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Chapter 05
Introduction to Valuation: The Time Value of Money
Multiple Choice Questions
1.
You are investing $100 today in a savings account at your local bank. Which
one of the following terms refers to the value of this investment one year
from now?
2.
Tracy invested $1,000 five years ago and earns 4 percent interest on her
investment. By leaving her interest earnings in her account, she increases
the amount of interest she earns each year. The way she is handling her
interest income is referred to as which one of the following?
3.
Steve invested $100 two years ago at 10 percent interest. The first year, he
earned $10 interest on his $100 investment. He reinvested the $10. The
second year, he earned $11 interest on his $110 investment. The extra $1
he earned in interest the second year is referred to as:
4.
Interest earned on both the initial principal and the interest reinvested from
prior periods is called:
5.
Sara invested $500 six years ago at 5 percent interest. She spends her
earnings as soon as she earns any interest so she only receives interest on
her initial $500 investment. Which type of interest is Sara earning?
6.
Shelley won a lottery and will receive $1,000 a year for the next ten years.
The value of her winnings today discounted at her discount rate is called
which one of the following?
7.
Terry is calculating the present value of a bonus he will receive next year.
The process he is using is called:
8.
Steve just computed the present value of a $10,000 bonus he will receive in
the future. The interest rate he used in this process is referred to as which
one of the following?
9.
The process of determining the present value of future cash flows in order
to know their worth today is called which one of the following?
10.
Andy deposited $3,000 this morning into an account that pays 5 percent
interest, compounded annually. Barb also deposited $3,000 this morning
into an account that pays 5 percent interest, compounded annually. Andy
will withdraw his interest earnings and spend it as soon as possible. Barb
will reinvest her interest earnings into her account. Given this, which one of
the following statements is true?
11.
Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25
years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both
investments compound interest annually. Both Sue and Neal retire at age
60. Which one of the following statements is correct assuming that neither
Sue nor Neal has withdrawn any money from their accounts?
12.
Samantha opened a savings account this morning. Her money will earn 5
percent interest, compounded annually. After five years, her savings
account will be worth $5,600. Assume she will not make any withdrawals.
Given this, which one of the following statements is true?
13.
This afternoon, you deposited $1,000 into a retirement savings account. The
account will compound interest at 6 percent annually. You will not withdraw
any principal or interest until you retire in forty years. Which one of the
following statements is correct?
14.
Your grandmother has promised to give you $5,000 when you graduate from
college. She is expecting you to graduate two years from now. What
happens to the present value of this gift if you delay your graduation by one
year and graduate three years from now?
15.
Luis is going to receive $20,000 six years from now. Soo Lee is going to
receive $20,000 nine years from now. Which one of the following statements
is correct if both Luis and Soo Lee apply a 7 percent discount rate to these
amounts?
16.
Which one of the following variables is the exponent in the present value
formula?
17.
You want to have $1 million in your savings account when you retire. You
plan on investing a single lump sum today to fund this goal. You are
planning on investing in an account which will pay 7.5 percent annual
interest. Which of the following will reduce the amount that you must
deposit today if you are to have your desired $1 million on the day you
retire?
I. Invest in a different account paying a higher rate of interest.
II. Invest in a different account paying a lower rate of interest.
III. Retire later.
IV. Retire sooner.
18.
Which one of the following will produce the highest present value interest
factor?
19.
What is the relationship between present value and future value interest
factors?
20.
Martin invested $1,000 six years ago and expected to have $1,500 today. He
has not added or withdrawn any money from this account since his initial
investment. All interest was reinvested in the account. As it turns out,
Martin only has $1,420 in his account today. Which one of the following
must be true?
