Test bank financial management principles and applications 11e chapter5

Therefore, the annual percentage yield on the investment is: Topic: 5.1 Using Timelines to Visualize Cash Flows Keywords: compound interest Principles: Principle 1: Money Has a Time Valu

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Financial Management: Principles and Applications, 11e (Titman)

Chapter 5 Time Value of Money-The Basics

5.1 Using Timelines to Visualize Cash Flows

1) Financial managers use the time value of money to:

A) make business decisions

B) compare cash flows of different projects

C) determine the price of common stock

D) both A and B

E) all of the above

Answer: D

Diff: 1

Topic: 5.1 Using Timelines to Visualize Cash Flows

Keywords: time value of money

Principles: Principle 1: Money Has a Time Value

2) The time value of money is created by:

A) the existence of profitable investment alternatives and interest rates

B) the fact that the passing of time increases the value of money

C) the elimination of the opportunity cost as a consideration

D) the fact that the value of saving money for tomorrow could be more or less than spending it today

Answer: A

Diff: 2

3) Which of the following statements is FALSE?

A) Quarterly compounding has a higher annual percentage yield than monthly compounding B) On monthly compounding loans, the annual percentage yield will be less than the nominal or quoted rate of interest

C) Compounding essentially means earning interest on interest on an initial balance

D) Perpetuities pay an equal payment forever

Answer: A

Diff: 2

Keywords: compound interest

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4) An investment has a nominal interest rate of 12% annually, but interest on the investment is compounded monthly Therefore, the annual percentage yield on the investment is:

5) An investment has a nominal interest rate of 12% annually, but interest on the investment is compounded semiannually Therefore, the annual percentage yield on the investment is: A) 12%

6) Which of the following provides the greatest annual interest?

7) A bank pays a quoted annual (nominal) interest rate of 4.25%, compounded daily (365-day year) What is the annual percentage yield (APY)?

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8) Northwest Bank pays a quoted annual (nominal) interest rate of 4.75% However, it pays interest (compounds) daily using a 365-day year What is the effective annual rate of return (APY)?

9) If you are an investor, which of the following would you prefer?

A) Earnings on funds invested would compound annually

B) Earnings on funds invested would compound daily

C) Earnings on funds invested would compound monthly

D) Earnings on funds invested would compound quarterly

Answer: B

Diff: 1

10) You have $10,000 to invest You do not want to take any risk, so you will put the funds in a savings account at the local bank Of the following choices, which one will produce the largest sum at the end of 22 years?

A) An account that compounds interest annually

B) An account that compounds interest daily

C) An account that compounds interest quarterly

D) An account that compounds interest monthly

Answer: B

Diff: 1

11) Which of the following statements is true about the time value of money?

A) The future value of a single sum will be greater if funds earn 5% instead of 10%

B) The future value of a single sum will be unaffected by the rate of return at which funds grow C) The future value of a single sum will be greater if funds earn 12% instead of 6%

D) The future value of a single sum will be unaffected by the length of time funds are invested Answer: C

Diff: 1

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12) Which of the following statements is true about the time value of money?

A) The present value of a future amount will be greater if funds earn 5% instead of 10%

B) The present value of a single sum will be unaffected by the rate of return at which funds grow.C) The present value of a future amount will be greater if funds earn 12% instead of 6%

D) The present value of a future amount will be unaffected by how far in the future funds would

be received

Answer: A

Diff: 2

13) If you are a borrower, which of the choices would lower your APR?

A) Repay your loan in monthly installments

B) Repay your loan in quarterly installments

C) Repay your loan in semiannual installments

D) Repay your loan in annual installments

E) You would be indifferent to how frequent your loan payments are

Answer: D

Diff: 2

14) As the number of compounding periods increases, the increases

A) quoted

B) annual percentage yield

C) effective annual rate

D) both B and C

Answer: D

Diff: 2

15) Which of the following statements is FALSE?

A) The effective annual rate (APR) of a loan is always the same as the quoted rate

B) The payments of an ordinary annuity are made or received at the end of each period

C) The effective annual rate (APR) of a loan is always equal to or greater than the quoted rate D) A perpetuity is a series of equal payments, which are made for an infinite period of time Answer: A

Diff: 2

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16) Which of the following provides the lowest return to an investor?

17) The discount rate for the time value of money should reflect delaying consumption

Answer: TRUE

Diff: 2

18) Why is the concept of the time value of money so important to financial managers?

Answer: The concept of the time value of money is important to financial managers because it isthis concept that drives managerial decision making Management decisions are driven by cash flow and these cash flows must be adjusted for the time value of money This would be most closely reflected in the project evaluation In addition, the value of a firm's common stock is driven by discounted cash flows Management pays close attention as to how their decisions affect the value of ownership in their firm

Diff: 2

Keywords: cash flow

5.2 Compounding and Future Value

1) Which of the following is the formula for compound value?

Topic: 5.2 Compounding and Future Value

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2) At 8% compounded annually, how long will it take $750 to double?

3) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years? A) 6%

4) An increase in future value can be caused by an increase in the:

A) annual interest rate

B) number of compounding periods

C) original amount invested

D) both A and B

E) all of the above

Answer: D

Diff: 2

5) A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1

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6) You just purchased a parcel of land for $10,000 If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?

7) If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?

8) If you put $700 in a savings account with a 10% nominal rate of interest compounded

monthly, what will the investment be worth in 21 months (round to the nearest dollar)?

9) If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the investment be worth in 37 weeks (round to the nearest dollar)?

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10) Which of the following formulas represents the future value of $500 invested at 8%

compounded quarterly for five years?

11) What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?

12) Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania The ticket costs $142, but Mr Jones has only $80 If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?

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13) If you want to have $10,000 in 10 years, which of the following formulas represents how much money you must put in a savings account today? Assume that the savings account pays 6%and it is compounded monthly

Keywords: future value

14) Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $4,500 Today, the average cost is $29,000 What is the growth rate in tuition cost over this 20-year period? Round off to the nearest 0.1%

15) If you want to have $1,700 in seven years, how much money must you put in a savings account today? Assume that the savings account pays 6% and it is compounded quarterly (round

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16) If you want to have $90 in four years, how much money must you put in a savings account today? Assume that the savings account pays 8.5% and it is compounded monthly (round to the nearest $1)

17) How much money must be put into a bank account yielding 5.5% (compounded annually) in order to have $250 at the end of five years (round to nearest $1)?

18) If you want to have $1,200 in 27 months, how much money must you put in a savings account today? Assume that the savings account pays 14% and it is compounded monthly (round

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Use the following information to answer the following question(s).

A Max, Inc deposited $2,000 in a bank account that pays 12% interest annually

19) What will the dollar amount be in four years, assuming that interest is paid annually? A) $2,800

20) What will the dollar amount be if the interest is compounded semiannually for those four years?

21) How many periods would it take for the deposit to grow to $6,798 if the interest is compounded semiannually?

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22) You bought a painting 10 years ago as an investment You originally paid $85,000 for it If you sold it for $484,050, what was your annual return on investment?

Keywords: return on investment

23) You deposit $5,000 today in an account drawing 12% compounded quarterly How much willyou have in the account at the end of 2 1/2 years?

24) Middletown, USA currently has a population of 1.5 million people It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years

If this city's population continues to grow at 4% per year, what will the population be 10 years from now?

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25) How many years will it take for an initial investment of $200 to grow to $544 if it is investedtoday at 8% compounded annually?

26) The future value of $200 deposited today in an account for four years paying semiannual interest when the annual interest rate is 12% is:

27) The future value of a single sum:

A) increases as the compound rate decreases

B) decreases as the compound rate increases

C) increases as the number of compound periods decreases

D) increases as the compound rate increases

E) none of the above

Answer: D

Diff: 2

28) The future value of $500 deposited into an account paying 8% annually for three years is: A) $500

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