Chapter 5: Time Value of Money True/False Page 135
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Note that there is some overlap between the T/F and the multiple choice questions, as some T/F
statements are used in the MC questions. See the preface for information on the AACSB letter
indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
1. Starting to invest early for retirement increases the benefits of
compound interest.
a. True
b. False
2. Starting to invest early for retirement reduces the benefits of
compound interest.
a. True
b. False
3. A time line is meaningful even if all cash flows do not occur annually.
a. True
b. False
4. A time line is not meaningful unless all cash flows occur annually.
a. True
b. False
5. Time lines can be constructed in situations where some of the cash
flows occur annually but others occur quarterly.
a. True
b. False
6. Time lines cannot be constructed in situations where some of the cash
flows occur annually but others occur quarterly.
a. True
b. False
CHAPTER 5
TIME VALUE OF MONEY
Page 136 True/False Chapter 5: Time Value of Money
7. Time lines can be constructed for annuities where the payments occur at
either the beginning or the end of the periods.
a. True
b. False
8. Time lines cannot be constructed for annuities unless all the payments
occur at the end of the periods.
a. True
b. False
9. Some of the cash flows shown on a time line can be in the form of
annuity payments while others can be uneven amounts.
a. True
b. False
10. Some of the cash flows shown on a time line can be in the form of
annuity payments but none can be uneven amounts.
a. True
b. False
11. If the discount (or interest) rate is positive, the present value of an
expected series of payments will always exceed the future value of the
same series.
a. True
b. False
12. If the discount (or interest) rate is positive, the future value of an
expected series of payments will always exceed the present value of the
same series.
a. True
b. False
13. Disregarding risk, if money has time value, it is impossible for the
present value of a given sum to exceed its future value.
a. True
b. False
Chapter 5: Time Value of Money True/False Page 137
14. Disregarding risk, if money has time value, it is impossible for the
future value of a given sum to exceed its present value.
a. True
b. False
15. If a bank compounds savings accounts quarterly, the nominal rate will
exceed the effective annual rate.
a. True
b. False
16. If a bank compounds savings accounts quarterly, the effective annual
rate will exceed the nominal rate.
a. True
b. False
17. The greater the number of compounding periods within a year, then (1)
the greater the future value of a lump sum investment at Time 0 and (2)
the greater the present value of a given lump sum to be received at
some future date.
a. True
b. False
18. The greater the number of compounding periods within a year, then (1)
the greater the future value of a lump sum investment at Time 0 and (2)
the smaller the present value of a given lump sum to be received at
some future date.
a. True
b. False
19. Suppose Sally Smith plans to invest $1,000. She can earn an effective
annual rate of 5% on Security A, while Security B has an effective
annual rate of 12%. After 11 years, the compounded value of Security B
should be more than twice the compounded value of Security A. (Ignore
risk, and assume that compounding occurs annually.)
a. True
b. False
Page 138 True/False Chapter 5: Time Value of Money
20. Suppose Randy Jones plans to invest $1,000. He can earn an effective
annual rate of 5% on Security A, while Security B has an effective
annual rate of 12%. After 11 years, the compounded value of Security B
should be somewhat less than twice the compounded value of Security A.
(Ignore risk, and assume that compounding occurs annually.)
a. True
b. False
21. The present value of a future sum decreases as either the discount rate
or the number of periods per year increases, other things held
constant.
a. True
b. False
22. The present value of a future sum increases as either the discount rate
or the number of periods per year increases, other things held
constant.
a. True
b. False
23. All other things held constant, the present value of a given annual
annuity decreases as the number of periods per year increases.
a. True
b. False
24. All other things held constant, the present value of a given annual
annuity increases as the number of periods per year increases.
a. True
b. False
25. If we are given a periodic interest rate, say a monthly rate, we can
find the nominal annual rate by multiplying the periodic rate by the
number of periods per year.
a. True
b. False
26. If we are given a periodic interest rate, say a monthly rate, we can
find the nominal annual rate by dividing the periodic rate by the
number of periods per year.
Chapter 5: Time Value of Money True/False Page 139
a. True
b. False
27. As a result of compounding, the effective annual rate on a bank deposit
(or a loan) is always equal to or greater than the nominal rate on the
deposit (or loan).
a. True
28. As a result of compounding, the effective annual rate on a bank deposit
(or a loan) is always equal to or less than the nominal rate on the
deposit (or loan).
a. True
b. False
29. When a loan is amortized, a relatively high percentage of the payment
goes to reduce the outstanding principal in the early years, and the
principal repayment’s percentage declines in the loan’s later years.
a. True
b. False
30. When a loan is amortized, a relatively low percentage of the payment
goes to reduce the outstanding principal in the early years, and the
principal repayment’s percentage increases in the loan’s later years.
a. True
b. False
31. The payment made each period on an amortized loan is constant, and it
consists of some interest and some principal. The closer we are to the
end of the loan’s life, the greater the percentage of the payment that
will be a repayment of principal.
a. True
b. False
32. The payment made each period on an amortized loan is constant, and it
consists of some interest and some principal. The closer we are to the
end of the loan’s life, the smaller the percentage of the payment that
will be a repayment of principal.
a. True
b. False
Page 140 Conceptual M/C Chapter 5: Time Value of Money
33. Midway through the life of an amortized loan, the percentage of the
payment that represents interest must be equal to the percentage that
represents repayment of principal. This is true regardless of the
original life of the loan or the interest rate on the loan.
a. True
b. False
34. Midway through the life of an amortized loan, the percentage of the
payment that represents interest could be equal to, less than, or
greater than to the percentage that represents repayment of principal.
The proportions depend on the original life of the loan and the
interest rate.
a. True
b. False
Multiple Choice: Conceptual
The correct answers to most of these questions can be determined without doing any
calculations, but calculations are required for a few of them, and calculations are useful to
confirm the answers to others. You can see from the answer where calculations are required.
Those questions generally take students longer to answer.
35. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b. Time lines are useful for visualizing complex problems prior to doing
actual calculations.
c. Time lines cannot be constructed in situations where some of the cash
flows occur annually but others occur quarterly.
d. Time lines cannot be constructed for annuities where the payments
occur at the beginning of the periods.
e. Some of the cash flows shown on a time line can be in the form of
annuity payments, but none can be uneven amounts.
36. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b. Time lines are not useful for visualizing complex problems prior to
doing actual calculations.
c. Time lines cannot be constructed in situations where some of the cash
flows occur annually but others occur quarterly.
d. Time lines can be constructed for annuities where the payments occur
at either the beginning or the end of the periods.
e. Some of the cash flows shown on a time line can be in the form of
annuity payments, but none can be uneven amounts.
Chapter 5: Time Value of Money Conceptual M/C Page 141
37. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b. Time lines are not useful for visualizing complex problems prior to
doing actual calculations.
c. Time lines can be constructed to deal with situations where some of
the cash flows occur annually but others occur quarterly.
d. Time lines can only be constructed for annuities where the payments
occur at the end of the periods, i.e., for ordinary annuities.
e. Time lines cannot be constructed where some of the payments
constitute an annuity but others are unequal and thus are not part
of the annuity.
38. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b. Time lines are not useful for visualizing complex problems prior to
doing actual calculations.
c. Time lines cannot be constructed to deal with situations where some
of the cash flows occur annually but others occur quarterly.
d. Time lines can only be constructed for annuities where the payments
occur at the end of the periods, i.e., for ordinary annuities.
e. Time lines can be constructed where some of the payments constitute
an annuity but others are unequal and thus are not part of the
annuity.
39. You plan to analyze the value of a potential investment by calculating
the sum of the present values of its expected cash flows. Which of the
following would lower the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total
to $100,000. You learn that the annuity lasts for only 5 rather
than 10 years, hence that each payment is for $20,000 rather than
for $10,000.
b. The discount rate increases.
c. The riskiness of the investment’s cash flows decreases.
d. The total amount of cash flows remains the same, but more of the cash
flows are received in the earlier years and less are received in the
later years.
e. The discount rate decreases.
40. You plan to analyze the value of a potential investment by calculating
the sum of the present values of its expected cash flows. Which of the
following would increase the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to
$100,000. You learn that the annuity lasts for 10 years rather than 5
years, hence that each payment is for $10,000 rather than for $20,000.
b. The discount rate decreases.
c. The riskiness of the investment’s cash flows increases.
Page 142 Conceptual M/C Chapter 5: Time Value of Money
d. The total amount of cash flows remains the same, but more of the cash
flows are received in the later years and less are received in the
earlier years.
e. The discount rate increases.
41. Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at
the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, such
as once a year, then the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the ends of the
periods.
d. The cash flows for an annuity must all be equal, and they must occur
at regular intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others
occur at the ends, then we have what the textbook defines as a
variable annuity.
42. Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at
the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, such
as once a year, then the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the beginning of
the periods.
d. The cash flows for an annuity may vary from period to period, but
they must occur at regular intervals, such as once a year or once a
month.
e. If some cash flows occur at the beginning of the periods while others
occur at the ends, then we have what the textbook defines as a
variable annuity.
43. Your bank account pays a 6% nominal rate of interest. The interest is
compounded quarterly. Which of the following statements is CORRECT?
a. The periodic rate of interest is 1.5% and the effective rate of
interest is 3%.
b. The periodic rate of interest is 6% and the effective rate of
interest is greater than 6%.
c. The periodic rate of interest is 1.5% and the effective rate of
interest is greater than 6%.
d. The periodic rate of interest is 3% and the effective rate of
interest is 6%.
e. The periodic rate of interest is 6% and the effective rate of
interest is also 6%.
Chapter 5: Time Value of Money Conceptual M/C Page 143
44. Your bank account pays an 8% nominal rate of interest. The interest is
compounded quarterly. Which of the following statements is CORRECT?
a. The periodic rate of interest is 2% and the effective rate of
interest is 4%.
b. The periodic rate of interest is 8% and the effective rate of
interest is greater than 8%.
c. The periodic rate of interest is 4% and the effective rate of
interest is less than 8%.
d. The periodic rate of interest is 2% and the effective rate of
interest is greater than 8%.
e. The periodic rate of interest is 8% and the effective rate of
interest is also 8%.
45. A $50,000 loan is to be amortized over 7 years, with annual end-of-year
payments. Which of these statements is CORRECT?
a. The annual payments would be larger if the interest rate were lower.
b. If the loan were amortized over 10 years rather than 7 years, and if
the interest rate were the same in either case, the first payment
would include more dollars of interest under the 7-year amortization
plan.
c. The proportion of each payment that represents interest as opposed
to repayment of principal would be lower if the interest rate were
lower.
d. The last payment would have a higher proportion of interest than the
first payment.
e. The proportion of interest versus principal repayment would be the
same for each of the 7 payments.
46. A $150,000 loan is to be amortized over 7 years, with annual end-of–
year payments. Which of these statements is CORRECT?
a. The annual payments would be larger if the interest rate were lower.
b. If the loan were amortized over 10 years rather than 7 years, and if
the interest rate were the same in either case, the first payment
would include more dollars of interest under the 7-year amortization
plan.
c. The proportion of each payment that represents interest as opposed
to repayment of principal would be higher if the interest rate were
lower.
d. The proportion of each payment that represents interest versus
repayment of principal would be higher if the interest rate were
higher.
e. The proportion of interest versus principal repayment would be the
same for each of the 7 payments.
Page 144 Conceptual M/C Chapter 5: Time Value of Money
47. Which of the following statements regarding a 15-year (180-month)
$125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and
transactions costs.)
a. The remaining balance after three years will be $125,000 less one
third of the interest paid during the first three years.
b. Because it is a fixed-rate mortgage, the monthly loan payments
(which include both interest and principal payments) are constant.
c. Interest payments on the mortgage will increase steadily over time,
but the total amount of each payment will remain constant.
d. The proportion of the monthly payment that goes towards repayment of
principal will be lower 10 years from now than it will be the first
year.
e. The outstanding balance declines at a slower rate in the later years
of the loan’s life.
48. Which of the following statements regarding a 15-year (180-month)
$125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and
transactions costs.)
a. The remaining balance after three years will be $125,000 less one
third of the interest paid during the first three years.
b. Because the outstanding balance declines over time, the monthly
payments will also decline over time.
c. Interest payments on the mortgage will increase steadily over time,
but the total amount of each payment will remain constant.
d. The proportion of the monthly payment that goes towards repayment of
principal will be lower 10 years from now than it will be the first
year.
e. The outstanding balance declines at a faster rate in the later years
of the loan’s life.
49. Which of the following statements regarding a 30-year monthly payment
amortized mortgage with a nominal interest rate of 10% is CORRECT?
a. The monthly payments will decline over time.
b. A smaller proportion of the last monthly payment will be interest,
and a larger proportion will be principal, than for the first
monthly payment.
c. The total dollar amount of principal being paid off each month gets
smaller as the loan approaches maturity.
d. The amount representing interest in the first payment would be
higher if the nominal interest rate were 7% rather than 10%.
e. Exactly 10% of the first monthly payment represents interest.
Chapter 5: Time Value of Money Conceptual M/C Page 145
50. Which of the following statements regarding a 30-year monthly payment
amortized mortgage with a nominal interest rate of 10% is CORRECT?
a. The monthly payments will increase over time.
b. A larger proportion of the first monthly payment will be interest,
and a smaller proportion will be principal, than for the last
monthly payment.
c. The total dollar amount of interest being paid off each month gets
larger as the loan approaches maturity.
d. The amount representing interest in the first payment would be
higher if the nominal interest rate were 7% rather than 10%.
e. Exactly 10% of the first monthly payment represents interest.
51. Which of the following investments would have the highest future value
at the end of 10 years? Assume that the effective annual rate for all
investments is the same and is greater than zero.
a. Investment A pays $250 at the beginning of every year for the next
10 years (a total of 10 payments).
b. Investment B pays $125 at the end of every 6-month period for the
next 10 years (a total of 20 payments).
c. Investment C pays $125 at the beginning of every 6-month period for
the next 10 years (a total of 20 payments).
d. Investment D pays $2,500 at the end of 10 years (just one payment).
e. Investment E pays $250 at the end of every year for the next 10
years (a total of 10 payments).
52. Which of the following investments would have the lowest present value?
Assume that the effective annual rate for all investments is the same
and is greater than zero.
a. Investment A pays $250 at the end of every year for the next 10
years (a total of 10 payments).
b. Investment B pays $125 at the end of every 6-month period for the
next 10 years (a total of 20 payments).
c. Investment C pays $125 at the beginning of every 6-month period for
the next 10 years (a total of 20 payments).
d. Investment D pays $2,500 at the end of 10 years (just one payment).
e. Investment E pays $250 at the beginning of every year for the next
10 years (a total of 10 payments).
53. A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from
today. The nominal interest rate is 6%, semiannual compounding. Which
of the following statements is CORRECT?
a. The periodic interest rate is greater than 3%.
b. The periodic rate is less than 3%.
c. The present value would be greater if the lump sum were discounted
back for more periods.
d. The present value of the $1,000 would be smaller if interest were
compounded monthly rather than semiannually.
Page 146 Conceptual M/C Chapter 5: Time Value of Money
e. The PV of the $1,000 lump sum has a higher present value than the PV
of a 3-year, $333.33 ordinary annuity.
54. A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from
today. The nominal interest rate is 6%, semiannual compounding. Which
of the following statements is CORRECT?
a. The periodic interest rate is greater than 3%.
b. The periodic rate is less than 3%.
c. The present value would be greater if the lump sum were discounted
back for more periods.
d. The present value of the $1,000 would be larger if interest were
compounded monthly rather than semiannually.
e. The PV of the $1,000 lump sum has a smaller present value than the
PV of a 3-year, $333.33 ordinary annuity.
55. Which of the following statements is CORRECT, assuming positive
interest rates and holding other things constant?
a. The present value of a 5-year, $250 annuity due will be lower than
the PV of a similar ordinary annuity.
b. A 30-year, $150,000 amortized mortgage will have larger monthly
payments than an otherwise similar 20-year mortgage.
c. A bank loan’s nominal interest rate will always be equal to or less
than its effective annual rate.
d. If an investment pays 10% interest, compounded annually, its
effective annual rate will be less than 10%.
e. Banks A and B offer the same nominal annual rate of interest, but A
pays interest quarterly and B pays semiannually. Deposits in Bank B
will provide the higher future value if you leave your funds on
deposit.
56. Which of the following statements is CORRECT, assuming positive
interest rates and holding other things constant?
a. The present value of a 5-year, $250 annuity due will be lower than
the PV of a similar ordinary annuity.
b. A 30-year, $150,000 amortized mortgage will have larger monthly
payments than an otherwise similar 20-year mortgage.
c. A bank loan’s nominal interest rate will always be equal to or
greater than its effective annual rate.
d. If an investment pays 10% interest, compounded quarterly, its
effective annual rate will be greater than 10%.
e. Banks A and B offer the same nominal annual rate of interest, but A
pays interest quarterly and B pays semiannually. Deposits in Bank B
will provide the higher future value if you leave your funds on
deposit.
Chapter 5: Time Value of Money Conceptual M/C Page 147
57. Which of the following statements is CORRECT?
a. The present value of a 3-year, $150 annuity due will exceed the
present value of a 3-year, $150 ordinary annuity.
b. If a loan has a nominal annual rate of 8%, then the effective rate
can never be greater than 8%.
c. If a loan or investment has annual payments, then the effective,
periodic, and nominal rates of interest will all be different.
d. The proportion of the payment that goes toward interest on a fully
amortized loan increases over time.
e. An investment that has a nominal rate of 6% with semiannual payments
will have an effective rate that is smaller than 6%.
58. Which of the following statements is CORRECT?
a. The present value of a 3-year, $150 ordinary annuity will exceed the
present value of a 3-year, $150 annuity due.
b. If a loan has a nominal annual rate of 8%, then the effective rate
will never be less than 8%.
c. If a loan or investment has annual payments, then the effective,
periodic, and nominal rates of interest will all be different.
d. The proportion of the payment that goes toward interest on a fully
amortized loan increases over time.
e. An investment that has a nominal rate of 6% with semiannual payments
will have an effective rate that is smaller than 6%.
59. You are considering two equally risky annuities, each of which pays
$5,000 per year for 10 years. Investment ORD is an ordinary (or
deferred) annuity, while Investment DUE is an annuity due. Which of
the following statements is CORRECT?
a. The present value of ORD must exceed the present value of DUE, but
the future value of ORD may be less than the future value of DUE.
b. The present value of DUE exceeds the present value of ORD, while the
future value of DUE is less than the future value of ORD.
c. The present value of ORD exceeds the present value of DUE, and the
future value of ORD also exceeds the future value of DUE.
d. The present value of DUE exceeds the present value of ORD, and the
future value of DUE also exceeds the future value of ORD.
e. If the going rate of interest decreases from 10% to 0%, the
difference between the present value of ORD and the present value of
DUE would remain constant.
Page 148 Conceptual M/C Chapter 5: Time Value of Money
60. You are considering two equally risky annuities, each of which pays
$5,000 per year for 10 years. Investment ORD is an ordinary (or
deferred) annuity, while Investment DUE is an annuity due. Which of
the following statements is CORRECT?
a. A rational investor would be willing to pay more for DUE than for
ORD, so their market prices should differ.
b. The present value of DUE exceeds the present value of ORD, while the
future value of DUE is less than the future value of ORD.
c. The present value of ORD exceeds the present value of DUE, and the
future value of ORD also exceeds the future value of DUE.
d. The present value of ORD exceeds the present value of DUE, while the
future value of DUE exceeds the future value of ORD.
e. If the going rate of interest decreases from 10% to 0%, the
difference between the present value of ORD and the present value of
DUE would remain constant.
61. Which of the following statements is CORRECT?
a. If you have a series of cash flows, each of which is positive, you
can solve for I, where the solution value of I causes the PV of the
cash flows to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is negative but each of
the following CFs is positive, you can solve for I, but only if the
sum of the undiscounted cash flows exceeds the cost.
c. To solve for I, one must identify the value of I that causes the PV
of the positive CFs to equal the absolute value of the PV of the
negative CFs. This is, essentially, a trial-and-error procedure
that is easy with a computer or financial calculator but quite
difficult otherwise.
d. If you solve for I and get a negative number, then you must have
made a mistake.
e. If CF0 is positive and all the other CFs are negative, then you
cannot solve for I.
62. Which of the following statements is CORRECT?
a. If you have a series of cash flows, each of which is positive, you
can solve for I, where the solution value of I causes the PV of the
cash flows to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is negative but each of
the following CFs is positive, you can solve for I, but only if the
sum of the undiscounted cash flows exceeds the cost.
c. To solve for I, one must identify the value of I that causes the PV
of the positive CFs to equal the absolute value of the FV of the
negative CFs. It is impossible to find the value of I without a
computer or financial calculator.
d. If you solve for I and get a negative number, then you must have
made a mistake.
e. If CF0 is positive and all the other CFs are negative, then you can
still solve for I.
Chapter 5: Time Value of Money M/C Problems Page 149
63. Which of the following bank accounts has the highest effective annual
return?
a. An account that pays 8% nominal interest with monthly compounding.
b. An account that pays 8% nominal interest with annual compounding.
c. An account that pays 7% nominal interest with daily (365-day)
compounding.
d. An account that pays 7% nominal interest with monthly compounding.
e. An account that pays 8% nominal interest with daily (365-day)
compounding.
64. Which of the following bank accounts has the lowest effective annual
return?
a. An account that pays 8% nominal interest with monthly compounding.
b. An account that pays 8% nominal interest with annual compounding.
c. An account that pays 7% nominal interest with daily (365-day)
compounding.
d. An account that pays 7% nominal interest with monthly compounding.
e. An account that pays 8% nominal interest with daily (365-day)
compounding.
65. You plan to invest some money in a bank account. Which of the
following banks provides you with the highest effective rate of
interest?
a. Bank 1; 6.1% with annual compounding.
b. Bank 2; 6.0% with monthly compounding.
c. Bank 3; 6.0% with annual compounding.
d. Bank 4; 6.0% with quarterly compounding.
e. Bank 5; 6.0% with daily (365-day) compounding.
Multiple Choice: Problems
66. Sue now has $125. How much would she have after 8 years if she leaves
it invested at 8.5% with annual compounding?
a. $205.83
b. $216.67
c. $228.07
d. $240.08
e. $252.08
67. Jose now has $500. How much would he have after 6 years if he leaves
it invested at 5.5% with annual compounding?
a. $591.09
b. $622.20
Page 150 M/C Problems Chapter 5: Time Value of Money
c. $654.95
d. $689.42
e. $723.89
68. Suppose you have $1,500 and plan to purchase a 5-year certificate of
deposit (CD) that pays 3.5% interest, compounded annually. How much
will you have when the CD matures?
a. $1,781.53
b. $1,870.61
c. $1,964.14
d. $2,062.34
e. $2,165.46
69. Suppose you have $2,000 and plan to purchase a 10-year certificate of
deposit (CD) that pays 6.5% interest, compounded annually. How much
will you have when the CD matures?
a. $3,754.27
b. $3,941.99
c. $4,139.09
d. $4,346.04
e. $4,563.34
70. Last year Rocco Corporation’s sales were $225 million. If sales grow
at 6% per year, how large (in millions) will they be 5 years later?
a. $271.74
b. $286.05
c. $301.10
d. $316.16
e. $331.96
71. Last year Dania Corporation’s sales were $525 million. If sales grow
at 7.5% per year, how large (in millions) will they be 8 years later?
a. $ 845.03
b. $ 889.51
c. $ 936.33
d. $ 983.14
e. $1,032.30
72. How much would $1, growing at 3.5% per year, be worth after 75 years?
a. $12.54
b. $13.20
c. $13.86
d. $14.55
e. $15.28
Chapter 5: Time Value of Money M/C Problems Page 151
73. How much would $100, growing at 5% per year, be worth after 75 years?
a. $3,689.11
b. $3,883.27
c. $4,077.43
d. $4,281.30
e. $4,495.37
74. You deposit $1,000 today in a savings account that pays 3.5% interest,
compounded annually. How much will your account be worth at the end of
25 years?
a. $2,245.08
b. $2,363.24
c. $2,481.41
d. $2,605.48
e. $2,735.75
75. You deposit $500 today in a savings account that pays 3.5% interest,
compounded annually. How much will your account be worth at the end of
25 years?
a. $1,122.54
b. $1,181.62
c. $1,240.70
d. $1,302.74
e. $1,367.88
76. Suppose a State of New York bond will pay $1,000 ten years from now.
If the going interest rate on these 10-year bonds is 5.5%, how much is
the bond worth today?
a. $585.43
b. $614.70
c. $645.44
d. $677.71
e. $711.59
77. Suppose a State of California bond will pay $1,000 eight years from
now. If the going interest rate on these 8-year bonds is 5.5%, how
much is the bond worth today?
a. $651.60
b. $684.18
c. $718.39
d. $754.31
e. $792.02
Page 152 M/C Problems Chapter 5: Time Value of Money
78. How much would $20,000 due in 50 years be worth today if the discount
rate were 7.5%?
a. $438.03
b. $461.08
c. $485.35
d. $510.89
e. $537.78
79. How much would $5,000 due in 25 years be worth today if the discount
rate were 5.5%?
a. $1,067.95
b. $1,124.16
c. $1,183.33
d. $1,245.61
e. $1,311.17
80. Suppose a U.S. treasury bond will pay $2,500 five years from now. If
the going interest rate on 5-year treasury bonds is 4.25%, how much is
the bond worth today?
a. $1,928.78
b. $2,030.30
c. $2,131.81
d. $2,238.40
e. $2,350.32
81. Suppose an Exxon Corporation bond will pay $4,500 ten years from now.
If the going interest rate on safe 10-year bonds is 4.25%, how much is
the bond worth today?
a. $2,819.52
b. $2,967.92
c. $3,116.31
d. $3,272.13
e. $3,435.74
82. Suppose the U.S. Treasury offers to sell you a bond for $747.25. No
payments will be made until the bond matures 5 years from now, at which
time it will be redeemed for $1,000. What interest rate would you earn
if you bought this bond at the offer price?
a. 4.37%
b. 4.86%
c. 5.40%
d. 6.00%
e. 6.60%
Chapter 5: Time Value of Money M/C Problems Page 153
83. Suppose the U.S. Treasury offers to sell you a bond for $3,000. No
payments will be made until the bond matures 10 years from now, at
which time it will be redeemed for $5,000. What interest rate would
you earn if you bought this bond at the offer price?
a. 3.82%
b. 4.25%
c. 4.72%
d. 5.24%
e. 5.77%
84. Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this
year were $2.20. What was the growth rate in earnings per share (EPS)
over the 10-year period?
a. 15.17%
b. 15.97%
c. 16.77%
d. 17.61%
e. 18.49%
85. Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this
year were $3.20. What was the growth rate in earnings per share (EPS)
over the 5-year period?
a. 15.54%
b. 16.36%
c. 17.18%
d. 18.04%
e. 18.94%
86. Janice has $5,000 invested in a bank that pays 3.8% annually. How long
will it take for her funds to triple?
a. 23.99
b. 25.26
c. 26.58
d. 27.98
e. 29.46
87. Bob has $2,500 invested in a bank that pays 4% annually. How long will
it take for his funds to double?
a. 14.39
b. 15.15
c. 15.95
d. 16.79
e. 17.67
Page 154 M/C Problems Chapter 5: Time Value of Money
88. Last year Thomson Inc’s earnings per share were $3.50, and its growth
rate during the prior 5 years was 9.0% per year. If that growth rate
were maintained, how many years would it take for Thomson’s EPS to
triple?
a. 9.29
b. 10.33
c. 11.47
d. 12.75
e. 14.02
89. You plan to invest in securities that pay 8.0%, compounded annually.
If you invest $5,000 today, how many years will it take for your
investment to grow to $9,140.20?
a. 5.14
b. 5.71
c. 6.35
d. 7.05
e. 7.84
90. You plan to invest in bonds that pay 6.0%, compounded annually. If you
invest $10,000 today, how many years will it take for your investment
to grow to $30,000?
a. 12.37
b. 13.74
c. 15.27
d. 16.97
e. 18.85
91. You want to buy a new sports car 3 years from now, and you plan to save
$4,200 per year, beginning one year from today. You will deposit your
savings in an account that pays 5.2% interest. How much will you have
just after you make the 3rd deposit, 3 years from now?
a. $11,973
b. $12,603
c. $13,267
d. $13,930
e. $14,626
92. You want to buy a new ski boat 2 years from now, and you plan to save
$8,200 per year, beginning one year from today. You will deposit your
savings in an account that pays 6.2% interest. How much will you have
just after you make the 2nd deposit, 2 years from now?
a. $15,260
b. $16,063
c. $16,908