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An increase in future value can be caused by an increase in the:
Answer: D) both A and B.
A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1.
Answer: B) $1,604
You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?
Answer: B) $31,060
If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?
Answer: C) $71
If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)?
Answer: B) $833
If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the investment be worth in 37 weeks (round to the nearest dollar)?
Answer: B) $635
Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?
Answer: D) 500(1 + .02)20
What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?
Answer: A) $1,048
Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?
Answer: C) 77 months
If you want to have $10,000 in 10 years, which of the following formulas represents how much money you must put in a savings account today? Assume that the savings account pays 6% and it is compounded monthly.
Answer: B) 10,000/(1 + .005)120
Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $4,500. Today, the average cost is $29,000. What is the growth rate in tuition cost over this 20-year period? Round off to the nearest 0.1%.
Answer: C) 9.8%
If you want to have $1,700 in seven years, how much money must you put in a savings account today? Assume that the savings account pays 6% and it is compounded quarterly (round to the nearest $10).
Answer: A) $1,120
If you want to have $90 in four years, how much money must you put in a savings account today? Assume that the savings account pays 8.5% and it is compounded monthly (round to the nearest $1).
Answer: A) $64
How much money must be put into a bank account yielding 5.5% (compounded annually) in order to have $250 at the end of five years (round to nearest $1)?
Answer: B) $191
If you want to have $1,200 in 27 months, how much money must you put in a savings account today? Assume that the savings account pays 14% and it is compounded monthly (round to the nearest $10).
Answer: C) $880
What will the dollar amount be in four years, assuming that interest is paid annually?
Answer: D) $3,148
What will the dollar amount be if the interest is compounded semiannually for those four years?
Answer: B) $3,188
How many periods would it take for the deposit to grow to $6,798 if the interest is compounded semiannually?
Answer: C) 21
You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?
Answer: C) 19%
You deposit $5,000 today in an account drawing 12% compounded quarterly. How much will you have in the account at the end of 2 1/2 years?
Answer: D) $6,720
Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years. If this city's population continues to grow at 4% per year, what will the population be 10 years from now?
Answer: B) 2,220,366
How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually?
Answer: D) 13 years
The future value of $200 deposited today in an account for four years paying semiannual interest when the annual interest rate is 12% is:
Answer: B) $318.80.
The future value of a single sum:
Answer: D) increases as the compound rate increases.
The future value of $500 deposited into an account paying 8% annually for three years is:
Answer: B) $630.
If you were to deposit $2,000 in an IRA that would earn interest of 7.5%, compounded quarterly for 18 years, how much would you have accumulated?
Answer: E) $7,619
When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much would his salary have been in 1997?
Answer: E) $3,489,097
If you purchased a share of Mico.com stock on March 1, 1993 for $45 and you sold the stock at $168 on February 28, 1998, what was your annual rate of return on the stock?
Answer: D) 30%
At 8%, compounded annually, how long will it take $750 to double?
Answer: A) 9 years
The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest declines. TRUE/FALSE
Answer: FALSE
If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, during which we receive 4% interest each period. TRUE/FALSE
Answer: TRUE
Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation TRUE/FALSE
Answer: TRUE
The same basic formula is used for computing both the computation of future value and of present value. TRUE/FALSE
Answer: TRUE
The more frequent the compounding periods in a year, the higher the future value TRUE/FALSE
Answer: TRUE
The present value of a single future sum:
Answer: C) depends upon the number of discount periods
Assuming two investments have equal lives, a high discount rate tends to favor:
Answer: A) the investment with large cash flow early
Discounting is the opposite of:
Answer: D) both A and C
An increase in ________ will decrease present value.
Answer: D) both A and C
What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
Answer: C) $429
What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.
Answer: A) $5,790
Three years from now, Barbara Waters will purchase a laptop computer that will cost $2,250. Assume that Barbara can earn 6.25% (compounded monthly) on her money. How much should she set aside today for the purchase? Round off to the nearest $1.
Answer: C) $1,866
If you want to have $875 in 32 months, how much money must you put in a savings account today? Assume that the savings account pays 16% and it is compounded monthly (round to the nearest $10).
Answer: B) $570
You are considering two investments: A and B. Both investments provide a cash flow of $100 per year for n years. However, investment A receives the cash flow at the beginning of each year, while investment B receives the cash at the end of each year. If the present value of cash flows from investment A is P, and the discount rate is c, what is the present value of the cash flows from investment B?
Answer: A) P/(1 + c)
All else constant, the future value of an investment will increase if:
Answer: C) the investment is compounded at a higher interest rate.
To compound $100 quarterly for 20 years at 8%, we must use:
Answer: D) 80 periods at 2%.
California Investors recently advertised the following claim: Invest your money with us at 21%, 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 21%, compounded annually? Round off to the nearest year.
Answer: B) Approximately four years
How much money do I need to place into a bank account which pays a 6% rate in order to have $500 at the end of seven years?
Answer: A) $332.53
Bobby's grandmother deposited $100 in a savings account for him when he was born. The money has been earning an annual rate of 12% interest, compounded quarterly for the last 25 years. He is getting married and would like to take his new bride on a fabulous honeymoon. How much does he have in this account to use?
Answer: D) $1,922
What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments. Round to the nearest whole dollar.
Year Cash Flow
1 $3,000
2 $4,000
3 $5,000
Answer: A) PV = $3,000/[1.06]1 + $4,000/[1.06]2 + $5,000/[1.06]3
The present value of $400 to be received at the end of 10 years, if the discount rate is 5%, is:
Answer: D) $245.60.
The present value of $1,000 to be received at the end of five years, if the discount rate is 10%, is:
Answer: A) $621.
What is the present value of an investment that pays $400 at the end of three years and $700 at the end of 10 years if the discount rate is 5%?
Answer: C) $775.40
The present value of a single sum:
Answer: A) increases as the discount rate decreases.
As the discount rate increases, the present value of future cash flows increases TRUE/FALSE
Answer: FALSE
As the compound interest rate increases, the present value of future cash flows decreases TRUE/FALSE
Answer: TRUE
The present value of a future sum of money increases as the number of years before the payment is received increases TRUE/FALSE
Answer: FALSE
The present value of the future sum of money is inversely related to both the number of years until payment is received and the opportunity rate TRUE/FALSE
Answer: TRUE
Which of the following provides the greatest annual interest?
Answer: A) 10% compounded annually
The effective annual rate increases when the ________ increases.
Answer: D) both A and C
What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)?
Answer: D) 6.1%
You are considering two investments. Investment A yields 10% compounded quarterly. Investment B yields r% compounded semiannually. Both investments have equal annual yields.
Find r.
Answer: D) 10.125%
The annual percentage yield is also referred to as the:
Answer: C) effective annual rate.
It is easy to choose a discount rate in an international setting due to stability of inflation TRUE/FALSE
Answer: FALSE
As the number of compounding periods per year increase, the nominal rate of interest increases. TRUE/FALSE
Answer: FALSE
The annual percentage yield is equal to the nominal rate of interest TRUE/FALSE
Answer: FALSE
The nominal interest rate on two different investments will equal the annual percentage yield on the two investments only if interest on both investments is compounded annually TRUE/FALSE
Answer: TRUE
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