8) 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).
A) $630
B) $570
C) $650
D) $660
Topic: 5.3 Discounting and Present Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
9) 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?
A) P/(1 + c)
B) P(1 + c)
C) P/(1 + c)n
D) P(1 + c)n
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
10) All else constant, the future value of an investment will increase if:
A) the investment involves more risk.
B) the investment is compounded for fewer years.
C) the investment is compounded at a higher interest rate.
D) both B & C.
Topic: 5.3 Discounting and Present Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
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11) To compound $100 quarterly for 20 years at 8%, we must use:
A) 40 periods at 4%.
B) five periods at 12%.
C) 10 periods at 4%.
D) 80 periods at 2%.
Topic: 5.3 Discounting and Present Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
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.
A) Approximately two years
B) Approximately four years
C) Approximately six years
D) Approximately eight years
Topic: 5.3 Discounting and Present Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
13) 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?
A) $332.53
B) $381.82
C) $423.77
D) $489.52
Topic: 5.3 Discounting and Present Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
20
14) 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?
A) $4,165
B) $1,700
C) $5,051
D) $1,922
Topic: 5.3 Discounting and Present Value
Keywords: future value
Principles: Principle 1: Money Has a Time Value
15) 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.
3 $5,000
A) PV = $3,000/[1.06]1 + $4,000/[1.06]2 + $5,000/[1.06]3
B) PV = $3,000[1.06]1 + $4,000[1.06]2 + $5,000[1.06]3
C) PV = $3,000/[1.06]0 + $4,000/[1.06]1 + $5,000/[1.06]2
D) PV = $3,000[1.06]-0 + $4,000[1.06]-1 + $5,000[1.06]-2
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
16) The present value of $400 to be received at the end of 10 years, if the discount rate is 5%, is:
A) $400.00.
B) $248.40.
C) $313.60.
D) $245.60.
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
21
10%, is:
A) $621.
B) $784.
C) $614.
D) $500.
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
18) 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%?
A) $1,100.00
B) $675.30
C) $775.40
D) $424.60
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
19) The present value of a single sum:
A) increases as the discount rate decreases.
B) decreases as the discount rate decreases.
C) increases as the number of discount periods increases.
D) increases as the discount rate increases.
E) none of the above.
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
20) As the discount rate increases, the present value of future cash flows increases.
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
22
21) As the compound interest rate increases, the present value of future cash flows decreases.
Topic: 5.3 Discounting and Present Value
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
22) The present value of a future sum of money increases as the number of years before the
payment is received increases.
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
23) 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.
Topic: 5.3 Discounting and Present Value
Keywords: present value
Principles: Principle 1: Money Has a Time Value
1) Which of the following provides the greatest annual interest?
A) 10% compounded annually
B) 9.5% compounded monthly
C) 9% compounded quarterly
D) 8.5% compounded daily
Topic: 5.4 Making Interest Rates Comparable
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
2) The effective annual rate increases when the ________ increases.
A) number of compounding periods in a year
B) number of years invested
C) quoted rate
D) both A and C
E) all of the above
Topic: 5.4 Making Interest Rates Comparable
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
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3) 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%)?
A) 51.7%
B) 6.7%
C) 10.9%
D) 6.1%
Topic: 5.4 Making Interest Rates Comparable
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
4) 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.
A) 19.875%
B) 10%
C) 10.38%
D) 10.125%
Topic: 5.4 Making Interest Rates Comparable
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
5) The annual percentage yield is also referred to as the:
A) quoted rate.
B) nominal rate.
C) effective annual rate.
D) all of the above.
Topic: 5.4 Making Interest Rates Comparable
Keywords: effective annual rate
Principles: Principle 1: Money Has a Time Value
6) It is easy to choose a discount rate in an international setting due to stability of inflation.
Topic: 5.4 Making Interest Rates Comparable
Keywords: discount rate
Principles: Principle 1: Money Has a Time Value
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7) As the number of compounding periods per year increase, the nominal rate of interest
increases.
Topic: 5.4 Making Interest Rates Comparable
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
8) The annual percentage yield is equal to the nominal rate of interest.
Topic: 5.4 Making Interest Rates Comparable
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
9) 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.
Topic: 5.4 Making Interest Rates Comparable
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
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