Question 1

The calculation of future value requires the removal of interest.

Accepted Answer

The calculation of future value involves the addition of interest, not the removal.

Question 2

Given identical current amounts owed and identical interest rates, annual payments of an ordinary annuity will be greater than annual payments of an annuity due.

Accepted Answer

Annual payments of an ordinary annuity are made at the end of each period, while annual payments of an annuity due are made at the beginning of each period. Because the payments of an annuity due are made earlier, they have more time to earn interest, and therefore the total amount required to pay off an annuity due will be less than that of an ordinary annuity. This means that, holding all other factors constant, the annual payments of an ordinary annuity will be greater than those of an annuity due.

Question 3

When interest is compounded, the stated rate of interest exceeds the effective rate of interest.

Accepted Answer

When interest is compounded, the effective rate of interest exceeds the stated rate of interest. This is because with each compounding period, interest is earned not only on the principal amount but also on the accumulated interest. This results in a higher effective rate of interest than the stated rate.

Question 4

Shane wants to invest money in a 6% CD account that compounds semiannually. Shane would like the account to have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal?
A)$88,848.
B)$78,941.
C)$25,336.
D)$22,510.PV = $100,000 x .78941* = $78,941 *PV of $1: n=8; i=3%

Accepted Answer

We can use the formula for future value of a single sum with semiannual compounding to solve for the deposit amount: FV = PV(1+(r/n))^(nt), where FV=$100,000, r=6%, n=2 (since compounding is semiannual), and t=4. Solving for PV, we get PV=FV/(1+(r/n))^(nt)= $78,941. Therefore, Shane must deposit $78,941 to accomplish his goal. Answer B is the correct choice.

Question 5

With an ordinary annuity, a payment is made or received on the date the agreement begins.

Accepted Answer

The answer of With an ordinary annuity, a payment is...

Question 6

A deferred annuity is one in which interest charges are deferred for a stated time period.

Accepted Answer

The answer of A deferred annuity is one in which...

Question 7

Other things being equal, the present value of an annuity due will be less than the present value of an ordinary annuity.

Accepted Answer

The answer of Other things being equal, the present value...

Question 8

An annuity is a series of equal periodic payments.

Accepted Answer

An annuity is defined as a series of equal periodic payments made over a certain time period.

Question 9

An annuity consists of level principal payments plus interest on the unpaid balance.

Accepted Answer

The answer of An annuity consists of level principal payments...

Question 10

The calculation of present value eliminates interest from future cash flows.

Accepted Answer

The present value calculation involves discounting future cash flows back to their present value, by applying an interest rate, in order to determine their value today. This eliminates the effect of compound interest on the future cash flows, and provides a comparison of their value at different points in time.

Question 11

Today Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD?
A)$109,270.
B)$119,410.
C)$142,576.
D)$309,090.FV = $100,000 x 1.42576* = $142,576 *FV of $1: n = 12; i = 3%

Accepted Answer

Using the formula for compound interest, we can find the maturity value of the CD:
FV = P(1 + r/n)^(nt)
Where:
P = $100,000 (initial deposit)
r = 0.12 (annual interest rate)
n = 4 (quarterly compounding)
t = 3 (number of years)

FV = $100,000(1 + 0.12/4)^(4*3)
FV = $100,000(1.03)^12
FV = $142,576.49

Therefore, the maturity value of the CD is $142,576. Answer choice C is correct.

Question 12

Compound interest includes interest earned on interest.

Accepted Answer

Compound interest is calculated based on the initial principal amount and any accumulated interest. As interest is earned, it is added to the principal, thus increasing the amount of interest earned in subsequent periods. This cycle of earning interest on interest leads to an exponential growth in the value of the investment over time.

Question 13

The company's credit-adjusted risk-free rate of interest is used when computing present value applying the expected cash flow approach.

Accepted Answer

This statement is true. The credit-adjusted risk-free rate is used to adjust the risk of the cash flows being analyzed and should be used when applying the expected cash flow approach to determine present value.

Question 14

In the future value of an ordinary annuity, the last cash payment will not earn any interest.

Accepted Answer

In the future value of an ordinary annuity calculation, only the cash payments made before the last payment will earn interest. The last payment is assumed to be made on the future value date and is not given any time to earn interest.

Question 15

Carol wants to invest money in a 6% CD account that compounds semiannually. Carol would like the account to have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal?
A)$35,069.
B)$43,131.
C)$37,205.
D)$35,000.PV = $50,000 x .744409* = $37,205 *PV of $1: n=10; i=3%

Accepted Answer

Using the formula for compound interest, we can set up the equation: 
$50,000 = P(1 + 0.03)^{10}
where P is the initial deposit. 
Solving for P, we get P = $37,205. Therefore, the best choice is C.

Question 16

Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria's gift worth today?
A)$ 66,110.
B)$ 81,310.
C)$406,550.
D)$330,560.PV = $500,000 x .66112* = $330,560 *PV of $1: n=14; i=3%

Accepted Answer

Using the formula for present value of a future lump sum: PV = FV / (1 + r)^n, where PV is present value, FV is future value, r is the interest rate, and n is the number of years, we can calculate the present value of the $500,000 gift as PV = $500,000 / (1 + 0.06/2)^(7*2) = $330,560. Therefore, the best choice is D.

Question 17

Monetary assets include only cash and cash equivalents.

Accepted Answer

Monetary assets can also include short-term investments with high liquidity and low risk, such as treasury bills and commercial paper.

Question 18

Most, but not all, liabilities are monetary liabilities.

Accepted Answer

Liabilities generally refer to an obligation to pay money or provide goods or services in the future. This includes accounts payable, loans, and bonds payable, which are all monetary liabilities. However, there are non-monetary liabilities such as warranties, customer deposits, and environmental obligations.

Question 19

With an annuity due, a payment is made or received on the date the agreement begins.

Accepted Answer

An annuity due requires a payment or receipt at the beginning of the payment period, as opposed to an ordinary annuity where payment is made or received at the end of the payment period.

Question 20

Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6% compounded semiannually, what would Monica accept today?
A)$ 8,375.
B)$41,874.
C)$11,941.
D)$41,000.PV = $50,000 x .83748* = $41,874 *PV of $1: n=6; i=3%

Accepted Answer

We can use the formula PV = FV/(1+r/n)^(nt) where FV is the future value, r is the interest rate, n is the number of times the interest is compounded per year, and t is the number of years. Plugging in the values, we get PV = 50000/(1+0.06/2)^(2*3) = $41,874. Therefore, Monica would accept $41,874 today. Option B is the correct answer.

Quiz 6: Time Value of Money Concepts