Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 28: Time Value of Money
1. Starting to invest early for retirement increases the benefits of compound interest.
a.
True
b.
False
ANSWER:
True
2. Starting to invest early for retirement reduces the benefits of compound interest.
a.
True
b.
False
ANSWER:
False
3. A time line is meaningful even if all cash flows do not occur annually.
a.
True
b.
False
ANSWER:
True
Copyright Cengage Learning. Powered by Cognero.
Page 2
4. A time line is not meaningful unless all cash flows occur annually.
a.
True
b.
False
ANSWER:
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
ANSWER:
True
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 28: Time Value of Money
ANSWER:
False
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
ANSWER:
True
8. Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
a.
True
b.
False
ANSWER:
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
ANSWER:
True
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
ANSWER:
False
11. 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
ANSWER:
False
12. 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
ANSWER:
True
13. 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
ANSWER:
True
14. 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
ANSWER:
False
15. Ellen 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
ANSWER:
d
16. How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5% with annual
compounding?
a.
$591.09
b.
$622.20
c.
$654.95
d.
$689.42
e.
$723.89
ANSWER:
d
17. JG Asset Services is recommending that you invest $1,500 in 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
ANSWER:
a
18. Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. If you invest
$2,000 in the CD, how much will you have when it matures?
a.
$3,754.27
b.
$3,941.99
c.
$4,139.09
d.
$4,346.04
e.
$4,563.34
ANSWER:
a
Copyright Cengage Learning. Powered by Cognero.
Page 9
19. Cyberhost Corporation's sales were $225 million last year. 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
ANSWER:
c
20. Cochrane Associate's net sales last year 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
Chapter 28: Time Value of Money
e.
$1,032.30
ANSWER:
c
21. 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
ANSWER:
b
22. 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
ANSWER:
b
23. Your bank offers a savings account that pays 3.5% interest, compounded annually. If you invest $1,000 in the account,
then how much will it 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
ANSWER:
b
24. Your bank offers a savings account that pays 3.5% interest, compounded annually. How much will $500 invested
today 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
ANSWER:
b
25. 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
ANSWER:
False
26. 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
ANSWER:
True
27. 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
ANSWER:
True
Copyright Cengage Learning. Powered by Cognero.
Page 14
28. 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
ANSWER:
False
29. 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
ANSWER:
True
30. 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
Chapter 28: Time Value of Money
Copyright Cengage Learning. Powered by Cognero.
Page 15
ANSWER:
False
31. 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 discount rate decreases.
b.
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.
c.
The discount rate increases.
d.
The riskiness of the investment's cash flows decreases.
e.
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.
ANSWER:
c
32. 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 discount rate increases.
b.
The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity
Chapter 28: Time Value of Money
lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
c.
The discount rate decreases.
d.
The riskiness of the investment's cash flows increases.
e.
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.
ANSWER:
c
33. Suppose a State of North Carolina 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
ANSWER:
a
34. Suppose a State of New Mexico 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
ANSWER:
a
35. 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
ANSWER:
e
Copyright Cengage Learning. Powered by Cognero.
Page 18
36. You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?
a.
$1,067.95
b.
$1,124.16
c.
$1,183.33
d.
$1,245.61
e.
$1,311.17
ANSWER:
e
37. The going rate of interest on a 5-year treasury bond is 4.25%. You have one that will pay $2,500 five years from now.
How much is the bond worth today?
a.
$1,928.78
b.
$2,030.30
Chapter 28: Time Value of Money
c.
$2,131.81
d.
$2,238.40
e.
$2,350.32
ANSWER:
b
38. Suppose a Google.com 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
ANSWER:
b
Copyright Cengage Learning. Powered by Cognero.
Page 20
39. If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.
a.
True
b.
False
ANSWER:
False
40. If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
a.
True
b.
False
ANSWER:
True
41. 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
