Question 1

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today).Of the following,which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?
A)2%
B)​5%
C)​7%
D)​10%

Accepted Answer

The present value of the four annual payments at a 7% interest rate is less than $10,000, making the lump-sum payment more favorable.

Question 2

You are considering buying a share of stock in XYZ Corporation.At the end of years 1,2,and 3 the stock will pay you a dividend of $15.In addition,at the end of the third year you expect to sell the share of stock for $100.If the interest rate is 3%,how much is the share of XYZ stock worth to you today?
A)$123.14
B)$133.94
C)$137.96
D)$145.00

Accepted Answer

To calculate the present value of the stock, we need to discount the future cash flows at the given interest rate of 3%.

PV = (15/1.03) + (15/1.03^2) + (115/1.03^3)
PV = $12.62 + $13.05 + $108.27
PV = $133.94

Therefore, the share of XYZ stock is worth $133.94 today. Option B is the correct answer.

Question 3

You receive $2,000 today which you plan to save for 15 years.If the interest rate is 4 percent,what is the future value of this $2,000?
A)$3,494.40
B)$3,585.85
C)$3,601.89
D)$3,676.14

Accepted Answer

Using the formula for compound interest:
Future Value = Present Value * (1 + Interest Rate)^Time Period
Substituting the given values:
Future Value = $2,000 * (1 + 0.04)^15
Future Value = $2,000 * 1.749
Future Value = $3,499

Rounding to two decimal places, the closest answer choice is C: $3,601.89, which is the best choice.

Question 4

Suppose you put $10,000 into a bank account today that pays interest annually at an annual rate of 0.5%.What is the future value of the $10,000 after 10 years?​
A)​$10,050.00
B)​$10,511.40
C)​$10,573.26
D)​$16,288.95

Accepted Answer

The future value of the $10,000 after 10 years can be calculated using the formula:FV = PV * (1 + r)^nwhere:PV is the present value ($10,000)r is the annual interest rate (0.5%)n is the number of years (10)Plugging in the values, we get:FV = 10000 * (1 + 0.005)^10= 10000 * 1.05114= $10,511.40Therefore, the future value of the $10,000 after 10 years is $10,511.40.

Question 5

Suppose you win the lottery and one of your payment options is to receive $20,000 today,$20,000 one year from now,and $20,000 two years from now.If the interest rate is 5%,what is the present value of this option?
A)$51,830.26
B)$54,464.96
C)$57,188.21
D)$58,237.71

Accepted Answer

The answer of Suppose you win the lottery and one...

Question 6

Suppose you purchase a savings bond today for $25.In seven years you may cash in the savings bond for $50.What is the approximate interest rate paid by the savings bond?
A)5%
B)10%
C)15%
D)20%

Accepted Answer

The savings bond doubles in value in 7 years, so the interest earned over that period is the amount of increase in value divided by the initial value: 
Interest earned = ($50-$25) / $25 = $25 / $25 = 1
This means the interest rate is 100% over 7 years, so the approximate annual interest rate is 100% / 7 = 14.29%. The closest answer choice is B, 10%.

Question 7

Suppose you own a savings bond that will pay you $100 in 7 years.If the annual interest rate is 2%,what is the present value of the savings bond?
A)​$27.91
B)​$87.06
C)​$93.64
D)​$87.06.

Accepted Answer

The answer of Suppose you own a savings bond that...

Question 8

If you deposit $1,000 into a savings account that pays you 5% interest per year,approximately how long will it take to double your money?
A)8 years
B)10 years
C)12 years
D)14 years

Accepted Answer

The answer of If you deposit $1,000 into a savings...

Question 9

Suppose Emilio offers you $500 today or $X in 10 years.If the interest rate is 6 percent,then at what value of X would you be indifferent between the two options?
A)X = 809.33
B)X = 855.56
C)X = 895.42
D)X = 916.74

Accepted Answer

The future value of $500 compounded annually at 6% for 10 years is calculated as $500 * (1 + 0.06)^10 = $895.42. Thus, you would be indifferent if X equals $895.42.

Question 10

You are considering buying a share of stock in Company ABC.At the end of years 1,2,and 3 the stock will pay you a dividend of $10.In addition,at the end of the third year you expect to sell the share of stock for $200.If the interest rate is 5%,how much is the share of ABC stock worth to you today?
A)$200
B)$210
C)$220
D)$230

Accepted Answer

The answer of You are considering buying a share of...

Question 11

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today).Of the following,which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?
A)2%
B)​5%
C)​7%
D)​10%

Accepted Answer

The answer of Suppose you have a choice between receiving...

Question 12

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment one year from today).Of the following,which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?
A)2%
B)​5%
C)​7%
D)​10%

Accepted Answer

To compare the two options, we can calculate the present value of the four annual payments using the formula:
present value = annual payment / (1 + interest rate)^n
Where n is the number of years until each payment is received.
Using a financial calculator or spreadsheet, we can find that the present value of the four annual payments is $9,848.69 at a 5% annual interest rate.
Therefore, if the annual interest rate is less than 5%, we would prefer the lump-sum payment of $10,000. If the annual interest rate is greater than 5%, we would prefer the four annual payments of $2,750. 
Option B with an annual interest rate of 5% is the threshold rate at which the present value of the four annual payments equals the lump-sum payment, so any annual interest rate below 5% would make the lump-sum payment preferable.

Question 13

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old.Approximately how many times will the investment double by the time it is paid out to the child?
A)2 times
B)3 times
C)4 times
D)8 times

Accepted Answer

To solve this problem, we can use the rule of 72, which tells us how many years it takes for an investment to double in value.

The rule of 72 states that we can find the approximate number of years it takes for an investment to double by dividing 72 by the interest rate. In this case, the interest rate is 10%, so 72/10 = 7.2 years.

We can use this information to determine how many times the investment will double by the time it is paid out to the child.

When the child turns 21, the investment will have been growing for 21 years. We can divide 21 by 7.2 to find that the investment will have doubled approximately 2.9 times.

Since we can't have a partial doubling, we round down to 2, meaning the investment will double twice during that time period.

Therefore, the correct answer is B) 3 times.

Quiz 14: The Basic Tools of Finance: Present Value Measuring the Time Value of Money

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) .Of the following,which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?

You receive $2,000 today which you plan to save for 15 years.If the interest rate is 4 percent,what is the future value of this $2,000?

Suppose you put $10,000 into a bank account today that pays interest annually at an annual rate of 0.5%.What is the future value of the $10,000 after 10 years?

Suppose you win the lottery and one of your payment options is to receive $20,000 today,$20,000 one year from now,and $20,000 two years from now.If the interest rate is 5%,what is the present value of this option?

Suppose you purchase a savings bond today for $25.In seven years you may cash in the savings bond for $50.What is the approximate interest rate paid by the savings bond?

Suppose you own a savings bond that will pay you $100 in 7 years.If the annual interest rate is 2%,what is the present value of the savings bond?

If you deposit $1,000 into a savings account that pays you 5% interest per year,approximately how long will it take to double your money?

Suppose Emilio offers you $500 today or $X in 10 years.If the interest rate is 6 percent,then at what value of X would you be indifferent between the two options?

You are considering buying a share of stock in Company ABC.At the end of years 1,2,and 3 the stock will pay you a dividend of $10.In addition,at the end of the third year you expect to sell the share of stock for $200.If the interest rate is 5%,how much is the share of ABC stock worth to you today?

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) .Of the following,which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment one year from today) .Of the following,which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old.Approximately how many times will the investment double by the time it is paid out to the child?