Use the following information to answer the following question(s).
A Max, Inc. deposited $2,000 in a bank account that pays 12% interest annually.
19) What will the dollar amount be in four years, assuming that interest is paid annually?
A) $2,800
B) $3,100
C) $3,111
D) $3,148
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
20) What will the dollar amount be if the interest is compounded semiannually for those four
years?
A) $3,100
B) $3,188
C) $3,240
D) $3,290
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
21) How many periods would it take for the deposit to grow to $6,798 if the interest is
compounded semiannually?
A) 17
B) 19
C) 21
D) 25
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
11
22) 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?
A) 47%
B) 4.7%
C) 19%
D) 12.8%
Topic: 5.2 Compounding and Future Value
Keywords: return on investment
Principles: Principle 1: Money Has a Time Value
23) 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?
A) $7,401
B) $5,523
C) $7,128
D) $6,720
Topic: 5.2 Compounding and Future Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
24) 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?
A) 1,560,000
B) 2,220,366
C) 2,100,000
D) 1,824,979
Topic: 5.2 Compounding and Future Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
12
25) 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?
A) 8 years
B) 10 years
C) 11 years
D) 13 years
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
26) The future value of $200 deposited today in an account for four years paying semiannual
interest when the annual interest rate is 12% is:
A) $309.40.
B) $318.80.
C) $320.20.
D) $296.00.
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
27) The future value of a single sum:
A) increases as the compound rate decreases.
B) decreases as the compound rate increases.
C) increases as the number of compound periods decreases.
D) increases as the compound rate increases.
E) none of the above.
Topic: 5.2 Compounding and Future Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
28) The future value of $500 deposited into an account paying 8% annually for three years is:
A) $500.
B) $630.
C) $700.
D) $620.
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
13
29) 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?
A) $9,621
B) $36,000
C) $22,419
D) $12,363
E) $7,619
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
30) 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?
A) $1,025,000
B) $954,719
C) $2,525,548
D) $4,085,920
E) $3,489,097
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
31) 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?
A) 83%
B) 75%
C) 20%
D) 30%
E) 50%
Topic: 5.2 Compounding and Future Value
Keywords: return on investment
Principles: Principle 1: Money Has a Time Value
14
32) At 8%, compounded annually, how long will it take $750 to double?
A) 9 years
B) 8 years
C) 12 years
D) 4 years
E) 6 years
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
33) The future value of a lump sum deposited today increases as the number of years of
compounding at a positive rate of interest declines.
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
34) 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.
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
35) Determining the specified amount of money that you will receive at the maturity of an
investment is an example of a future value equation.
Topic: 5.2 Compounding and Future Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
36) The same basic formula is used for computing both the computation of future value and of
present value.
Topic: 5.2 Compounding and Future Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
15
37) The more frequent the compounding periods in a year, the higher the future value.
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
38) Briefly discuss how non-annual compounding (more than one compounding period per year)
is preferable to annual compounding if you are an investor.
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
39) If you deposit $1,000 each year in a savings account earning 4%, compounded annually, how
much will you have in 10 years?
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
40) Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five
years. What annual rate of interest will you be paying?
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
41) Earnings per share for XYZ, Inc. grew constantly from $7.99 in 1974 to $12.68 in 1980.
What was the compound annual growth rate in earnings-per-share over the period?
1.587 = FVIF[? %, 6 yr]
g = 8%
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
42) If you invest $450 today and it increases to $6,185 at the end of 20 years, what rate of return
have you earned?
13.743 = FVIF[? %, 20 yr]
i = 14%
Topic: 5.2 Compounding and Future Value
Keywords: compound interest
1) The present value of a single future sum:
A) increases as the number of discount periods increases.
B) is generally larger than the future sum.
C) depends upon the number of discount periods.
D) increases as the discount rate increases.
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
2) Assuming two investments have equal lives, a high discount rate tends to favor:
A) the investment with large cash flow early.
B) the investment with large cash flow late.
C) the investment with even cash flow.
D) neither investment since they have equal lives.
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
3) Discounting is the opposite of:
A) compounding.
B) future value.
C) opportunity costs.
D) both A and C.
Topic: 5.3 Discounting and Present Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
17
4) An increase in ________ will decrease present value.
A) the discount rate per period
B) the original amount invested
C) the number of periods
D) both A and C
E) all of the above
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
5) 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).
A) $893
B) $3,106
C) $429
D) $833
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
6) 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.
A) $5,790
B) $11,574
C) $9,210
D) $17,010
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
7) 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.
A) $1,250
B) $900
C) $1,866
D) $3,775
Topic: 5.3 Discounting and Present Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
18