TEST BANK CHAPTER 05 TIME VALUE OF MONEY QUẢN TRỊ TÀI CHÍNH

CHAPTER 05—TIME VALUE OF MONEY Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in multiple-choice questions Multiple Choice: True/False Starting to invest early for retirement increases the benefits of compound interest a True b Fals e ANSWER: True POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Knowledge Starting to invest early for retirement reduces the benefits of compound interest a True b Fals e ANSWER: False POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Knowledge A time line is meaningful even if all cash flows not occur annually a True b Fals e ANSWER: True POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY STATE STANDARDS: TOPICS: KEYWORDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money Compounding Bloom's: Knowledge A time line is not meaningful unless all cash flows occur annually a True b Fals e ANSWER: False POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Knowledge Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly a True b Fals e ANSWER: True POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Knowledge Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly a True b Fals e ANSWER: False POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY STATE STANDARDS: TOPICS: KEYWORDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money Compounding Bloom's: Knowledge Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods a True b Fals e ANSWER: True POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Knowledge Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods a True b Fals e ANSWER: False POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Knowledge 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 Fals e ANSWER: True POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Knowledge 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 Fals e ANSWER: False POINTS: DIFFICULTY: EASY REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Knowledge 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 Fals e ANSWER: False POINTS: DIFFICULTY: EASY REFERENCES: 5-3 Present Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: PV versus FV KEYWORDS: Bloom's: Comprehension 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 Fals e ANSWER: True POINTS: DIFFICULTY: EASY Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: TOPICS: KEYWORDS: 5-3 Present Values FOFM.BRIG.16.05.03 - Present Values United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money PV versus FV Bloom's: Comprehension 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 b Fals e ANSWER: True POINTS: DIFFICULTY: EASY REFERENCES: 5-3 Present Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: PV versus FV KEYWORDS: Bloom's: Comprehension 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 Fals e ANSWER: False POINTS: DIFFICULTY: EASY REFERENCES: 5-3 Present Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: PV versus FV KEYWORDS: Bloom's: Comprehension 15 If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate a True b Fals e ANSWER: False Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: TOPICS: KEYWORDS: EASY 5-16 Comparing Interest Rates FOFM.BRIG.16.05.16 - Comparing Interest Rates United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money Effective annual rate Bloom's: Comprehension 16 If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate a True b Fals e ANSWER: True POINTS: DIFFICULTY: EASY REFERENCES: 5-16 Comparing Interest Rates LEARNING OBJECTIVES: FOFM.BRIG.16.05.16 - Comparing Interest Rates NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Effective annual rate KEYWORDS: Bloom's: Comprehension 17 The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time and (2) the greater the present value of a given lump sum to be received at some future date a True b Fals e ANSWER: False POINTS: DIFFICULTY: MODERATE REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Compounding KEYWORDS: Bloom's: Comprehension 18 The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time and (2) the smaller the present value of a given lump sum to be received at some future date a True b Fals Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY e ANSWER: POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: TOPICS: KEYWORDS: True MODERATE 5-2 Future Values FOFM.BRIG.16.05.02 - Future Values United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money Compounding Bloom's: Comprehension 19 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.) a True b Fals e ANSWER: True RATIONALE: Work out the numbers with a calculator: PV FVA = 1000 $1,710.34 Rate on A × FVA = 5% $3,420.68 Rate on B FVB = 12% $3,478.55 Years FVB > × FVA, so TRUE 11 POINTS: DIFFICULTY: MODERATE REFERENCES: 5-2 Future Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Comparative compounding KEYWORDS: Bloom's: Evaluation 20 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 Fals e ANSWER: False RATIONALE: Work out the numbers with a calculator: PV FVA = 1000 $1,710.34 Rate on A × FV = 5% $3,420.68 A Rate on B FV = 12% $3,478.55 B Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY Years POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: TOPICS: KEYWORDS: 11 FVB > × FVA, so FALSE MODERATE 5-2 Future Values FOFM.BRIG.16.05.02 - Future Values United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money Comparative compounding Bloom's: Evaluation 21 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 Fals e ANSWER: True POINTS: DIFFICULTY: MODERATE REFERENCES: 5-3 Present Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: PV of a sum KEYWORDS: Bloom's: Comprehension 22 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 Fals e ANSWER: False POINTS: DIFFICULTY: MODERATE REFERENCES: 5-3 Present Values LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: PV of a sum KEYWORDS: Bloom's: Comprehension 23 All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY a True b Fals e ANSWER: True RATIONALE: One could make up an example and see that the statement is true Alternatively, one could simply recognize that the PV of an annuity declines as the discount rate increases and recognize that more frequent compounding increases the effective rate POINTS: DIFFICULTY: REFERENCES : LEARNING O BJECTIVES: NATIONAL ST ANDARDS: STATE STAND ARDS: TOPICS: KEYWORDS: MODERATE 5-9 Present Value of an Ordinary Annuity FOFM.BRIG.16.05.09 - Present Value of an Ordinary Annuity United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money PV of an annuity Bloom's: Comprehension 24 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 Fals e ANSWER: False RATIONALE: One could make up an example and see that the statement is false Alternatively, one could simply recognize that the PV of an annuity declines as the discount rate increases and recognize that more frequent compounding increases the effective rate POINTS: DIFFICULTY: REFERENCES : LEARNING O BJECTIVES: NATIONAL ST ANDARDS: STATE STAND ARDS: TOPICS: KEYWORDS: MODERATE 5-9 Present Value of an Ordinary Annuity FOFM.BRIG.16.05.09 - Present Value of an Ordinary Annuity United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money PV of an annuity Bloom's: Comprehension 25 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 Fals Cengage Learning Testing, Powered by Cognero Page CHAPTER 05—TIME VALUE OF MONEY e ANSWER: POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: True MODERATE 5-15 Semiannual and Other Compounding Periods FOFM.BRIG.16.05.15 - Semiannual and Other Compounding Periods NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Periodic and nominal rates KEYWORDS: Bloom's: Knowledge 26 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 b Fals e ANSWER: False POINTS: DIFFICULTY: MODERATE REFERENCES: 5-15 Semiannual and Other Compounding Periods LEARNING OBJECTIVES: FOFM.BRIG.16.05.15 - Semiannual and Other Compounding Periods NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Periodic and nominal rates KEYWORDS: Bloom's: Knowledge 27 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 Fals e ANSWER: True POINTS: DIFFICULTY: MODERATE REFERENCES: 5-16 Comparing Interest Rates LEARNING OBJECTIVES: FOFM.BRIG.16.05.16 - Comparing Interest Rates NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money TOPICS: Effective and nominal rates KEYWORDS: Bloom's: Comprehension Cengage Learning Testing, Powered by Cognero Page 10