Chapter 04: Time Value of Money
1. Starting to invest early for retirement increases the benefits of compound interest.
a. True
2. Starting to invest early for retirement reduces the benefits of compound interest.
a. True
3. A time line is meaningful even if all cash flows do not occur annually.
a. True
Chapter 04: Time Value of Money
4. A time line is not meaningful unless all cash flows occur annually.
a. True
5. Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
a. True
6. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
a. True
Chapter 04: 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
8. Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
a. True
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
Chapter 04: Time Value of Money
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
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
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
Chapter 04: Time Value of Money
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
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
Chapter 04: Time Value of Money
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
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
Chapter 04: Time Value of Money
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
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
Chapter 04: Time Value of Money
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
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 04: Time Value of Money
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
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
Chapter 04: Time Value of Money
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
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
Chapter 04: Time Value of Money
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
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
Chapter 04: Time Value of Money
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
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
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
Chapter 04: Time Value of Money
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
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
Chapter 04: Time Value of Money
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 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
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
Chapter 04: Time Value of Money
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
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
Chapter 04: Time Value of Money
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
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
c. $2,131.81
d. $2,238.40
Chapter 04: Time Value of Money
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
39. If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.
a. True
Chapter 04: Time Value of Money
40. If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
a. 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
42. 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.
a. True
Chapter 04: Time Value of Money
43. 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
44. 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
45. Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following
statements is CORRECT?
a. The periodic rate of interest is 5% and the effective rate of interest is also 5%.
b. The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.
c. The periodic rate of interest is 5% and the effective rate of interest is greater than 5%.
d. The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%.
Chapter 04: Time Value of Money
46. 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 8% and the effective rate of interest is also 8%.
b. The periodic rate of interest is 2% and the effective rate of interest is 4%.
c. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
d. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
47. At the end of 10 years, which of the following investments would have the highest future 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 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).