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1. Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations?
A.The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now.
B.Both discount factors are greater than one.
C.Regardless of the interest rate, the discount factors are such that the present value of the $1,000 will always be greater than the present value of the $800.
D.Since the payments are different, no statement can be made regarding the discount factors.
E.You should factor in the time differential and choose the payment that arrives the soonest.


2. The process of accumulating interest on an investment over time to earn more interest is called:
A.Growth.
B.Compounding.
C.Aggregation.
D.Accumulation.


3. An account was opened with $1,000 three years ago. Today, the account balance is $1,157.63. If the account earns a fixed annual interest rate, how long will it take until the account has earned a total of $225 in simple interest?
A.Less than one more year.
B.Between one and two more years.
C.Between two and three more years.
D.Between three and four more years.
E.Between four and five more years.


4. You just won the lottery and want to put some money away for your child's college education. College will cost $65,000 in 18 years. You can earn 8% compounded annually. How much do you need to invest today?
A.$ 9,828.18
B.$11,763.07
C.$13,690.82
D.$15,258.17
E.$16,266.19


5. Granny puts $35,000 into a bank account earning 4%. You can't withdraw the money until the balance has doubled. How long will you have to leave the money in the account?
A.16 years
B.17 years
C.18 years
D.19 years
E.20 years


6. You have $500 in an account which pays 5% compound interest. How much additional dollars of interest would you earn over 4 years if you moved the money to an account earning 6%?
A.$21.89
B.$23.49
C.$24.93
D.$25.88
E.$29.94


7. How much would you have to invest today at 8% compounded annually to have $25,000 available for the purchase of a car four years from now?
A.$18,267.26
B.$18,375.75
C.$19,147.25
D.$21,370.10
E.$22,149.57


8. What is the future value of $25,000 received today if it is invested at 6.5% compounded annually for six years?
A.$17,133.35
B.$27,476.42
C.$36,478.56
D.$39,521.75
E.$41,374.89


9. Explain what compounding is and the relationship between compound interest earned and the number of years over which an investment is compounded.

Answer:


10. Many economists view a 3% annual inflation rate as “acceptable”. Assuming a 3% annual increase in the price of automobiles, how much will a new Suburban cost you 5 years from now, if today's price is $38,000?
A.$32,779
B.$36,110
C.$40,575
D.$42,813
E.$44,052


11. The future value interest factor is calculated as:
A.(1 + r)t
B.(1 + [r x t])
C.(1 + r)(t)
D.1 + r - t
E.None of the above is correct


12. Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $6,000 to invest today and can earn 10% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?
A.$ 7,260
B.$11,948
C.$12,000
D.$13,250
E.$14,520


13. Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from now. If you can earn 7% on your invested funds, which of the following is true?
A.Take the signing bonus because it has the lower present value.
B.Take the signing bonus because it has the higher future value.
C.Take the lump sum because it has the higher present value.
D.Take the lump sum because it has the lower future value.
E.Based on these numbers, you are indifferent between the two.


14.

In a growing mid-western town, the number of eating establishments at the end of each of the last five years is as follows:


Year 1 = 143

Year 2 = 149

Year 3 = 162

Year 4 = 171

Year 5 = 178

R-1 4-1

If, over the next five years, eating establishments are expected to grow at the same rate as they did during year 5, forecast the number of eating establishments at the end of year 10.
A.218
B.220
C.222
D.224
E.226



15.

In a growing mid-western town, the number of eating establishments at the end of each of the last five years is as follows:


Year 1 = 143

Year 2 = 149

Year 3 = 162

Year 4 = 171

Year 5 = 178

R-1 4-1

Between the end of year 2 and the end of year 3, the number of eating establishments grew at a rate of _______ compounded annually.
A.4.2%
B.4.7%
C.5.6%
D.8.7%
E.9.3%



16.

In a growing mid-western town, the number of eating establishments at the end of each of the last five years is as follows:


Year 1 = 143

Year 2 = 149

Year 3 = 162

Year 4 = 171

Year 5 = 178

R-1 4-1

If the town's population was 62,000 at the end of year 5, and the population grew at the same annual rate as the number of eating establishments between the end of year 1 and the end of year 5, what was the town's population at the end of year 1?
A.49,809
B.51,435
C.53,230
D.54,330
E.56,730



17. All County Insurance, Inc. promises to pay Ted $1 million on his 65th birthday in return for a one-time payment of $75,000 today. (Ted just turned 25.) At what rate of interest would Ted be indifferent between accepting the company's offer and investing the premium on his own?
A.2.4%
B.5.5%
C.6.1%
D.6.7%
E.7.2%


18. Given r and t greater than zero:

I. Present value interest factors are less than one.
II. Future value interest factors are less than one.
III. Present value interest factors are greater than future value interest factors.
IV. Present value interest factors grow as t grows, provided r is held constant.

A.I only
B.I and III only
C.I and IV only
D.II and III only
E.II and IV only


19. You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded annually, how long will you have to wait to buy the stereo?
A.6.58 years
B.8.42 years
C.14.58 years
D.15.75 years
E.18.78 years


20. An account paying annual compound interest was opened with $1,000 10 years ago. Today, the account balance is $1,500. If the same interest rate is offered on an account paying simple interest, how much income would be earned over the same time period?
A.$ 86.20
B.$ 92.47
C.$413.80
D.$436.29
E.$500.00


21. Your grandfather placed $2,000 in a trust fund for you. In 10 years the fund will be worth $5,000. What is the rate of return on the trust fund?
A.5.98%
B.8.76%
C.9.60%
D.9.98%
E.10.14%


22. You are considering two lottery payment streams, choice A pays $1,000 today and choice B pays $1,750 at the end of five years from now. Using a discount rate of 5%, based on present values, which would you choose? Using the same discount rate of 5%, based on future values, which would you choose? What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.)

Answer:


23. You received a $1 savings account earning 5% on your 1st birthday. How much will you have in the account on your 40th birthday if you don't withdraw any money before then?
A.$5.89
B.$6.34
C.$6.70
D.$7.00
E.$7.04


24. You are supposed to receive $2,000 five years from now. At an interest rate of 6%, what is that $2,000 worth today?
A.$1,491.97
B.$1,492.43
C.$1,494.52
D.$1,497.91
E.$1,499.01


25. An account was opened with $1,000 10 years ago. Today, the account balance is $1,500. If the account paid interest compounded annually, how much interest on interest was earned?
A.$ 86.20
B.$ 93.10
C.$102.39
D.$130.28
E.$500.00


26. Interest earned on the reinvestment of previous interest payments is called ______.
A.free interest
B.annual interest
C.simple interest
D.interest on interest
E.compound interest


27. Which of the following statements is/are accurate? All else the same, ________.

I. present values increase as the discount rate increases
II. present values increase the further away in time the future value
III. present values are always smaller than future values when both r and t are positive

A.I only
B.I and II only
C.II only
D.III only
E.II and III only


28. At an interest rate of 10% and using the Rule of 72, how long will it take to double the value of a lump sum invested today? How long will it take after that until the account grows to four times the initial investment? Given the power of compounding, shouldn't it take less time for the money to double the second time?

Answer:


29. You will receive a $100,000 inheritance in 20 years. You can invest that money today at 6% compounded annually. What is the present value of your inheritance?
A.$ 27,491.53
B.$ 29,767.15
C.$ 31,180.47
D.$ 35,492.34
E.$100,000.00


30. The amount an investment is worth after one or more periods of time is the ______.
A.future value
B.present value
C.principal value
D.compound interest rate
E.simple interest rate



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