Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 1
1. When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.
a. ordinary annuity
b. annuity due
c. immediate annuity
d. terminal annuity
e. discounted annuity
2. An annuity with payments that occur at the beginning of each period is known as a _____.
a. deferred annuity
b. ordinary annuity
c. immediate annuity
d. annuity due
e. discounted annuity
3. A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of cash flow
pattern is a(n) _____.
a. ordinary annuity
b. annuity due
c. uneven cash flow stream
d. lump-sum payment
e. compounded cash flow
4. A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form
of cash flow pattern represents a(n) _____.
a. lump-sum payment
b. uneven cash flow stream
c. annuity due
d. ordinary annuity
e. immediate annuity
5. Pelican Corporation is planning to invest $12,000 at the beginning of each of the next eight years. This form of cash
flow pattern is known as a(n) _____.
a. immediate annuity
b. annuity due
c. uneven cash flow stream
d. ordinary annuity
e. deferred annuity
6. Ibiza Corporation invested $20,000 for the last four years in an investment that will pay the firm $120,000 at the end of
this year. The $120,000 received at the end of this year is an example of a(n) _____.
a. uneven cash flow
b. annuity due
c. ordinary annuity
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 2
d. deferred annuity
e. lump-sum amount
7. At the beginning of the year, William bought 20 shares of Zync Corporation at $18.50 per share. Zync pays dividend at
the end of each year based on annual profits, which generally vary substantially from year to year. In its 25 years history,
Zync has paid dividends every year without fail. The initial investment by William and the receipt of dividend at the end
of every year are examples of a(n) _____ and a(n) _____, respectively.
a. uneven cash flow stream; annuity due
b. uneven cash flow stream; ordinary annuity
c. lump-sum payment; annuity due
d. lump-sum payment; uneven cash flow stream
e. lump-sum payment; ordinary annuity
8. Which of the following types of annuities best describes a mortgage payment or payment of rent that normally must be
paid at the beginning of each month?
a. Annuity due
b. Ordinary annuity
c. Deferred annuity
d. Annuity in arrears
e. Immediate annuity
9. Which of the following is the rate of return on the best available alternative investment of equal risk?
a. Amortization rate
b. Risk adjusted rate
c. Required rate of return
d. Opportunity cost rate
e. Expected rate of return
10. An investor purchased a 10-year bond that makes a $50 interest payment at the end of every six-month period until the
bond matures. These interest payments represent a(an) _____.
a. perpetuity
b. ordinary annuity
c. annuity due
d. compounded annuity
e. discounted annuity
11. In most instances, the payment of utility bills is an example of _____.
a. immediate annuity
b. ordinary annuity
c. annuity due
d. lump-sum payments
e. uneven cash flows
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 3
12. The process of determining the value to which an amount or a series of cash flows will grow in the future when
interest on interest is applied is known as _____.
a. discounting
b. compounding
c. amortization
d. consolidation
e. annualizing
13. Which of the following is the correct expression for calculating the future value of an investment? (r represents the
interest rate and n represents the length of time)
a. Future value = Present value × (1 + r)n
b. Future value = Present value + (1 + r)n
c. Future value = Present value – (1 + r)n
d. Future value = Present value / (1 + r)n
e. Future value = Present value / [(1 + r) × n]
14. Sarah invests $2,700 today in an account that pays 6 percent interest compounded annually. She wants to know the
total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to
determine the total balance.
a. N = 6, I/Y = 5%, PV = 2,700
b. N = 5, I/Y = 6%, FV = –2,700
c. N = 5, I/Y = 6%, PV = 2,700
d. N = 5, I/Y = 6%, FV = 2,700
e. N = 5, I/Y = 6%, PV = –2,700
15. Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. What
is the value of the investment today?
a. $36,667.76
b. $38,250.26
c. $40,527.37
d. $44,260.91
e. $46,458.63
16. Adam plans to invest $1500 today in a mutual fund. If he earns 12 percent interest compounded monthly, to what
amount will his investment grow in 20 years?
a. $17,289
b. $15,897
c. $16,339
d. $12,450
e. $18,546
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 4
17. Shekhar plans to invest $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8
percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the
equation method to calculate the worth of the investment.
a. $11,125.76
b. $11,857.58
c. $12,580.20
d. $13,351.39
e. $14,871.32
18. Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate
is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made?
a. $5,055
b. $5,642
c. $5,980
d. $6,026
e. $6,222
19. Robert plans to invest $650 in a savings account at the beginning of each of the next seven years. If his opportunity
cost rate is 5 percent compounded annually, how much will his investment be worth at the end of seven years?
a. $5,048
b. $5,292
c. $5,557
d. $6,058
e. $6,656
20. Dwayne plans to invest $4,700 in a savings account at the beginning of each of the next 12 years. If his opportunity
cost rate is 7 percent compounded annually, how much will his investment be worth at the end of 12 years?
a. $87,542.29
b. $89,961.02
c. $91,250.52
d. $93,668.27
e. $84,075.72
21. The future value of an uneven cash flow stream is also referred to as its _____.
a. discounted value
b. amortized value
c. consolidated value
d. terminal value
e. periodic value
22. Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year,
$500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 5
earns 6 percent interest each year, the terminal (future) value of this uneven cash flow stream at the end of Year 4 is
_____.
a. $2,314
b. $1,833
c. $2,097
d. $2,355
e. $1,784
23. The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the
future is known as _____.
a. compounding
b. discounting
c. consolidation
d. amortization
e. annualizing
24. Identify the correct equation for calculating the present value of an investment. (Assume ‘r’ stands for rate of return
and ‘n’ stands for number of periods interest is earned.)
a. Present value = Future value × (1 + r)n
b. Present value = Future value + (1 + r)n
c. Present value = Future value – (1 + r)n
d. Present value = Future value / (1 + r)n
e. Present value = Future value / ((1 + r) × n)
25. If the opportunity cost rate is 8 percent, compounded annually, what is the present value of $8,200 due to be received
in 12 years?
a. $3,068
b. $3,256
c. $3,552
d. $3,688
e. $3,854
26. Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam’s opportunity
cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment
today?
a. $23,089
b. $25,526
c. $26,888
d. $28,685
e. $30,534
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 6
27. Lisa’s opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if
she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to
be deposited today.
a. $17,226
b. $14,868
c. $23,252
d. $18,725
e. $21,804
28. Jason’s opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he
wants to receive $5,400 at the end of each of the next 10 years?
a. $32,625
b. $34,852
c. $36,234
d. $38,996
e. $40,252
29. Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent
compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation.
a. $6,088
b. $7,086
c. $6,874
d. $6,636
e. $6,420
30. Andrea’s opportunity cost rate is 12 percent compounded annually. How much must she deposit in an account today if
she wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the
amount.
a. $10,734
b. $11,625
c. $10,998
d. $11,887
e. $9,584
31. If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take
for her to accumulate $6,500 in her account?
a. 23.02 years
b. 18.50 years
c. 20.52 years
d. 16.89 years
e. 25.65 years
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 7
32. Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8
percent interest compounded annually, how long will he have to wait to take his holiday?
a. 12.36 years
b. 16.25 years
c. 15.19 years
d. 13.52 years
e. 14.12 years
33. Paul wants to accumulate $14,500 for the down payment for a new condo. He plans to start investing $2,500 annually
beginning today. The investment account will pay 10 percent interest compounded annually. How long would it take him
to accumulate enough money to make the down payment?
a. 3.5 years
b. 5.9 years
c. 6.1 years
d. 4.4 years
e. 4.8 years
34. Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need
$20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly.
How long would it take her to have enough money to start college?
a. 28.5 months
b. 27.8 months
c. 25.0 months
d. 22.6 months
e. 30.3 months
35. Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest
was compounded annually, what is the annual rate of return earned on the investment?
a. 7.3%
b. 8.2%
c. 9.5%
d. 10.8%
e. 11.7%
36. Dire invested $10,000 today in an investment that has a maturity value of $13,500 in five years. If the interest is
compounded annually, what is the annual rate of return earned on the investment?
a. 7.8%
b. 8.2%
c. 6.2%
d. 4.5%
e. 9.5%
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 8
37. Zoey is planning to invest $5,000 in a fixed income security at the end of each of the next four years. She will receive
$23,000 at the end of four years. If interest is compounded annually, what is the annual rate of return earned on the
investment?
a. 5.7%
b. 7.3%
c. 8.7%
d. 10.2%
e. 9.4%
38. Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in eight years. If the
interest is compounded monthly, what is the effective annual rate of return earned on the investment?
a. 4.3%
b. 5.7%
c. 6.5%
d. 7.3%
e. 8.8%
39. Bill is considering investing $450 at the end of every month in a fixed income instrument. He will receive $27,000 at
the end of four years. If interest is compounded monthly, what is the effective annual rate of return earned on the
investment?
a. 11.6%
b. 22.3%
c. 15.1%
d. 11.1%
e. 13.6%
40. LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas
Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of Investment A and
Investment B?
a. 9.38 percent and 10.50 percent, respectively
b. 9.38 percent and 10.25 percent, respectively
c. 9.75 percent and 10.25 percent, respectively
d. 9.75 percent and 10.50 percent, respectively
e. 9.94 percent and 10.45 percent, respectively
41. The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded
_____.
a. continuously
b. daily
c. monthly
d. semi-annually
e. annually
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 9
42. A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment’s
effective annual rate (rEAR)?
a. 8.16%
b. 8.36%
c. 8.56%
d. 8.76%
e. 8.96%
43. Identify the correct expression for the effective annual rate (EAR).
a. (1 + Periodic rate of interest)Number of borrowing (interest) periods in one year – 1
b. (1 / Periodic rate of interest)Number of borrowing (interest) periods in one year – 1
c. (1 – Periodic rate of interest)Number of borrowing (interest) periods in one year – 1
d. (1 + Periodic rate of interest)Number of borrowing (interest) periods in one year + 1
e. (1 – Periodic rate of interest)Number of borrowing (interest) periods in one year + 1
44. If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that
the interest is paid once per year, the effective annual rate of the investment is _____.
a. 10.8%
b. 11.5%
c. 12.2%
d. 12.9%
e. 13.6%
45. Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans.
Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest
compounded semiannually. What would be the difference between the future values of the two investments if Mira’s
investment horizon is seven years?
a. $4,204.52
b. $3,577.87
c. $1,152.34
d. $2,703.78
e. $3,250.22
46. Kim has just graduated from law school. She had taken an education loan of $45,000, which now must be repaid in
equal monthly installments over the next six years. What is the amount of the monthly loan repayment, if the loan carries
a simple annual interest of 5 percent? The first payment will be made in one month.
a. $689.76
b. $721.71
c. $702.46
d. $658.92
e. $724.72
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 10
47. Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan
with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments
for three years (i.e., when two years of payments remain)?
a. $10,089.56
b. $10,602.44
c. $10,857.28
d. $11,345.77
e. $11,568.25
48. Frank purchased his house 16 years ago by taking out a 25-year mortgage for $150,000. The mortgage has a fixed
interest rate of 5 percent compounded monthly. If he wants to pay off his mortgage today, how much money does he
need? He made his most recent mortgage payment earlier today. (Round your intermediate calculation and your answer to
two decimal places.)
a. $65,459.98
b. $70,856.65
c. $76,136.95
d. $80,425.21
e. $85,024.66
49. David borrowed $120,000 for his business to be repaid in six equal annual installment. The lender charges 6.5 percent
interest on the amount of the loan balance that is outstanding at the beginning of each year. The interest component in the
amount of the annual installment will be the smallest at the end of:
a. sixth year.
b. first year.
c. third year.
d. fourth year.
e. fifth year.
50. Ordinary annuity is an annuity with payments that occur at the beginning of each period.
a. True
b. False
51. Gale Corporation leases the printing equipment it uses. The terms of the lease require the monthly lease payments to
be made at the beginning of every month. This is an example of an annuity due.
a. True
b. False
52. The rate of return on the best available alternative investment of equal risk is the risk-adjusted required rate of return.
a. True
b. False
Name:
Class:
Date:
04: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 11
53. An investment carries an interest rate of 8 percent compounded annually. When using the time value of money
functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet
to make the time value of money calculations.
a. True
b. False
54. The present value of an investment increases as the opportunity cost rate increases.
a. True
b. False
55. The present value of an uneven cash flow can be determined by using the annuity equations.
a. True
b. False
56. The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not
consider the effect of compounding.
a. True
b. False
57. Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return
that is earned on an investment.
a. True
b. False
58. If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.
a. True
b. False