Ch 04 Time Value of Money
1. Starting to invest early for retirement increases the benefits of compound interest.
a.
True
b.
False
True
False
Compounding
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2. Starting to invest early for retirement reduces the benefits of compound interest.
a.
True
b.
False
False
False
Compounding
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3. A time line is meaningful even if all cash flows do not occur annually.
Ch 04 Time Value of Money
a.
True
b.
False
True
False
Compounding
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4. A time line is not meaningful unless all cash flows occur annually.
a.
True
b.
False
False
False
Compounding
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5. Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
a.
True
Ch 04 Time Value of Money
b.
False
True
False
Compounding
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6. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
a.
True
b.
False
False
Compounding
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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
Ch 04 Time Value of Money
True
False
Compounding
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8. Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
a.
True
b.
False
False
False
Compounding
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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
Ch 04 Time Value of Money
True
False
Compounding
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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
False
False
Compounding
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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
Ch 04 Time Value of Money
False
False
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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
True
False
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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
Ch 04 Time Value of Money
b.
False
True
False
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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
False
False
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15. If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.
a.
True
Ch 04 Time Value of Money
b.
False
False
False
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16. If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
a.
True
b.
False
False
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17. A “growing annuity” is a cash flow stream that grows at a constant rate for a specified number of periods.
a.
True
b.
False
Ch 04 Time Value of Money
True
False
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18. A “growing annuity” is any cash flow stream that grows over time.
a.
True
b.
False
False
False
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19. 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
Ch 04 Time Value of Money
False
Difficulty: Moderate
True / False
False
FMTP.EHRH.17.04.02 – LO: 4-2
United States – BUSPROG: Analytic
United States – AK – DISC: Time value of money
United States – OH – Default City – TBA
Compounding
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20. 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
True
Difficulty: Moderate
True / False
False
FMTP.EHRH.17.04.02 – LO: 4-2
United States – BUSPROG: Analytic
United States – AK – DISC: Time value of money
United States – OH – Default City – TBA
Compounding
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21. 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.)
Ch 04 Time Value of Money
a.
True
b.
False
True
False
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22. 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
False
False
Ch 04 Time Value of Money
23. 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
True
False
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24. 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
False
False
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Ch 04 Time Value of Money
25. 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
True
False
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26. 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
False
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Ch 04 Time Value of Money
27. 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
True
False
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28. 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
False
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Ch 04 Time Value of Money
b.
False
False
Difficulty: Moderate
True / False
False
FMTP.EHRH.17.04.15 – LO: 4-15
United States – BUSPROG: Analytic
United States – AK – DISC: Time value of money
United States – OH – Default City – TBA
Periodic and nominal rates
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29. 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
b.
False
True
Difficulty: Moderate
True / False
False
FMTP.EHRH.17.04.15 – LO: 4-15
United States – BUSPROG: Analytic
United States – AK – DISC: Time value of money
United States – OH – Default City – TBA
Effective and nominal rates
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30. 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).
Ch 04 Time Value of Money
a.
True
b.
False
False
False
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31. 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
False
False
Amortization
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32. When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the
Ch 04 Time Value of Money
early years, and the principal repayment’s percentage increases in the loan’s later years.
a.
True
b.
False
True
False
Amortization
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33. 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
True
False
Amortization
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Ch 04 Time Value of Money
34. 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
False
False
Amortization
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35. 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
False
Ch 04 Time Value of Money
False
Amortization
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36. 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
True
False
Amortization
Ch 04 Time Value of Money
37. Which of the following statements is CORRECT?
a.
Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven
amounts.
b.
A time line is not meaningful unless all cash flows occur annually.
c.
Time lines are useful for visualizing complex problems prior to doing actual calculations.
d.
Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur
quarterly.
e.
Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.
c
Difficulty: Moderate
Multiple Choice
False
FMTP.EHRH.17.04.01 – LO: 4-1
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Time value of money
United States – OH – Default City – TBA
Time lines
TYPE: Multiple Choice: Conceptual
for this question.
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38. Which of the following statements is CORRECT?
a.
Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven
amounts.
b.
A time line is not meaningful unless all cash flows occur annually.
c.
Time lines are not useful for visualizing complex problems prior to doing actual calculations.
d.
Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur
quarterly.
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