Question 1

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

Accepted Answer

FV = PV × 11ea7fdb_fc26_8652_a768_13644cc25e39_TB2902_00 FV = 100 × 11ea7fdb_fc26_8653_a768_3559817bcd71_TB2902_00 = $126.25
Using a financial calculator:
N = 4, I/Y = 6, PV = -100, PMT = 0, cpt FV = $126.25

Question 2

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?

Accepted Answer

FV = PV × 11ea7fdb_fc27_e5fb_a768_3b1b31270212_TB2902_00 FV = 30,000 × 11ea7fdb_fc27_e5fc_a768_4f38158fb767_TB2902_00 = $59,014.54
Using a financial calculator:
N = 10, I/Y = 7, PV = -30,000, PMT = 0, cpt FV = $59,014.54

Question 3

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?

Accepted Answer

i = 11ea7fdb_fc27_229c_a768_bf2e65312044_TB2902_00 - 1
i = 11ea7fdb_fc27_229d_a768_6312ae33a76e_TB2902_00 - 1 = 7%
Using a financial calculator:
N = 30, PV = -1,800, PMT = 0, FV = 13,700, cpt I/Y = 6.999 or 7%

Question 4

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?

Accepted Answer

Using a financial calculator:
I/Y = 14, PV = -1, PMT = 0, FV = 2, cpt N = 5.29

Question 5

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)

Accepted Answer

i = 11ea7fdb_fc27_229e_a768_a9bc5f9e9f4d_TB2902_00 - 1
i = 11ea7fdb_fc27_49af_a768_e997eb04be8a_TB2902_00 - 1 = 10%
Using a financial calculator:
N = 4, PV = -.26, PMT = 0, FV = .38, cpt I/Y = 9.95 or 10%
i = 11ea7fdb_fc27_49b0_a768_aba2464d6c4a_TB2902_00 - 1
i = 11ea7fdb_fc27_49b1_a768_d544d6631196_TB2902_00 - 1 = 5%
Using a financial calculator:
N = 7, PV = -.38, PMT = 0, FV = .535, cpt I/Y = 5%

Question 6

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)

Accepted Answer

FV = PV × 11ea7fdb_fc27_97d7_a768_e7b7a5d348f2_TB2902_00 FV = 100,000 × (1.03 11ea7fdb_fc27_bee8_a768_ff7e849bc57f_TB2902_00 = $134,391.64
Using a financial calculator:
N = 10, I/Y = 3, PV = -100,000, PMT = 0, cpt FV = $134,391.64

Question 7

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

Accepted Answer

FV = PV × 11ea7fdb_fc26_603e_a768_e9b2d9dfe58d_TB2902_00 FV = 16.54 × 11ea7fdb_fc26_603f_a768_e742cf2048d3_TB2902_00 = $18.41
Using a financial calculator:
N = 2, I/Y = 5.5, PV = -16.54, PMT = 0, cpt FV = $18.41

Question 8

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

Accepted Answer

FV = PV × 11ea7fdb_fc26_6040_a768_9d68408d65b5_TB2902_00 FV = 200 × 11ea7fdb_fc26_6041_a768_8be2b045ab96_TB2902_00 = $251.94
Using a financial calculator:
N = 3, I/Y = 8, PV = -200, PMT = 0, cpt FV = $251.94

Question 9

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?

Accepted Answer

Effective interest rate = 11ea7fdb_fc27_70c4_a768_83eed727b0ff_TB2902_00 - 1
Effective interest rate of Darlington Bank = 11ea7fdb_fc27_70c5_a768_137ec15a5f29_TB2902_00 - 1 = 13.35%
Effective interest rate of Barlett Bank = 11ea7fdb_fc27_97d6_a768_7ded139ace42_TB2902_00 - 1 = 12.19%

Question 10

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:

Accepted Answer

With the same future value, a rise in interest rates will decrease the present value of the amount.

Question 11

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)

Accepted Answer

FV = PV × 11ea7fdb_fc26_fb8a_a768_7d176defb965_TB2902_00 FV = 1,000 × (1.02 11ea7fdb_fc26_fb8b_a768_1b1de7fed205_TB2902_00 = $1,126.16
Using a financial calculator:
N = 6, I/Y = 2, PV = -1,000, PMT = 0, cpt FV = $1,126.16

Question 12

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)

Accepted Answer

i = 11ea7fdb_fc26_ad64_a768_278a1c7063eb_TB2902_00 - 1
i = 11ea7fdb_fc26_ad65_a768_0de0dd1e7a40_TB2902_00 - 1 = 14.02%
Using a financial calculator:
N = 4, PV = -1.71, PMT = 0, FV = 2.89, cpt I/Y = 14.02%

Question 13

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

Accepted Answer

When interest is compounded, the amount of interest paid increases resulting in the effective rate of interest.

Question 14

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:

Accepted Answer

i = 11ea7fdb_fc26_ad66_a768_4d2a188ead7a_TB2902_00 - 1
i = 11ea7fdb_fc26_d477_a768_3b6fc3f88f67_TB2902_00 - 1 = 13%
Using a financial calculator:
N = 50, PV = -1, PMT = 0, FV = 450, cpt I/Y = 13%

Question 15

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?

Accepted Answer

Using a financial calculator:
I/Y = 4, PV = -1, PMT = 0, FV = 2, cpt N = 17.67

Question 16

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?

Accepted Answer

Step 1 - Calculate the amount of interest earned on the $100 before withdrawal.
100 × .03 = $3
Step 2 - Use $3 as the present value and calculate the future value.
FV = PV × 11ea7fdb_fc27_49b2_a768_737242fe6684_TB2902_00 FV = 3 × (1.03 11ea7fdb_fc27_70c3_a768_e1cac9dccfe2_TB2902_00 = $9.50
Using a financial calculator:
N = 39, I/Y = 3, PV = -3, PMT = 0, cpt FV = $9.50

Question 17

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?

Accepted Answer

i = 11ea7fdb_fc26_d478_a768_9f71c558b316_TB2902_00 - 1
i = 11ea7fdb_fc26_d479_a768_4b32948f82cd_TB2902_00 - 1 = 1%
Using a financial calculator:
N = 9, PV = -4.5, PMT = 0, FV = 4.92, cpt I/Y = .996 or 1%

Question 18

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

Accepted Answer

FV = PV × 11ea7fdb_fc26_392c_a768_595a35464a27_TB2902_00 FV = 100 × 11ea7fdb_fc26_392d_a768_9b9b0ea78e42_TB2902_00 = $116.64
$116.64 - 100 = $16.64
Using a financial calculator:
N = 2, I/Y = 8, PV = -100, PMT = 0, cpt FV = $116.64116.64 - 100 = $16.64

Question 19

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

Accepted Answer

A rise in the discount rate will decrease the present value of the amount, bringing it closer to zero as it increases.

Question 20

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?

Accepted Answer

FV = PV × 11ea7fdb_fc27_bee9_a768_f71724dca372_TB2902_00 FV = 100 × 11ea7fdb_fc27_beea_a768_f5569c8b6f95_TB2902_00 = $493.41
Using a financial calculator:
N = 54, I/Y = 3, PV = -100, PMT = 0, cpt FV = $493.41

Quiz 3: Time Value of Money - Introduction