Money and policy chapter 5 test bank (1)

TRUE AACSB: Reflective Thinking Skills Blooms: Understanding Difficulty: 2 Medium Learning Objective: 05-01 Calculate the future value to which money invested at a given interest rate wi

Trang 1

The Time Value of Money

True / False Questions

1 Compound interest pays interest for each time period on the original investment plus the accumulated interest

Trang 2

8 Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges

11 You should never compare cash flows occurring at different times without first

discounting them to a common date

Trang 3

16 Converting an annuity to an annuity due decreases the present value

Trang 4

23 An annual percentage rate (APR) is determined by annualizing the rate using compound interest

Multiple Choice Questions

27 What is the future value of $10,000 on deposit for 5 years at 6% simple interest?

A The interest rate is very high

B The investment period is very long

C The compounding is annually

D This is not possible with positive interest rates

Trang 5

29 How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?

A $70.00

B $80.14

C $105.62

D $140.00

30 How much interest will be earned in the next year on an investment paying 12%

compounded annually if $100 was just credited to the account for interest?

A $88

B $100

C $112

D $200

31 The concept of compound interest refers to:

A earning interest on the original investment

B payment of interest on previously earned interest

C investing for a multiyear period of time

D determining the APR of the investment

32 When an investment pays only simple interest, this means:

A the interest rate is lower than on comparable investments

B the future value of the investment will be low

C the earned interest is nontaxable to the investor

D interest is earned only on the original investment

33 Approximately how long must one wait (to the nearest year) for an initial investment of

$1,000 to triple in value if the investment earns 8% compounded annually?

A 9 years

B 14 years

C 22 years

D 25 years

Trang 6

34 How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for 3 years?

A $107.69

B $133.10

C $134.49

D $313.84

35 What will be the approximate population of the United States, if its current population of

300 million grows at a compound rate of 2% annually for 25 years?

Trang 7

39 Assume the total expense for your current year in college equals $20,000 Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

A $3,774

B $3,782

C $3,925

D $4,080

41 Given a set future value, which of the following will contribute to a lower present value?

A Higher discount rate

B Fewer time periods

C Less frequent discounting

D Lower discount factor

42 Cash flows occurring in different periods should not be compared unless:

A interest rates are expected to be stable

B the flows occur no more than one year from each other

C high rates of interest can be earned on the flows

D the flows have been discounted to a common date

Trang 8

43 A corporation has promised to pay $1,000 20 years from today for each bond sold now

No interest will be paid on the bonds during the 20 years, and the bonds are discounted at a 7% interest rate Approximately how much should an investor pay for each bond?

A $70.00

B $258.42

C $629.56

D $857.43

44 What is the present value of your trust fund if it promises to pay you $50,000 on your 30th

birthday (7 years from today) and earns 10% compounded annually?

A $25,000.00

B $25,657.91

C $28,223.70

D $29,411.76

45 How much more would you be willing to pay today for an investment offering $10,000 in

4 years rather than the normally advertised 5-year period? Your discount rate is 8%

Trang 9

47 How much must be invested today in order to generate a 5-year annuity of $1,000 per year, with the first payment 1 year from today, at an interest rate of 12%?

A $1,000.00

B $4,520.64

C $5,127.24

D $8,000.00

49 What is the present value of the following payment stream, discounted at 8% annually:

$1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3?

A $5,022.11

B $5,144.03

C $5,423.87

D $5,520.00

50 What is the present value of the following set of cash flows at an interest rate of 7%:

$1,000 today, $2,000 at end of year 1, $4,000 at end of year 3, and $6,000 at end of year 5?

A $9,731

B $10,412

C $10,524

D $11,524

Trang 10

51 A cash-strapped young professional offers to buy your car with four, equal annual

payments of $3,000, beginning 2 years from today Assuming you're indifferent to cash versuscredit, that you can invest at 10%, and that you want to receive $9,000 for the car, should you accept?

A Yes; present value is $9,510

B Yes; present value is $11,372

C No; present value is $8,645

D No; present value is $7,461

52 How much more is a perpetuity of $1,000 worth than an annuity of the same amount for

20 years? Assume a 10% interest rate and cash flows at end of period

B Cash payment of a perpetuity

C Interest rate on a perpetuity

D Discount rate of a perpetuity

55 The present value of a perpetuity can be determined by:

A Multiplying the payment by the interest rate

B Dividing the interest rate by the payment

C Multiplying the payment by the number of payments to be made

D Dividing the payment by the interest rate

Trang 11

56 A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate What

is its present value?

A $33,333.33

B $37,681.16

C $38,333.33

D $65,217.39

57 Your car loan requires payments of $200 per month for the first year and payments of

$400 per month during the second year The annual interest rate is 12% and payments begin inone month What is the present value of this 2-year loan?

A $6,246.34

B $6,389.78

C $6,428.57

D $6,753.05

58 Which of the following will increase the present value of an annuity, other things equal?

A Increasing the interest rate

B Decreasing the interest rate

C Decreasing the number of payments

D Decreasing the amount of the payment

59 What is the present value of a five-period annuity of $3,000 if the interest rate is 12% and the first payment is made today?

A $9,655.65

B $10,814.33

C $12,112.05

D $13,200.00

Trang 12

60 $3,000 is deposited into an account paying 10% annually, to provide three annual

withdrawals of $1,206.34 beginning in one year How much remains in the account after the second payment has been withdrawn?

Trang 13

64 $50,000 is borrowed, to be repaid in three equal, annual payments with 10% interest Approximately how much principal is amortized with the first payment?

A $2,010.60

B $5,000.00

C $15,105.74

D $20,105.74

65 An amortizing loan is one in which:

A the principal remains unchanged with each payment

B accrued interest is paid regularly

C the maturity of the loan is variable

D the principal balance is reduced with each payment

66 You're ready to make the last of four equal, annual payments on a $1,000 loan with a 10% interest rate If the amount of the payment is $315.47, how much of that payment is accrued interest?

Trang 14

68 Your real estate agent mentions that homes in your price range require a payment of approximately $1,200 per month over 30 years at 9% interest What is the approximate size ofthe mortgage with these terms?

A The amortization decreases with each payment

B The amortization increases with each payment

C The amortization is constant throughout the loan

D The amortization fluctuates monthly with changes in interest rates

70 How much must be saved annually, beginning 1 year from now, in order to accumulate

$50,000 over the next 10 years, earning 9% annually?

A $261,500.00

B $323,800.00

C $578,700.00

D $690,000.00

Trang 15

72 The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate By approximately how much would the value change if these were annuities due?

A An increase of $10

B An increase of $61

C An increase of $100

D Unknown without knowing number of payments

73 Approximately how much must be saved for retirement in order to withdraw $100,000 peryear for the next 25 years if the balance earns 8% annually, and the first payment occurs 1 year from now?

A $1,067,000

B $1,250,000

C $2,315,000

D $2,500,000

74 With $1.5 million in an account expected to earn 8% annually over the retiree's 30 years

of life expectancy, what annual annuity can be withdrawn, beginning today?

Trang 16

76 Which of the following strategies will allow real retirement spending to remain

approximately equal, assuming savings of $1,000,000 invested at 8%, a 25-year horizon, and 4% expected inflation?

A Spend approximately $63,000 annually

B Spend approximately $78,225 annually

C Spend approximately $93,680 annually

D Spend approximately $127,500 annually

77 In calculating the present value of $1,000 to be received 5 years from today, the discount factor has been calculated to be 7008 What is the apparent interest rate?

big-A The "free" credit costs about 8.75%

B The "free" credit costs about 9.13%

C The "free" credit costs about 9.59%

D The "free" credit effectively costs zero%

Trang 17

80 The present value of the following cash flows is known to be $6,939.91; $500 today,

$2,000 in 1 year, and $5,000 in 2 years What discount rate is being used?

A 3%

B 4%

C 5%

D 6%

81 Your retirement account has a current balance of $50,000 What interest rate would need

to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?

Trang 18

84 A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment What is the loan's APR?

A 6%

B 9%

C 11%

D 12%

85 What APR is being earned on a deposit of $5,000 made 10 years ago today if the deposit

is worth $9,948.94 today? The deposit pays interest semiannually

A 3.56%

B 6.76%

C 7.00%

D 7.12%

86 An interest rate that has been annualized using compound interest is termed the:

A simple interest rate

B annual percentage rate

C discounted interest rate

D effective annual interest rate

87 What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly

payments?

A The APR is lower than the annually compounded rate

B The APR is higher than the annually compounded rate

C The APR equals the annually compounded rate

D The answer depends on the interest rate

88 What is the APR on a loan that charges interest at the rate of 1.4% per month?

A 10.20%

B 14.00%

C 16.80%

D 18.16%

Trang 19

89 If interest is paid m times per year, then the per-period interest rate equals the:

A effective annual rate divided by m.

B compound interest rate times m.

C effective annual rate

D annual percentage rate divided by m.

90 If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments, what is the annual percentage rate?

A 4.02%

B 10.02%

C 14.50%

D 15.19%

91 Which account would be preferred by a depositor: an 8% APR with monthly

compounding or 8.5% APR with semiannual compounding?

A 8.0% with monthly compounding

B 8.5% with semiannual compounding

C The depositor would be indifferent

D The time period must be known to select the preferred account

92 What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding?

Trang 20

94 What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments?

A 9.00%

B 9.38%

C 9.81%

D 10.94%

95 Other things being equal, the more frequent the compounding period, the:

A higher the APR

B lower the APR

C higher the effective annual interest rate

D lower the effective annual interest rate

96 An APR will be equal to an effective annual rate if:

A compounding occurs monthly

B compounding occurs continuously

C compounding occurs annually

D an error has occurred; these terms cannot be equal

97 A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _ and an APR of _

A 16.08%; 15.00%

B 14.55%; 16.08%

C 12.68%; 15.00%

D 15.00%; 14.55%

98 If inflation in Wonderland averaged about 20% per month in 2000, what was the

approximate annual inflation rate?

A 20%

B 240%

C 790%

D 890%

Trang 21

99 Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold If inflation averaged 4% annually during the period, how would you describe his purchasing power, on average?

A His purchasing power remained on par with inflation

B He "beat" inflation by nearly 1% annually

C He "beat" inflation by slightly below 2% annually

D He "beat" inflation by 5% annually

100 Which of the following statements best describes the real interest rate?

A Real interest rates exceed inflation rates

B Real interest rates can decline only to zero

C Real interest rates can be negative, zero, or positive

D Real interest rates traditionally exceed nominal rates

101 What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually?

A The real cost is constant

B The real cost is increasing

C The real cost is decreasing

D The price index must be known to answer this question

Trang 22

103 What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period?

104 Discuss the statement, "Money has a time value."

105 Would you prefer a savings account that paid 7% interest, compounded quarterly, over anaccount that paid 7.5% with annual compounding if you had $1,000 to deposit? Would the answer change if you had $100,000 to deposit?

Trang 23

106 If 4 years of college are expected to cost $150,000 18 years from now, how much must

be deposited now into an account that will average 8% annually in order to save the

$150,000? By how much would your answer change if you expected 11% annually?

107 Prizes are often not "worth" as much as claimed Place a value on a prize of $5,000,000 which is to be received in equal payments over 20 years, with the first payment beginning today Assume an interest rate of 7% over the 20 years

108 Show numerically that a savings account with a current balance of $1,000 that earns interest at 9% annually is precisely sufficient to make the payments on a 3-year loan of $1,000that carries equal annual payments at 9% interest

Trang 24

109 A loan officer states, "Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest Both mortgages are for

$100,000 and have monthly payments What is the difference in total dollars that will be paid

to the lender under each loan?

110 Some home loans involve "points," which are fees charged by the lender Each point charged means that the borrower must pay 1% of the loan amount as a fee For example, if 0.5point is charged on a $100,000 loan, the loan repayment schedule is calculated on the

$100,000 loan, but the net amount the borrower receives is only $99,500 What is the

effective annual interest rate charged on such a loan, assuming that loan repayment occurs over 360 months, and that the interest rate is 1% per month?

111 In 1973 Gordon Moore, one of Intel's founders, predicted that the number of transistors that could be placed on a single silicon chip would double every 18 months, equivalent to an annual growth of 59% (i.e., 1.591.5 = 2.0) The first microprocessor was built in 1971 and had 2,250 transistors By 2003 Intel chips contained 410 million transistors, over 182,000 times the number 32 years earlier What has been the annual compound rate of growth in processingpower? How does it compare with the prediction of Moore's law?

Trang 25

112 How should we compare interest rates quoted over different time intervals—for example,monthly versus annual rates?

113 Discuss the statement, "It is always preferred to select an account that offers compound interest over an account that offers simple interest."

114 After reading the fine print in your credit card agreement, you find that the "low" interestrate is actually an 18% APR, or 1.5% per month Now, to make you feel even worse, calculatethe effective annual interest rate

115 Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?

Trang 26

116 What is the difference between real and nominal cash flows and between real and nominal interest rates?

117 What problem can be caused by "mixing" real and nominal cash flows in discounting exercises?

118 In 2004 there was widespread dismay as the price of unleaded gasoline climbed to $2.03

a gallon Motorists looked back longingly to 20 years earlier when they were paying just

$1.19 a gallon But how much had the real price of gasoline changed over this period, if the consumer price index was 1.81 times itself in 1984?

Trang 27

Chapter 05 The Time Value of Money Answer Key

True / False Questions

1 Compound interest pays interest for each time period on the original investment plus the accumulated interest

TRUE

AACSB: Communication Abilities

Blooms: Knowledge

Difficulty: 1 Easy

Learning Objective: 05-01 Calculate the future value to which money invested at a given interest rate will grow.

Topic: Present and Future Value

2 When money is invested at compound interest, the growth rate is the interest rate

TRUE

AACSB: Reflective Thinking Skills

Blooms: Understanding

Difficulty: 2 Medium

3 The present value of an annuity due equals the present value of an ordinary annuity times the discount rate

FALSE

Blooms: Knowledge

Topic: Perpetuities and Annuities

Trang 28

4 The more frequent the compounding, the higher the future value, other things equal

TRUE

5 A dollar tomorrow is worth more than a dollar today

FALSE

6 The Excel function for future value is FV (rate, nper, pmt, PV)

TRUE

AACSB: Use of Information Technology

Blooms: Knowledge

7 For a given amount, the lower the discount rate, the less the present value

FALSE

Learning Objective: 05-02 Calculate the present value of a future payment.

Trang 29

8 Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges

TRUE

9 To calculate present value, we discount the future value by some interest rate r, the discount

10 The discount factor is used to calculate the present value of $1 received in year t

TRUE

11 You should never compare cash flows occurring at different times without first

discounting them to a common date

TRUE

Trang 30

12 The Excel function for present value is PV (rate, nper, pmt, FV)

TRUE

AACSB: Use of Information Technology

Blooms: Knowledge

13 A perpetuity is a special form of an annuity

TRUE

Blooms: Knowledge

Learning Objective: 05-03 Calculate present and future values of a series of cash payments.

14 An annuity factor represents the future value of $1 that is deposited today

FALSE

Blooms: Knowledge

15 Accrued interest declines with each payment on an amortizing loan

Trang 31

16 Converting an annuity to an annuity due decreases the present value

FALSE

17 The term "constant dollars" refers to equal payments for amortizing a loan

19 Any sequence of equally spaced, level cash flows is called an annuity An annuity is also known as a perpetuity

FALSE

Trang 32

20 A mortgage loan is an example of an amortizing loan "Amortizing" means that part of themonthly payment is used to pay interest on the loan and part is used to reduce the amount of the loan

Learning Objective: 05-04 Find the interest rate implied by present and future values.

22 An effective annual rate must be greater than an annual percentage rate

Trang 33

24 In 2002, the U.S inflation rate was below 2% and a few countries were even experiencingdeflation

Trang 34

Multiple Choice Questions

27 What is the future value of $10,000 on deposit for 5 years at 6% simple interest?

28 Under which of the following conditions will a future value calculated with simple interestexceed a future value calculated with compound interest at the same rate?

A The interest rate is very high

B The investment period is very long

C The compounding is annually

D This is not possible with positive interest rates.

Trang 35

29 How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?

30 How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just credited to the account for interest?

Trang 36

31 The concept of compound interest refers to:

A earning interest on the original investment

B payment of interest on previously earned interest.

C investing for a multiyear period of time

D determining the APR of the investment

Blooms: Knowledge

32 When an investment pays only simple interest, this means:

A the interest rate is lower than on comparable investments

B the future value of the investment will be low

C the earned interest is nontaxable to the investor

D interest is earned only on the original investment.

Blooms: Knowledge

33 Approximately how long must one wait (to the nearest year) for an initial investment of

$1,000 to triple in value if the investment earns 8% compounded annually?

Solved with financial calculator; can also be solved with tables or logarithms

Blooms: Application

Trang 37

34 How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for 3 years?

35 What will be the approximate population of the United States, if its current population of

300 million grows at a compound rate of 2% annually for 25 years?

A 413 million

B 430 million

C 488 million

D 492 million

300 million  (1.02)25 = 492.2 million 492 million

Trang 38

36 How much interest can be accumulated during one year on a $1,000 deposit paying continuously compounded interest at an APR of 10%?

Topic: EAR and APR

37 How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate?

Thus, $138.83 was earned in interest

Difficulty: 3 Hard

Trang 39

38 What is the discount factor for $1 to be received in 5 years at a discount rate of 8%?

39 Assume the total expense for your current year in college equals $20,000 Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

Trang 40

40 How much must be deposited today in an account earning 6% annually to accumulate a 20% down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4%?

41 Given a set future value, which of the following will contribute to a lower present value?

A Higher discount rate

B Fewer time periods

C Less frequent discounting

D Lower discount factor

42 Cash flows occurring in different periods should not be compared unless:

A interest rates are expected to be stable

B the flows occur no more than one year from each other

C high rates of interest can be earned on the flows

D the flows have been discounted to a common date.

Định dạng
Số trang	82
Dung lượng	811,93 KB