very difficult to reach your financial goals?