Name:
Class:
Date:
Chapter 05: The Time Value of Money
Multiple Choice
1. The amount of simple interest is equal to the product of the principal times ____ times ____.
a.
(1 + rate per time period); the number of time periods
b.
(1 + rate per time period); (the number of time periods – 1)
c.
rate per time period; the number of time periods
d.
rate per time period; (the number of time periods – 1)
c
2. The present value of a single payment can be represented as ____.
a.
PV0 = FVn(PVIFi,n)
b.
PV0 = FVn(PVIFAi,n)
c.
PV0 = FVn[1/(1 – i)n]
d.
None of these are correct
a
3. The future value of a single payment equation is given by ____.
a.
FVn = PV0(PVIFi,n)
b.
FVn = PV0(FVIFAi,n)
c.
FVn = PV0(1/(1 + i)n)
d.
FVn = PV0(FVIFi,n)
4. The process of finding present values is frequently called ____.
a.
annualizing
b.
compounding
c.
discounting
d.
leasing
c
5. The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity
due form by ____ the ordinary annuity interest factor by ____.
a.
dividing; (1 + i)
b.
dividing; (1 + i)n
c.
multiplying; (1 + i)
d.
multiplying; (1 + i)n
c
6. A(n) ____ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future
(i.e., forever).
a.
annuity
b.
annuity due
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Chapter 05: The Time Value of Money
c.
sinking fund
d.
perpetuity
7. Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating
the ____.
a.
future value of an annuity
b.
future value of an annuity due
c.
present value of an annuity
d.
present value of an annuity due
c
8. Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the
_____.
a.
future value of an annuity
b.
present value of an annuity
c.
future value of an annuity due
d.
present value of an annuity due
c
9. When using a present value of an annuity table (e.g., Table IV at the back of the book), _____.
a.
payments are assumed to be made at the beginning of each period
b.
PVIFA factors decrease with an increase in the interest rate
c.
PVIFA factors decrease with an increase in the number of periods
d.
All of these are correct
10. When using a future value of an annuity table (e.g., Table III at the back of the book), _____.
a.
payments are assumed to be made at the end of each period
b.
FVIFA factors increase with an increase in the interest rate
c.
FVIFA factors increase with an increase in the number of periods
d.
All of these are correct
11. An annuity due is one in which _____.
a.
payments or receipts occur at the end of each period
b.
payments or receipts occur at the beginning of each period
c.
payments or receipts occur forever
d.
cash flows occur continuously
12. You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen
to the present value of your winnings if the interest rate increases during the next 20 years?
a.
It will be worth less.
Name:
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Chapter 05: The Time Value of Money
b.
It will be worth more.
c.
It will not change.
d.
It will increase during the first ten years.
13. The present value of a single payment can be represented as _____.
a.
PV0 = FVn ÷ (PVIFi,n)
b.
PV0 = FVn(PVIFAi,n)
c.
PV0 = FVn [1/(1 + i)n]
d.
None of these are correct
14. If the present value of a given sum is equal to its future value, then ____.
a.
the discount rate must be very high
b.
there is no inflation
c.
the discount rate must be zero
d.
None of these are correct
15. Using the “Rule of 72,” about how long will it take a sum of money to double in value if the annual interest rate is 9
percent?
a.
9 years
b.
7 years
c.
8 years
d.
10 years
16. The present value of an ordinary annuity is the ____.
a.
sum of the present value of a series of equal periodic payments
b.
future value of an equal series of payments
c.
receipt of equal cash flows for a specified amount of time
d.
sum of the future value of an equal series of payments
17. When a loan is amortized over a five-year term, the ____.
a.
rate of interest is reduced each year
b.
amount of interest paid is reduced each year
c.
payment is reduced each year
d.
balance is paid as a balloon payment in the fifth year
18. Annuity due calculations are especially important when dealing with ____.
a.
term loans
Name:
Class:
Date:
Chapter 05: The Time Value of Money
b.
lease contracts
c.
capital investments
d.
capital recovery problems
19. The more frequent the compounding, the _____.
a.
greater the present value
b.
greater the amount deposited
c.
greater the effective interest rate
d.
lesser the future value
c
20. The effective rate of interest will always be ____ the nominal rate.
a.
greater than
b.
equal to
c.
less than
d.
equal to or greater than
21. ____ interest is paid not only on the principal but also on any interest earned but not withdrawn during earlier periods.
a.
Basic
b.
Simple
c.
Future
d.
Compound
22. Which of the following is worth more?
a.
Future value of an ordinary annuity of PMT dollars per year for n years discounted at i percent
b.
Future value of an annuity due of PMT dollars per year for n years discounted at i percent
c.
Both are worth the same amount
d.
Cannot be determined from the information given
23. The annual effective rate of interest (ieff) is a function of _____.
a.
the annual nominal rate of interest (inom) only
b.
the number of compounding intervals per year (m) only
c.
the number of years (n) only
d.
both the nominal rate of interest and the number of compounding periods per year
24. More frequent compounding results in ____ future values and ____ present values than does less frequent
compounding at the same interest rate.
a.
higher; higher
Name:
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Chapter 05: The Time Value of Money
b.
lower; higher
c.
higher; lower
d.
lower; lower
c
25. The present value of a(n) ____ is determined by dividing the annual cash flow by the interest rate.
a.
annuity
b.
annuity due
c.
perpetuity
d.
lease
c
26. An annuity that begins more than 1 year in the future is referred to as a(n) ____.
a.
perpetuity
b.
annuity due
c.
uneven annuity
d.
deferred annuity
27. The ____ of a perpetual stream of equal, annual returns (PMT) discounted at i% per year is equal to ____.
a.
present value; PMT/i
b.
present value; PMT × i
c.
future value; PMT/i
d.
future value; PMT × i
a
28. Annuity due calculations are common when dealing with _____.
a.
cash dividends
b.
loan repayments
c.
rental contracts
d.
interest payments
c
29. The payment or receipt of a series of equal cash flows per period, at the end of each period, for a specified amount of
time is called a(n) ____.
a.
annuity due
b.
perpetuity
c.
ordinary annuity
d.
simple interest
c
30. The difference between an ordinary annuity and an annuity due is the _____.
a.
interest rate
b.
timing of the payments
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Chapter 05: The Time Value of Money
c.
amount of the payments
d.
number of periods
31. ____ is the return earned by someone who has forgone current consumption.
a.
The present value
b.
Principle
c.
An annuity
d.
Interest
32. Determine how much $1,000 deposited in a savings account paying 8% (compounded annually) will be worth after 5
years.
a.
$5,526
b.
$784
c.
$1,400
d.
$1,469
33. The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a nine-year time
period. Determine the compound annual growth rate.
a.
11.1%
b.
8%
c.
22.2%
d.
100%
34. Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at
the end of each of the next 25 years so that he can retire at age 60. He expects to live to the maximum age of 80 and wants
to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays. The account is expected to
earn 10 percent per annum for the entire period of time. Determine the size of the annual deposits that must be made by
Mr. Moore.
a.
$212,850
b.
$23,449
c.
$2,164
d.
$8,514
c
35. Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year
stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this
equipment.
a.
16.3%
b.
62.7%
c.
10%
d.
20%
Name:
Class:
Date:
Chapter 05: The Time Value of Money
c
36. Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely and never
matures (i.e., a perpetuity), assuming you require an 8 percent rate of return on this investment.
a.
$480
b.
$743
c.
$1,000
d.
$750
37. Air Atlantic (AA) has been offered a 3-year-old jet airliner under a 12-year lease arrangement. The lease requires AA
to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of
the lease payments if the opportunity cost of funds is 14 percent.
a.
$2,830,000
b.
$13,635,500
c.
$6,000,000
d.
$3,226,200
38. If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded annually,
determine how much the CD will be worth at the end of 4 years.
a.
$13,600
b.
$45,730
c.
$14,640
d.
$15,958
c
39. You sold 100 shares of stock today for $30 per share that you paid $20 for 6 years ago. Determine the average annual
rate of return on your investment, assuming the stock paid no dividends.
a.
25%
b.
8.33%
c.
150%
d.
7%
40. Your grandparents put $1,000 into a savings account for you when you were born 20 years ago. This account has been
earning interest at a compound rate of 7 percent. What is its value today?
a.
$3,870
b.
$1,967
c.
$3,026
d.
$3,583
a
41. Baggos has seen its EPS increase from $0.30 to $3.16 in seven years. What has been the growth rate of Baggos’s EPS?
a.
about 30%
Name:
Class:
Date:
Chapter 05: The Time Value of Money
b.
about 40%
c.
about 20%
d.
about 10%
42. You have just won a $50,000 bond that pays no interest and matures in 20 years. If the discount rate is 10%, what is
the present value of your bond?
a.
$7,450
b.
$8,175
c.
$8,900
d.
$1,490
a
43. BB&C bank has agreed to lend you $30,000 today, but you must repay $42,135 in 3 years. What rate is the bank
charging you?
a.
10%
b.
11%
c.
12%
d.
13%
c
44. The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years. What is the future
value of this lottery if you plan to put each payment in an account earning 9 percent?
a.
$2.28 million
b.
$12.79 million
c.
$14.32 million
d.
$ 5.00 million
45. Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40-year working life and then
retire. What will Billy have if the account will earn 10 percent compounded annually?
a.
$394,786
b.
$23,470
c.
$1,062,223
d.
$810,917
c
46. Jane wants to have $200,000 in an account in 20 years. If her account earns 11 percent per annum over the
accumulation period, how much must she save per year (end of year) to have the $200,000?
a.
$25,116
b.
$3,115
c.
$10,000
d.
$3,492
Name:
Class:
Date:
Chapter 05: The Time Value of Money
47. Many IRA fund managers argue that investors should invest at the beginning of the year rather than at the end. What
is the difference to an investor who invests $2,000 per year at 11 percent over a 30-year period?
a.
$43,785
b.
$36,189
c.
$54,244
d.
There is no difference
a
48. An insurance company offers you an end-of-year annuity of $48,000 per year for the next 20 years. They claim your
return on the annuity is 9 percent. What should you be willing to pay today for this annuity?
a.
$429,600
b.
$438,192
c.
$408,672
d.
$398,144
49. New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the
next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return?
a.
8%
b.
9%
c.
7%
d.
10%
c
50. Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires
five equal annual end-of-the-year payments. If the loan provides the bank with a 12 percent return, what will be your
annual payments?
a.
$5,547.85
b.
$3,148.12
c.
$6,000
d.
$1,666.67
a
51. Idlewild Bank has granted you a seven-year loan for $50,000. If your seven annual end-of-the-year payments are
$11,660.45, what is the rate of interest Idlewild is charging?
a.
14%
b.
23%
c.
12.6%
d.
11%
a
52. Your firm, New Sunrise, has just leased a $28,000 BMW for you. The lease requires six beginning-of-the-year
payments that will fully amortize the cost of the car. What is the amount of the payments if the interest rate is 12 percent?
a.
$6,810.99
b.
$7,766.99
Name:
Class:
Date:
Chapter 05: The Time Value of Money
c.
$6,423.74
d.
$6,081.25
53. The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the
next 10 years. At a discount rate of 14 percent, what is the present value of this stream of lease payments?
a.
$130,872
b.
$149,194
c.
$142,710
d.
$264,000
54. Alabama Power has preferred stock that pays an annual dividend of $9.44. If the security has no maturity, what is its
value to an investor who wishes to obtain a 9 percent rate of return?
a.
$84.96
b.
$104.89
c.
$95.34
d.
$94.40
55. Designs Now is opening a showcase office to display and sell its computer-designed poster art. Designs expects cash
flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11 percent
as its discount rate, what is the present value of the cash flows?
a.
$429,720
b.
$457,620
c.
$456,000
d.
$424,820
a
56. In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per year
(end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10
percent in each of the 10 years?
a.
$29,744.65
b.
$29,783.76
c.
$17,878.80
d.
$21,651.10
c
57. What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded
monthly for five years?
a.
$17,623.42
b.
$18,170
c.
$16,105.10
d.
$16,122.26
Name:
Class:
Date:
Chapter 05: The Time Value of Money
58. What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded
monthly?
a.
9.93%
b.
9.74%
c.
10.02%
d.
9.86%
a
59. John is 25 years old and wishes to retire in 30 years. His plan is to invest in a mutual fund earning a 12 percent annual
return and have a $1 million retirement fund at age 55. How much must he invest at the end of each year to achieve this
goal?
a.
$7,499.96
b.
$5,024.60
c.
$4,143.65
d.
$33,333.33
c
60. Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump sum, he found that he would
receive $22,500 annually (end of year) for 20 years. Joe is 75 years old and wants his money now. He has been offered
$140,827 to sell his ticket. What rate of return is the buyer expecting to make if Joe accepts the offer?
a.
less than 1%
b.
15%
c.
18%
d.
12%
61. A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual, end-of-year
payments that include both principal and interest on the outstanding balance. Determine the amount of these annual
payments (to the nearest dollar).
a.
$2,000
b.
$3,100
c.
$2,706
d.
$1,100
c
62. When using a financial calculator, n stands for the ____.
a.
interest rate per period
b.
number of periods
c.
present value amount
d.
future value amount
63. If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how
much will you have at retirement in 40 years?