Question 1

Mr. Fish wants to build a house in 8 years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

Accepted Answer

The correct answer is A because the rate of return must be between 17% and 18% in order to have the amount needed.

Question 2

Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the annual return on his investment?

Accepted Answer

The answer of Mr. Darden is selling his house for...

Question 3

A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be? Present value of $1 PV_IF= .215 Future value of $1 FV_IF= 4.661 Present value of annuity PV_IFA= 9.818 Future value of annuity FV_IFA= 45.762

Accepted Answer

The answer of A home buyer signed a 20-year, 8%...

Question 4

Increasing the number of periods will increase all of the following except

Accepted Answer

The present value of $1 decreases as the number of periods increases, because the value of $1 received in the future is worth less today the further into the future it is received. This is due to the time value of money principle, where a dollar today is worth more than a dollar in the future due to its potential earning capacity. Increasing the number of periods means the $1 is received further in the future, thus its present value decreases.

Question 5

Mike Carlson will receive $12,000 a year from the end of the third year to the end of the 12thyear (10 payments). The discount rate is 10%. The present value today of this deferred annuity is:

Accepted Answer

The answer of Mike Carlson will receive $12,000 a year...

Question 6

Mr. Smith has just invested $10,000 for his son (age 7). The money will be used for his son's education 15 years from now. He calculates that he will need $100,000 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal?

Accepted Answer

The answer of Mr. Smith has just invested $10,000 for...

Question 7

You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be:

Accepted Answer

The future value of the deposit after 6 years with semiannual compounding is calculated first. Then, using this future value, the annual withdrawal amount is determined using the annuity formula with an 8% annual interest rate over 4 years.

Question 8

The shorter the length of time between a present value and its corresponding future value,

Accepted Answer

The shorter the time period between present value and future value, the less time there is for interest to accumulate on the present value. Therefore, the present value needs to be higher to reach the same future value, so the answer is B. Choices A and C are not accurate statements about the relationship between time and present value.

Question 9

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment?

Accepted Answer

The correct answer is A because the principal outstanding after the first loan payment is $143,555. This is because the first loan payment is $11,250, which is calculated as follows: $150,000 x 6% = $9,000 (interest) + $150,000 / 15 = $10,000 (principal) = $11,250. The principal outstanding after the first loan payment is $150,000 - $11,250 = $143,555.

Question 10

Dr. J. wants to buy a Dell computer which will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 8% annual return. How much should he set aside?

Accepted Answer

To calculate the annual payment needed to reach $3,000 in three years with an 8% annual interest rate, we can use the present value of an annuity formula:

PMT = PV*(r*(1+r)^n)/((1+r)^n - 1)

where PMT is the annual payment, PV is the present value (which is $3,000), r is the annual interest rate (which is 8%), and n is the number of periods (which is 3).

Plugging in the numbers, we get:

PMT = 3000*(0.08*(1+0.08)^3)/((1+0.08)^3 - 1) = $924.16

Therefore, Dr. J should set aside $924.16 at the end of each year in order to accumulate $3,000 in three years. The best choice is C.

Question 11

Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

Accepted Answer

To find the present value of the contract, we need to use the present value of an annuity of $1, which will help us find the value of the annual payments in today's dollars. We also need to use the present value of $1 to discount the future payments to their present value. The future value of $1 and the future value of an annuity of $1 do not help us find the present value of the contract.

Question 12

The future value of a $500 investment today at 10 percent annual interest compounded semiannually for 5 years is

Accepted Answer

First, we need to find the semiannual interest rate, which is 10% divided by 2, or 5%. 
Next, we need to find the total number of compounding periods, which is 5 years times 2, or 10 periods. 
Using the formula for future value of a lump sum, FV = PV x (1 + r)^n, where PV is the present value, r is the interest rate per period, and n is the total number of periods, we can calculate the future value as follows: 
FV = $500 x (1 + 0.05)^10 = $812.50 (rounded to the nearest cent) 
Therefore, the best choice is B, $814, which is the closest answer choice to our calculated future value.

Question 13

A dollar today is worth more than a dollar to be received in the future because

Accepted Answer

A dollar today can be invested to earn interest, increasing its future value, making it worth more than a dollar received in the future.

Question 14

The higher the rate used in determining the future value of a $1 annuity,

Accepted Answer

The higher the rate used in determining the future value of a $1 annuity, the greater the future value at the end of a period. This is because a higher interest rate will increase the amount of interest earned on the annuity, resulting in a larger future value.

Question 15

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?

Accepted Answer

The answer of John Doeber borrowed $150,000 to buy a...

Question 16

A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given the following information, how much will your annual benefits be? Present value of $1 PV_IF= .178 Future value of $1 FV_IF= 5.604 Present value of annuity PV_IFA= 9.129 Future value of annuity FV_IFA= 51.16

Accepted Answer

The formula for calculating the annual benefits of a fixed-term annuity is: Annual benefits = (PV of annuity * interest rate) / PV of $1 PV of annuity = $73,425 / PV_IFA = $8,043.16 (rounded to the nearest cent) Interest rate = 9% PV of $1 = 1 / (1 + interest rate)^number of years = 1 / (1 + 0.09)^20 = 0.2065 (rounded to four decimal places) Annual benefits = ($8,043.16 * 0.09) / 0.2065 = $3,505.90 (rounded to the nearest cent) Therefore, the annual benefits will be $8,043.

Question 17

Joe Nautilus has $210,000 and wants to retire. What return must his money earn so he may receive annual benefits of $30,000 for the next 10 years.

Accepted Answer

The correct answer is C. About 7%.The formula for calculating the annual return required to receive a certain amount of benefits for a certain number of years is:r = (B / P) * (1 - (1 + r)^-n)where:r = annual returnB = annual benefitsP = principaln = number of yearsIn this case, we have:B = $30,000P = $210,000n = 10Plugging these values into the formula, we get:r = (30,000 / 210,000) * (1 - (1 + r)^-10)Solving for r, we get:r = 0.0694 or about 7%

Question 18

After 10 years, 100 shares of stock originally purchased for $500 was sold for $900. What was the yield on the investment? Choose the closest answer.

Accepted Answer

The answer of After 10 years, 100 shares of stock...

Question 19

Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13 percent, what is the net value of the payments vs. receipts in today's dollars?

Accepted Answer

The answer of Carol Thomas will pay out $6,000 at...

Question 20

Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?

Accepted Answer

The present value of an annuity table is used to calculate the present value of a series of equal payments made at regular intervals, which is exactly what the Babe Ruth Jr. contract entails. We need to find the present value of his $3 million per year payments for the next 10 years, so we would use this table to calculate the value of the contract in today's dollars.

Quiz 9: The Time Value of Money

Mr. Fish wants to build a house in 8 years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the annual return on his investment?

A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be? Present value of $1 PV_IF= .215 Future value of $1 FV_IF= 4.661 Present value of annuity PV_IFA= 9.818 Future value of annuity FV_IFA= 45.762

Increasing the number of periods will increase all of the following except

Mike Carlson will receive $12,000 a year from the end of the third year to the end of the 12thyear (10 payments) . The discount rate is 10%. The present value today of this deferred annuity is:

Mr. Smith has just invested $10,000 for his son (age 7) . The money will be used for his son's education 15 years from now. He calculates that he will need $100,000 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal?

You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be:

The shorter the length of time between a present value and its corresponding future value,

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment?

Dr. J. wants to buy a Dell computer which will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 8% annual return. How much should he set aside?

Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

The future value of a $500 investment today at 10 percent annual interest compounded semiannually for 5 years is

A dollar today is worth more than a dollar to be received in the future because

The higher the rate used in determining the future value of a $1 annuity,

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?

Joe Nautilus has $210,000 and wants to retire. What return must his money earn so he may receive annual benefits of $30,000 for the next 10 years.

After 10 years, 100 shares of stock originally purchased for $500 was sold for $900. What was the yield on the investment? Choose the closest answer.

Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13 percent, what is the net value of the payments vs. receipts in today's dollars?

Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?

Quiz 9: The Time Value of Money

Mr. Fish wants to build a house in 8 years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the annual return on his investment?

A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be? Present value of $1 PVIF= .215 Future value of $1 FVIF= 4.661 Present value of annuity PVIFA= 9.818 Future value of annuity FVIFA= 45.762

Increasing the number of periods will increase all of the following except

Mike Carlson will receive $12,000 a year from the end of the third year to the end of the 12thyear (10 payments) . The discount rate is 10%. The present value today of this deferred annuity is:

Mr. Smith has just invested $10,000 for his son (age 7) . The money will be used for his son's education 15 years from now. He calculates that he will need $100,000 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal?

You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be:

The shorter the length of time between a present value and its corresponding future value,

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment?

Dr. J. wants to buy a Dell computer which will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 8% annual return. How much should he set aside?

Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

The future value of a $500 investment today at 10 percent annual interest compounded semiannually for 5 years is

A dollar today is worth more than a dollar to be received in the future because

The higher the rate used in determining the future value of a $1 annuity,

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?

Joe Nautilus has $210,000 and wants to retire. What return must his money earn so he may receive annual benefits of $30,000 for the next 10 years.

After 10 years, 100 shares of stock originally purchased for $500 was sold for $900. What was the yield on the investment? Choose the closest answer.

Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13 percent, what is the net value of the payments vs. receipts in today's dollars?

Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?

A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be? Present value of $1 PV_IF= .215 Future value of $1 FV_IF= 4.661 Present value of annuity PV_IFA= 9.818 Future value of annuity FV_IFA= 45.762