Chapter 04 Introduction to Valuation: The Time Value of Money
Multiple Choice Questions
1. Martha is investing investing $ today today at ! percent percent interest interest so she can can have $10 later later.. The $10 is referred to as the:
". true value. #. future value. C. present value. . discounted value. %. comple& value. '. Tom earned $1'0 in interest interest on his savings savings account last year year.. Tom Tom has decided to leave the $1'0 in his account so that he can earn interest on the $1'0 this year. This process of earning interest on prior interest earnings is called:
". discountin g. #. compoundin g. C. duplicatin g. . multiplyin g. %. inde&in g.
(. )amie earned earned $1*0 in interest interest on her her savings account last last year. year. +he has has decided decided to leave the $1*0 in her account so that she can earn interest on the $1*0 this year. The interest )amie earns this year on this $1*0 is referred to as:
". simple interest. #. comple& interest. C. accrued interest. . interest interest on interest. %. discounted interest. 4. ,ester had $!-'0 in his his savings savings account at the /eginning /eginning of this year. year. This amount amount includes /oth the $!-000 he originally invested at the /eginning of last year plus the $'0 he earned in interest last year. This year- ,ester earned a total of $'*'.1 in interest even though the interest rate on the account remained constant. This $'*'.1 is /est descri/ed as:
". simple interest. #. interest interest on interest. C. discounted interest. . comple& interest. %. compound interest. . #y denitiondenition- a /an /an that pays pays simple interest on a savings savings account 2ill pay interest:
". only at the /eginning of the investment period. #. on interest. C. only on the principal amount originally invested. . on /oth the principal amount and the reinvested interest. %. only if all previous interest payments are reinvested.
(. )amie earned earned $1*0 in interest interest on her her savings account last last year. year. +he has has decided decided to leave the $1*0 in her account so that she can earn interest on the $1*0 this year. The interest )amie earns this year on this $1*0 is referred to as:
". simple interest. #. comple& interest. C. accrued interest. . interest interest on interest. %. discounted interest. 4. ,ester had $!-'0 in his his savings savings account at the /eginning /eginning of this year. year. This amount amount includes /oth the $!-000 he originally invested at the /eginning of last year plus the $'0 he earned in interest last year. This year- ,ester earned a total of $'*'.1 in interest even though the interest rate on the account remained constant. This $'*'.1 is /est descri/ed as:
". simple interest. #. interest interest on interest. C. discounted interest. . comple& interest. %. compound interest. . #y denitiondenition- a /an /an that pays pays simple interest on a savings savings account 2ill pay interest:
". only at the /eginning of the investment period. #. on interest. C. only on the principal amount originally invested. . on /oth the principal amount and the reinvested interest. %. only if all previous interest payments are reinvested.
!. +ue needs needs to invest invest $(-!'! $(-!'! today in order order for her savings savings accoun accountt to /e 2orth $-000 $-000 si& years from no2. no2. 3hich one of the follo2ing terms refers to the $(-!'!
". 5resent value #. Compound value C. 6uture value . Comple& value %. 6actor value . Todd 2ill /e receiving a $10-000 /onus one year from from no2. no2. The process process of determining determining ho2 much that /onus is 2orth today is called:
". aggregatin g. #. discountin g. C. simplifyin g. . compoundin g. %. e&trapolati ng. *. The interest interest rate used to compute compute the present present value value of a future cash cash 7o2 is is called the:
". prime rate. #. current rate. C. discount rate. . compound rate. %. simple rate.
8. Computing the present value of a future cash 7o2 to determine 2hat that cash 7o2 is 2orth today is called:
". compoundin g. #. factorin g. C. time valuation. . simple cash 7o2 valuation. %. discounted cash 7o2 valuation. 10. +ara is investing $1-000 today. 3hich one of the follo2ing 2ill increase the future value of that amount
". +hortening the investment time period. #. 5aying interest only on the principal amount. C. 5aying simple interest rather than compound interest. . 5aying interest only at the end of the investment period rather than throughout the investment period. %. Increasing the interest rate. 11. +am 2ants to invest $-000 for years. 3hich one of the follo2ing rates 2ill provide him 2ith the largest future value
1'. )enny needs to /orro2 $1!-000 for ( years. The loan 2ill /e repaid in one lump sum at the end of the loan term. 3hich one of the follo2ing interest rates is /est for )enny
". * percent simple interest #. * percent interest- compounded annually C. *. percent simple interest . *. percent interest- compounded annually %. 8 percent interest- compounded annually 1(. 3hich of the follo2ing 2ill increase the future value of a lump sum investment I. ecreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. ecreasing the amount of the lump sum investment
". I and III only #. I and IV only C. II and III only . II and IV only %. II- III- and IV only 14. 3hich one of the follo2ing is the correct formula for the future value of $00 invested today at percent interest for * years
1. Aiven an interest rate of Bero percent- the future value of a lump sum invested today 2ill al2ays:
". remain constant- regardless of the investment time period. #. decrease if the investment time period is shortened. C. decrease if the investment time period is lengthened. . /e eual to $0. %. /e innite in value. 1!. Terry invested $'-000 today in an investment that pays !. percent annual interest. 3hich one of the follo2ing statements is correct- assuming all interest is reinvested
". Terry 2ill earn the same amount of interest each year. #. Terry could have the same future value and invest less than $'-000 initially if he could earn more than !. percent interest. C. Terry 2ill earn an increasing amount of interest each and every year even if he should decide to 2ithdra2 the interest annually rather than reinvesting the interest. . TerryDs interest for year t2o 2ill /e eual to $'-000 ? 0.0! ? '. %. Terry 2ill /e earning simple interest.
1. 3hich of the follo2ing 2ill decrease the future value of a lump sum investment made today assuming that all interest is reinvested "ssume the interest rate is a positive value. I. Increase in the interest rate II. ecrease in the lump sum amount III. Increase in the investment time period IV. ecrease in the investment time period
". I and III only #. I and IV only C. I- II- and III only . II and III only %. II and IV only 1*. 3hich one of the follo2ing 2ill increase the present value of a lump sum future amount "ssume the interest rate is a positive value and all interest is reinvested.
". Increase in the time period #. Increase in the interest rate C. ecrease in the future value . ecrease in the interest rate %. Eone of these
18. )eF deposits $(-000 into an account 2hich pays '. percent percent interestinterest- compounded annually. "t the same time- Gurt deposits $(-000 into an account paying percent interest- compounded annually. "t the end of three years:
". #oth )eF and Gurt 2ill have accounts of eual value. #. Gurt 2ill have t2ice the money saved that )eF does. C. Gurt 2ill earn e&actly t2ice the amount of interest that )eF earns. earns. . Gurt Gurt 2ill have a larger account value than )eF 2ill. %. )eF 2ill have more money saved than Gurt. '0. ,isa has $1-000 in cash today. today. 3hich one of the follo2ing investment options is most apt to dou/le her money
". ! percent interest interest for ( years #. 1' percent interest interest for years C. percent interest for 8 years . * percent interest for 8 years %. ! percent interest for 10 years '1. 3hich one of the follo2ing is the correct formula for computing the present present value of $!00 to /e received in ! years The discount rate is percent.
''. Centre #an pays '. percent interest- compounded compounded annually- on its savings accounts. Country #an pays '. percent simple interest on its savings accounts. Hou 2ant to deposit sucient funds today so that you 2ill have $1-00 in your account ' years from today. The amount you must deposit today:
". is the same regardless of 2hich /an you choose /ecause they /oth pay compound interest. #. is the same regardless regardless of 2hich /an you choose /ecause they /oth pay simple interest. C. is the same regardless regardless of 2hich /an you choose /ecause the time period is the same for /oth /ans. . 2ill /e greater if you invest 2ith Centre #an. %. 2ill /e greater if you invest 2ith Country #an. '(. The present value value of a lump sum future amount: amount:
". increases as the interest rate decreases. #. decreases as the time period decreases. C. is inversely related to the future value. . is is directly related to the interest rate. %. is directly related to the time period. '4. The relationship /et2een /et2een the present value value and the time period is /est descri/ed as:
". direc t. #. invers e. C. unrelate d. . am/iguou s. %. paralle l.
'. Today- Courtney 2ants to invest less than $-000 2ith the goal of receiving $-000 /ac some time in the future. 3hich one of the follo2ing statements is correct correct
". The period of time she has to 2ait until she reaches her goal is unaFected /y the compounding of interest. #. The lo2er the rate of interest she earnsearns- the shorter the time she 2ill have to 2ait to reach her goal. C. +he 2ill have to 2ait longer if she earns ! percent compound interest instead of ! percent simple interest. . The length of time she has to 2ait to reach her goal is directly related to the interest rate she earns. %. The period of time she has to 2ait decreases decreases as the amount she invests today increases. '!. 3hich one of the follo2ing is a correct statementstatement- all else held constant
". The present present value is inversely related to the future value. #. The future value is inversely related to the period of time. C. The period of time is directly related to the interest rate. . The The present value is directly related to the interest rate. %. The future value is directly related to the interest rate. '. Hou 2ant to invest an amount of money today and receive /ac t2ice that amount in the future. Hou e&pect to earn ! percent interest. "ppro&imately ho2 long must you 2ait for your investment to dou/le in value
". ! years #. years C. * years . 1' years %. 14 years
'*. Today- you deposit $'-400 in a /an account that pays 4 percent simple interest. Jo2 much interest 2ill you earn over the ne&t years
". $8!.0 0 #. $101.1 C. $4*0.0 0 . $48'.1 ! %. $18.8 '8. Hour grandparents Kust gave you a gift of $1-000. Hou are investing this money for 1' years at ! percent simple interest. Jo2 much money 2ill you have at the end of the 1' years
". $1-80 0 #. $1!-00 0 C. $1-( . $'-*0 0 %. $'!-8( * (0. 5recision %ngineering invested $110-000 at !. percent interest- compounded annually for 4 years. Jo2 much interest on interest did the company earn over this period of time
(1. )im Kust deposited $1(-000 into his account at Traditions #an. The /an 2ill pay 1.( percent interest- compounded annually- on this account. Jo2 much interest on interest 2ill he earn over the ne&t 1 years
". $'(*.1 ! #. $'44.' 0 C. $(!0. 0 . $!0!.1 %. $!'(. 0 ('. #en invested $-000 t2enty years ago 2ith an insurance company that has paid him percent simple interest on his funds. Charles invested $-000 t2enty years ago in a fund that has paid him percent interest- compounded annually. Jo2 much more interest has Charles earned than #en over the past '0 years
((. %ric has $4-*00 that he 2ants to invest for 4 years. Je can invest this amount at his credit union and earn 4 percent simple interest. Lr- he can open an account at Compass #an and earn (.! percent interest- compounded annually. If he decides to invest at Copmpass #an for ( years- he 2ill:
". earn $1.0' more than if he had invested 2ith his credit union. #. earn $'.*8 less than if he had invested 2ith his credit union. C. earn the same amount as if he had invested 2ith the credit union. . have a total /alance of $4-88' in his account after one year. %. have a total /alance of $4-*! in his account after one year. (4. 3hat is the future value of $4-800 invested for * years at percent compounded annually
". $*-(8. 4 #. $*-418.1 1 C. $*-11.1 . $*-1(.0 ! %. $*-'0.' ' (. "ngela has Kust received an insurance settlement of $(-000. +he 2ants to save this money until her daughter goes to college. If she can earn an average of . percentcompounded annually- ho2 much 2ill she have saved 2hen her daughter enters college 10 years from no2
(!. Travis invests $10-000 today into a retirement account. Je e&pects to earn * percentcompounded annually- on his money for the ne&t '! years. "fter that- he 2ants to /e more conservative- so only e&pects to earn percent- compounded annually. Jo2 much money 2ill he have in his account 2hen he retires (* years from no2- assuming this is the only deposit he maes into the account
". $1'8-411. '0 #. $1('-*'. ** C. $1(4-!1!. ! . $141-818. ! %. $14'-00(. 1' (. T2elve years ago- you deposited $(-400 into an account. +even years ago- you added an additional $1-000 to this account. Hou earned * percent- compounded annually- for the rst years and . percent- compounded annually- for the last years. Jo2 much money do you have in your account today
(*. Hour parents spent $!-'00 to /uy 00 shares of stoc in a ne2 company 1( years ago. The stoc has appreciated 8 percent per year on average. 3hat is the current value of those 00 shares
". $1*-*'4. 1 #. $18-00. 88 C. $18-*0. 8' . $'0-1. 0* %. $''-448. 8' (8. Hou Kust 2on $0-000 and deposited your 2innings into an account that pays . percent interest- compounded annually. Jo2 long 2ill you have to 2ait until your 2innings are 2orth $100-000
". 11.'4 years #. 1'.00 years C. 1'.'8 years . 1'.! years %. 1'.8 years 40. 3hen you 2ere /orn- your parents opened an investment account in your name and deposited $00 into the account. The account has earned an average annual rate of return of 4.* percent. Today- the account is valued at $(!-811.''. Jo2 old are you
". 4.4 years #. !.! years C. *1.0* years . *.(( years %. 81. years
41. Today- +tacy is investing $'!-000 at !.0 percent- compounded annually- for 4 years. Jo2 much additional income could he earn if he had invested this amount at percent- compounded annually
". $1-04(.1 1 #. $1-'!.( 0 C. $1-401.1 ! . $1-44'. 8 %. $1-4*4.0 * 4'. +i&ty years ago- your grandparents opened t2o savings accounts and deposited $'00 in each account. The rst account 2as 2ith City #an at ( percent- compounded annually. The second account 2as 2ith Country #an at (. percent- compounded annually. 3hich one of the follo2ing statements is true concerning these accounts
". The City #an account is currently 2orth $1-'01.4. #. The City #an account has earned $'11.18 more in interest than the Country #an account. C. The Country #an account is currently 2orth $1-'!.0*. . The Country #an account has paid $(!.4* more in interest than the City #an account. %. The Country #an account has paid $(8.(0 more in interest than the City #an account. 4(. Ten years from no2- you 2ill /e inheriting $100-000. 3hat is this inheritance 2orth to you today if you can earn . percent interest- compounded annually
44. Hou 2ant to have $'-000 for a do2n payment on a house ! years from no2. If you can earn !. percent- compounded annually- on your savings- ho2 much do you need to deposit today to reach your goal
". $1-1((. ( #. $1-4'0. ( C. $1-**0. !8 . $1*-'11. 1 %. $1*-**!. 40 4. Hou 2ant to have $4-000 in cash to /uy a car 4 years from today. Hou e&pect to earn 4. percent- compounded annually- on your savings. Jo2 much do you need to deposit today if this is the only money you save for this purpose
". $((-!1*. 8' #. $(4-11. !* C. $(-'!. 04 . $(-(. '! %. $(*-1!. 18 4!. +yline Industries 2ill need $1.* million years from no2 to replace some euipment. Currently- the rm has some e&tra cash and 2ould lie to esta/lish a savings account for this purpose. The account pays .' percent interest- compounded annually. Jo2 much money must the company deposit today to fully fund the euipment purchase
4. Hou and your sister are planning a large anniversary party ( years from today for your parentsD 0th 2edding anniversary. Hou have estimated that you 2ill need $4-00 for this party. Hou can earn '. percent compounded annually on your savings. Jo2 much 2ould you and your sister have to deposit today in one lump sum to pay for the entire party
". $4-0!. #. $4-1*. 0 C. $4-(0*.1 ! . $4-((4.8 0 %. $4-(!*.* 1 4*. Isaac only has $!80 today /ut needs $*00 to /uy a ne2 laptop. Jo2 long 2ill he have to 2ait to /uy the laptop if he earns .4 percent compounded annually on his savings
". '.'8 years #. '.4* years C. '.1 years . '. years %. '.*1 years 48. Jo2 long 2ill it tae to dou/le your savings if you earn .' percent interestcompounded annually
0. Hou have $1-100 today and 2ant to triple your money in years. 3hat interest rate must you earn if the interest is compounded annually
". 1*.0* percent #. 18.80 percent C. ''.1 percent . '4. percent %. '.'1 percent 1. Hou have /een told that you need $'-!00 today in order to have $100-000 2hen you retire ( years from no2. 3hat rate of interest 2as used in the present value computation "ssume interest is compounded annually.
". (.8 percent #. 4.1 percent C. 4.'8 percent . 4.( percent %. 4.* percent '. Hour friend claims that he invested $-000 seven years ago and that this investment is 2orth $(*-00 today. 6or this to /e true- 2hat annual rate of return did he have to earn "ssume the interest compounds annually.
(. Hou have $1-00 today in your savings account. Jo2 long must you 2ait for your savings to /e 2orth $4-000 if you are earning 1.1 percent interest- compounded annually
". !.!* years #. 8.!8 years C. '.1( years . *0. years %. *8.!! years 4. 5lanters #an pays percent simple interest on its savings account /alances- 2hereas Centura #an pays percent compounded annually. If you made a $1'-000 deposit in each /an- ho2 much more money 2ould you earn from your Centura #an account at the end of '0 years
". $-1.* 4 #. $-*(8. C. $-8!0.4 . $*-400.0 8 %. $*-*4.1 4 . "ssume the total cost of a college education 2ill /e $'*-000 2hen your child enters college in '' years. Hou presently have $(-000 to invest. 3hat annual rate of interest must you earn on your investment to cover the cost of your childDs college education
!. "t 10 percent interest- ho2 long does it tae to uadruple your money
". 14.(( years #. 14. years C. 1.11 years . 1.(! years %. 1.! years . HouDre trying to save to /uy a ne2 $'10-000 6errari. Hou have $(*-000 today that can /e invested at your /an. The /an pays 4.1 percent annual interest on its accounts. Jo2 long 2ill it /e /efore you have enough to /uy the car
". (8.1( years #. (8.'8 years C. 40.! years . 41.0* years %. 4'.4 years *. Hour coin collection contains ten 18(8 silver dollars. If your great grandparents purchased them for their face value 2hen they 2ere ne2- ho2 much 2ill your collection /e 2orth 2hen you retire in '00- assuming they appreciate at a .1 percent annual rate
8. +uppose that in '010- a $10 silver certicate from 1*8* sold for $11-'00. 6or this to have /een true- 2hat 2ould the annual increase in the value of the certicate have /een
". !.4 percent #. !.*1 percent C. .'( percent . .48 percent %. .8 percent !0. Hou have Kust made your rst $-000 contri/ution to your individual retirement account. "ssuming you earn a percent rate of return and mae no additional contri/utions- 2hat 2ill your account /e 2orth 2hen you retire in ( years 3hat if you 2ait for years /efore contri/uting
". $'!-((.( $'(-011.!0 #. $'-(11.'0 $'8-*0(.04 C. $'-(11.'0 $''-!14.0* . $'-*0.0* '1-!08.1 %. $(1-'41.80 $('-!14.0* !1. Hou are scheduled to receive $-00 in three years. 3hen you receive it- you 2ill invest it for eight more years at . percent per year. Jo2 much 2ill you have in eleven years
!'. Hou e&pect to receive $'0-000 at graduation one year from no2. Hou plan on investing it at ! percent until you have $100-000. Jo2 long 2ill you 2ait from no2
". '.4 years #. '.1 years C. '. years . '*.4 years %. '*.!' years !(. Hou have $-000 you 2ant to invest for the ne&t 4 years. Hou are oFered an investment plan that 2ill pay you ! percent per year for the ne&t 1 years and 10 percent per year for the last (0 years. Jo2 much 2ill you have at the end of the 4 years Jo2 much 2ill you have if the investment plan pays you 10 percent per year for the rst 1 years and ! percent per year for the ne&t (0 years
!. Identify the relationship /et2een each of the follo2ing pairs of varia/les as they relate to the time value of money: <"ssume all else constant> 5resent value and future value OOOOOOOOO 5resent value and interest rate OOOOOOOOO 5resent value and time OOOOOOOOO Time and interest rate OOOOOOOOO Time and future value OOOOOOOOO Interest rate and future value OOOOOOOOO
!*. Hou 2ant to have $'. million saved on the day you retire. %&plain ho2 you can minimiBe the amount of cash you must invest in order to achieve this goal.
Tom earned $1'0 in interest on his savings account last year. Tom has decided to leave the $1'0 in his account so that he can earn interest on the $1'0 this year. This process of earning interest on prior interest earnings is called:
". discountin g. B. compoundin g. C. duplicatin g. . multiplyin g. %. inde&in g. Nefer to section 4.1.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: 'om%oun!ing
(.
)amie earned $1*0 in interest on her savings account last year. +he has decided to leave the $1*0 in her account so that she can earn interest on the $1*0 this year. The interest )amie earns this year on this $1*0 is referred to as:
". simple interest. #. comple& interest. C. accrued interest. D. interest on interest. %. discounted interest. Nefer to section 4.1.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: (nterest on interest
,ester had $!-'0 in his savings account at the /eginning of this year. This amount includes /oth the $!-000 he originally invested at the /eginning of last year plus the $'0 he earned in interest last year. This year- ,ester earned a total of $'*'.1 in interest even though the interest rate on the account remained constant. This $'*'.1 is /est descri/ed as:
". simple interest. #. interest on interest. C. discounted interest. . comple& interest. E. compound interest. Nefer to section 4.1.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: 'om%oun! interest
.
#y denition- a /an that pays simple interest on a savings account 2ill pay interest:
". only at the /eginning of the investment period. #. on interest. C. only on the principal amount originally invested. . on /oth the principal amount and the reinvested interest. %. only if all previous interest payments are reinvested. Nefer to section 4.1.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: #im%le interest
+ue needs to invest $(-!'! today in order for her savings account to /e 2orth $-000 si& years from no2. 3hich one of the follo2ing terms refers to the $(-!'!
A. 5resent value #. Compound value C. 6uture value . Comple& value %. 6actor value
Nefer to section 4.'.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
.
Todd 2ill /e receiving a $10-000 /onus one year from no2. The process of determining ho2 much that /onus is 2orth today is called:
". aggregatin g. B. discountin g. C. simplifyin g. . compoundin g. %. e&trapolati ng. Nefer to section 4.'.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: Discounting
The interest rate used to compute the present value of a future cash 7o2 is called the:
". prime rate. #. current rate. C. discount rate. . compound rate. %. simple rate. Nefer to section 4.'.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: Discount rate
8.
Computing the present value of a future cash 7o2 to determine 2hat that cash 7o2 is 2orth today is called:
". compoundin g. #. factorin g. C. time valuation. . simple cash 7o2 valuation. E. discounted cash 7o2 valuation. Nefer to section 4.'.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: Discounte! cash +o, valuation
+ara is investing $1-000 today. 3hich one of the follo2ing 2ill increase the future value of that amount
". +hortening the investment time period. #. 5aying interest only on the principal amount. C. 5aying simple interest rather than compound interest. . 5aying interest only at the end of the investment period rather than throughout the investment period. E. Increasing the interest rate. Nefer to section 4.1.
Blooms: n!erstan! Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
11.
+am 2ants to invest $-000 for years. 3hich one of the follo2ing rates 2ill provide him 2ith the largest future value
)enny needs to /orro2 $1!-000 for ( years. The loan 2ill /e repaid in one lump sum at the end of the loan term. 3hich one of the follo2ing interest rates is /est for )enny
Blooms: n!erstan! Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
1(.
3hich of the follo2ing 2ill increase the future value of a lump sum investment I. ecreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. ecreasing the amount of the lump sum investment
". I and III only #. I and IV only C. II and III only . II and IV only %. II- III- and IV only Nefer to section 4.1.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
1.
Aiven an interest rate of Bero percent- the future value of a lump sum invested today 2ill al2ays:
A. remain constant- regardless of the investment time period. #. decrease if the investment time period is shortened. C. decrease if the investment time period is lengthened. . /e eual to $0. %. /e innite in value.
Nefer to section 4.1.
Blooms: n!erstan! Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
Terry invested $'-000 today in an investment that pays !. percent annual interest. 3hich one of the follo2ing statements is correct- assuming all interest is reinvested
". Terry 2ill earn the same amount of interest each year. B. Terry could have the same future value and invest less than $'-000 initially if he could earn more than !. percent interest. C. Terry 2ill earn an increasing amount of interest each and every year even if he should decide to 2ithdra2 the interest annually rather than reinvesting the interest. . TerryDs interest for year t2o 2ill /e eual to $'-000 ? 0.0! ? '. %. Terry 2ill /e earning simple interest. Nefer to section 4.1.
Blooms: n!erstan! Difculty: ) .e!ium Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
3hich of the follo2ing 2ill decrease the future value of a lump sum investment made today assuming that all interest is reinvested "ssume the interest rate is a positive value. I. Increase in the interest rate II. ecrease in the lump sum amount III. Increase in the investment time period IV. ecrease in the investment time period
". I and III only #. I and IV only C. I- II- and III only . II and III only E. II and IV only Nefer to section 4.1.
Blooms: n!erstan! Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
1*.
3hich one of the follo2ing 2ill increase the present value of a lump sum future amount "ssume the interest rate is a positive value and all interest is reinvested.
". Increase in the time period #. Increase in the interest rate C. ecrease in the future value D. ecrease in the interest rate %. Eone of these Nefer to section 4.'.
Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
18.
)eF deposits $(-000 into an account 2hich pays '. percent interest- compounded annually. "t the same time- Gurt deposits $(-000 into an account paying percent interest- compounded annually. "t the end of three years:
". #oth )eF and Gurt 2ill have accounts of eual value. #. Gurt 2ill have t2ice the money saved that )eF does. C. Gurt 2ill earn e&actly t2ice the amount of interest that )eF earns. D. Gurt 2ill have a larger account value than )eF 2ill. %. )eF 2ill have more money saved than Gurt. Nefer to section 4.(.
Blooms: n!erstan! Difculty: 1 Easy Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"/ $o%ic: (nterest rate com%oun!ing
'0.
,isa has $1-000 in cash today. 3hich one of the follo2ing investment options is most apt to dou/le her money
". ! percent interest for ( years #. 1' percent interest for years C. percent interest for 8 years D. * percent interest for 8 years %. ! percent interest for 10 years Nefer to section 4.(.
Blooms: Remember Difculty: 1 Easy Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"/ $o%ic: Rule o )
''.
Centre #an pays '. percent interest- compounded annually- on its savings accounts. Country #an pays '. percent simple interest on its savings accounts. Hou 2ant to deposit sucient funds today so that you 2ill have $1-00 in your account ' years from today. The amount you must deposit today:
". is the same regardless of 2hich /an you choose /ecause they /oth pay compound interest. #. is the same regardless of 2hich /an you choose /ecause they /oth pay simple interest. C. is the same regardless of 2hich /an you choose /ecause the time period is the same for /oth /ans. . 2ill /e greater if you invest 2ith Centre #an. E. 2ill /e greater if you invest 2ith Country #an. Nefer to section 4.1.
Blooms: n!erstan! Difculty: 1 Easy Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"1 $o%ic: #im%le versus com%oun! interest
A. increases as the interest rate decreases. #. decreases as the time period decreases. C. is inversely related to the future value. . is directly related to the interest rate. %. is directly related to the time period.
Nefer to section 4.'.
Blooms: n!erstan! Difculty: ) .e!ium Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
'4.
The relationship /et2een the present value and the time period is /est descri/ed as:
". direc t. B. invers e. C. unrelate d. . am/iguou s. %. paralle l. Nefer to section 4.(.
Blooms: n!erstan! Difculty: 1 Easy Learning Objective: 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: $ime %erio!
Today- Courtney 2ants to invest less than $-000 2ith the goal of receiving $-000 /ac some time in the future. 3hich one of the follo2ing statements is correct
". The period of time she has to 2ait until she reaches her goal is unaFected /y the compounding of interest. #. The lo2er the rate of interest she earns- the shorter the time she 2ill have to 2ait to reach her goal. C. +he 2ill have to 2ait longer if she earns ! percent compound interest instead of ! percent simple interest. . The length of time she has to 2ait to reach her goal is directly related to the interest rate she earns. E. The period of time she has to 2ait decreases as the amount she invests today increases. Nefer to section 4.1.
Blooms: n!erstan! Difculty: ) .e!ium Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
'!.
3hich one of the follo2ing is a correct statement- all else held constant
". The present value is inversely related to the future value. #. The future value is inversely related to the period of time. C. The period of time is directly related to the interest rate. . The present value is directly related to the interest rate. E. The future value is directly related to the interest rate. Nefer to section 4.(.
Blooms: n!erstan! Difculty: ) .e!ium Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"/ $o%ic: (nterest rate
Hou 2ant to invest an amount of money today and receive /ac t2ice that amount in the future. Hou e&pect to earn ! percent interest. "ppro&imately ho2 long must you 2ait for your investment to dou/le in value
". ! years #. years C. * years D. 1' years %. 14 years "ppro&imate time period 9 '! 9 1' years
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"/ $o%ic: Rule o )
'*.
Today- you deposit $'-400 in a /an account that pays 4 percent simple interest. Jo2 much interest 2ill you earn over the ne&t years
Hour grandparents Kust gave you a gift of $1-000. Hou are investing this money for 1' years at ! percent simple interest. Jo2 much money 2ill you have at the end of the 1' years
". $1-80 0 #. $1!-00 0 C. $1-( D. $'-*0 0 %. $'!-8( * 6uture value 9 $1-000 = <$1-000 ? 0.0! ? 1'> 9 $'-*00
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: #im%le interest
(0.
5recision %ngineering invested $110-000 at !. percent interest- compounded annually for 4 years. Jo2 much interest on interest did the company earn over this period of time
". $'-4*1.' B. $'-811.( 0 C. $(-014.1 4 . $(-'0.0 0 %. $(-(((.( ( Interest on interest 9 $110-000 ? <1 = 0.0!>4 P ;$110-000 = <$110-000 ? 0.0! ? 4>@ 9 $'-811.(0
)im Kust deposited $1(-000 into his account at Traditions #an. The /an 2ill pay 1.( percent interest- compounded annually- on this account. Jo2 much interest on interest 2ill he earn over the ne&t 1 years
". $'(*.1 ! B. $'44.' 0 C. $(!0. 0 . $!0!.1 %. $!'(. 0 Interest on interest 9 $1(-000 ? <1 = 0.01(>1 P ;$1(-000 = <$1(-000 ? 0.01( ? 1>@ 9 $'44.'0
22'#B: 2nalytic Blooms: 2naly3e Difculty: ) .e!ium Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: (nterest on interest
('.
#en invested $-000 t2enty years ago 2ith an insurance company that has paid him percent simple interest on his funds. Charles invested $-000 t2enty years ago in a fund that has paid him percent interest- compounded annually. Jo2 much more interest has Charles earned than #en over the past '0 years
Blooms: 2naly3e Difculty: ) .e!ium Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: (nterest on interest
((.
%ric has $4-*00 that he 2ants to invest for 4 years. Je can invest this amount at his credit union and earn 4 percent simple interest. Lr- he can open an account at Compass #an and earn (.! percent interest- compounded annually. If he decides to invest at Copmpass #an for ( years- he 2ill:
". earn $1.0' more than if he had invested 2ith his credit union. B. earn $'.*8 less than if he had invested 2ith his credit union. C. earn the same amount as if he had invested 2ith the credit union. . have a total /alance of $4-88' in his account after one year. %. have a total /alance of $4-*! in his account after one year. Credit union future value 9 $4-*00 = <$4-*00 ? 0.04 ? 4> 9 $-!* Compass #an future value 9 $4-*00 ? <1 = 0.0(!> 4 9 $-40.11 iFerence 9 $-!* P $-40.11 9 $'.*8
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
3hat is the future value of $4-800 invested for * years at percent compounded annually
". $*-(8. 4 B. $*-418.1 1 C. $*-11.1 . $*-1(.0 ! %. $*-'0.' ' 6uture value 9 $4-800 ? <1.0> * 9 $*-418.11
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
(.
"ngela has Kust received an insurance settlement of $(-000. +he 2ants to save this money until her daughter goes to college. If she can earn an average of . percent- compounded annually- ho2 much 2ill she have saved 2hen her daughter enters college 10 years from no2
". $4*-000. 00 #. $0-8'8. 0' C. $1-(4. *8 . $8-*. 0! E. $8-*. 0! 6uture value 9 $(-000 ? <1 = 0.0> 10 9 $8-*.0!
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
Travis invests $10-000 today into a retirement account. Je e&pects to earn * percent- compounded annually- on his money for the ne&t '! years. "fter that- he 2ants to /e more conservative- so only e&pects to earn percent- compounded annually. Jo2 much money 2ill he have in his account 2hen he retires (* years from no2- assuming this is the only deposit he maes into the account
". $1'8-411. '0 B. $1('-*'. ** C. $1(4-!1!. ! . $141-818. ! %. $14'-00(. 1' 6uture value 9 $10-000 ? <1 = 0.0*> '! ? <1 = 0.0> <(* P '!> 9 $1('-*'.**
22'#B: 2nalytic Blooms: 2naly3e Difculty: ) .e!ium Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
(.
T2elve years ago- you deposited $(-400 into an account. +even years ago- you added an additional $1-000 to this account. Hou earned * percent- compounded annually- for the rst years and . percent- compounded annually- for the last years. Jo2 much money do you have in your account today
Difculty: ) .e!ium Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
(*.
Hour parents spent $!-'00 to /uy 00 shares of stoc in a ne2 company 1( years ago. The stoc has appreciated 8 percent per year on average. 3hat is the current value of those 00 shares
". $1*-*'4. 1 B. $18-00. 88 C. $18-*0. 8' . $'0-1. 0* %. $''-448. 8' 6uture value 9 $!-'00 ? <1 = 0.08> 1( 9 $18-00.88
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
(8.
Hou Kust 2on $0-000 and deposited your 2innings into an account that pays . percent interest- compounded annually. Jo2 long 2ill you have to 2ait until your 2innings are 2orth $100-000
". 11.'4 years #. 1'.00 years C. 1'.'8 years . 1'.! years E. 1'.8 years $100-000 9 $0-000 ? <1 = 0.0> t t 9 1'.8 years
Difculty: 1 Easy Learning Objective: 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: $ime %erio!
40.
3hen you 2ere /orn- your parents opened an investment account in your name and deposited $00 into the account. The account has earned an average annual rate of return of 4.* percent. Today- the account is valued at $(!-811.''. Jo2 old are you
". 4.4 years #. !.! years C. *1.0* years . *.(( years E. 81. years $(!-811.'' 9 $00 ? <1 = 0.04*>t t 9 81. years
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: $ime %erio!
Today- +tacy is investing $'!-000 at !.0 percent- compounded annually- for 4 years. Jo2 much additional income could he earn if he had invested this amount at percent- compounded annually
". $1-04(.1 1 B. $1-'!.( 0 C. $1-401.1 ! . $1-44'. 8 %. $1-4*4.0 * 6uture value !.0S 9 $'!-000 ? <1 = 0.0!0> 4 9 $('-*'4.40 6uture value S 9 $'!-000 ? <1 = 0.0> 4 9 $(4-0*0.0 iFerence 9 $(4-0*0.0 P $('-*'4.40 9 $1-'!.(0
22'#B: 2nalytic Blooms: 2naly3e Difculty: ) .e!ium Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"/ $o%ic: (nterest rate
+i&ty years ago- your grandparents opened t2o savings accounts and deposited $'00 in each account. The rst account 2as 2ith City #an at ( percentcompounded annually. The second account 2as 2ith Country #an at (. percentcompounded annually. 3hich one of the follo2ing statements is true concerning these accounts
". The City #an account is currently 2orth $1-'01.4. #. The City #an account has earned $'11.18 more in interest than the Country #an account. C. The Country #an account is currently 2orth $1-'!.0*. . The Country #an account has paid $(!.4* more in interest than the City #an account. E. The Country #an account has paid $(8.(0 more in interest than the City #an account. 6uture value City #an 9 $'00 ? <1 = 0.0(>!0 9 $1-1*.(' 6uture value Country #an 9 $'00 ? <1 = 0.0(>!0 9 $1-.!' iFerence 9 $1-.!' P $1-1*.(' 9 $(8.(0
22'#B: 2nalytic Blooms: 2naly3e Difculty: ) .e!ium Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"/ $o%ic: (nterest rate
4(.
Ten years from no2- you 2ill /e inheriting $100-000. 3hat is this inheritance 2orth to you today if you can earn . percent interest- compounded annually
A. $*-4(. 0! #. $!(-'1. 4! C. $'-418. 0 . $'-8*. 4 %. $4-00(. 1
5resent value 9 $100-000<1 = 0.0> 10 9 $*-4(.0!
Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
44.
Hou 2ant to have $'-000 for a do2n payment on a house ! years from no2. If you can earn !. percent- compounded annually- on your savings- ho2 much do you need to deposit today to reach your goal
A. $1-1((. ( #. $1-4'0. ( C. $1-**0. !8 . $1*-'11. 1 %. $1*-**!. 40
5resent value 9 $'-000<1 = 0.0!> ! 9 $1-1((.(
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
4.
Hou 2ant to have $4-000 in cash to /uy a car 4 years from today. Hou e&pect to earn 4. percent- compounded annually- on your savings. Jo2 much do you need to deposit today if this is the only money you save for this purpose
". $((-!1*. 8' #. $(4-11. !* C. $(-'!. 04 D. $(-(. '! %. $(*-1!. 18 5resent value 9 $4-000<1 = 0.04> 4 9 $(-(.'!
Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
4!.
+yline Industries 2ill need $1.* million years from no2 to replace some euipment. Currently- the rm has some e&tra cash and 2ould lie to esta/lish a savings account for this purpose. The account pays .' percent interestcompounded annually. Jo2 much money must the company deposit today to fully fund the euipment purchase
". $1-'8-84. '0 #. $1-'8*-40. '1 C. $1-(0-*!*. 4 D. $1-(8(-!!. ' %. $1-41'-(0*. 1* 5resent value 9 $1-*00-000<1 = 0.0'> 9 $1-(8(-!!.'
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
Hou and your sister are planning a large anniversary party ( years from today for your parentsD 0th 2edding anniversary. Hou have estimated that you 2ill need $4-00 for this party. Hou can earn '. percent compounded annually on your savings. Jo2 much 2ould you and your sister have to deposit today in one lump sum to pay for the entire party
". $4-0!. B. $4-1*. 0 C. $4-(0*.1 ! . $4-((4.8 0 %. $4-(!*.* 1 5resent value 9 $4-00<1 = 0.0'> ( 9 $4-1*.0
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
4*.
Isaac only has $!80 today /ut needs $*00 to /uy a ne2 laptop. Jo2 long 2ill he have to 2ait to /uy the laptop if he earns .4 percent compounded annually on his savings
". '.'8 years #. '.4* years C. '.1 years . '. years E. '.*1 years $*00 9 $!80 ? <1 = 0.04> t t 9 '.*1 years
Hou have /een told that you need $'-!00 today in order to have $100-000 2hen you retire ( years from no2. 3hat rate of interest 2as used in the present value computation "ssume interest is compounded annually.
A. (.8 percent #. 4.1 percent C. 4.'8 percent . 4.( percent %. 4.* percent
$100-000 9 $'-!00 ? <1 = r> ( r 9 (.8 percent
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"/ $o%ic: (nterest rate
'.
Hour friend claims that he invested $-000 seven years ago and that this investment is 2orth $(*-00 today. 6or this to /e true- 2hat annual rate of return did he have to earn "ssume the interest compounds annually.
Hou have $1-00 today in your savings account. Jo2 long must you 2ait for your savings to /e 2orth $4-000 if you are earning 1.1 percent interest- compounded annually
". !.!* years #. 8.!8 years C. '.1( years . *0. years E. *8.!! years $4-000 9 $1-00 ? <1 = 0.011> t t 9 *8.!!years
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: $ime %erio!
4.
5lanters #an pays percent simple interest on its savings account /alances2hereas Centura #an pays percent compounded annually. If you made a $1'-000 deposit in each /an- ho2 much more money 2ould you earn from your Centura #an account at the end of '0 years
". $-1.* 4 B. $-*(8. C. $-8!0.4 . $*-400.0 8 %. $*-*4.1 4 6uture value 5lanters 9 $1'-000 = <$1'-000 ? 0.0 ? '0> 9 $'4-000 6uture value Centura +treet 9 $1'-000 ? <1 = 0.0> '0 9 $(1-*(8. iFerence 9 $(1-*(8. P $'4-000 9 $-*(8.
Difculty: 1 Easy EO': 4"1 Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: #im%le versus com%oun! interest
.
"ssume the total cost of a college education 2ill /e $'*-000 2hen your child enters college in '' years. Hou presently have $(-000 to invest. 3hat annual rate of interest must you earn on your investment to cover the cost of your childDs college education
Blooms: 2naly3e Difculty: 1 Easy EO': 4" Learning Objective: 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: $ime %erio!
.
HouDre trying to save to /uy a ne2 $'10-000 6errari. Hou have $(*-000 today that can /e invested at your /an. The /an pays 4.1 percent annual interest on its accounts. Jo2 long 2ill it /e /efore you have enough to /uy the car
". (8.1( years #. (8.'8 years C. 40.! years . 41.0* years E. 4'.4 years $'10-000 9 $(*-000 ? <1 = 0.041> t t 9 4'.4 years
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy EO': 4"6 Learning Objective: 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: $ime %erio!
Hour coin collection contains ten 18(8 silver dollars. If your great grandparents purchased them for their face value 2hen they 2ere ne2- ho2 much 2ill your collection /e 2orth 2hen you retire in '00- assuming they appreciate at a .1 percent annual rate
". $'-'4(.! ( #. $'-('8.' 8 C. $'-(4*.8 * D. $'-488. * %. $'-!44.' 8 6uture value 9 $10 ? <1 = 0.01> <'00 P 18(8> 9 $'-488.*
22'#B: 2nalytic Blooms: 2naly3e Difculty: 1 Easy EO': 4"1) Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
8.
+uppose that in '010- a $10 silver certicate from 1*8* sold for $11-'00. 6or this to have /een true- 2hat 2ould the annual increase in the value of the certicate have /een
A. !.4 percent #. !.*1 percent C. .'( percent . .48 percent %. .8 percent
$11-'00 9 $10 ? <1 = r> <'010 P 1*8*> r 9 !.4 percent
Learning Objective: 04-0/ 'alculate the return on an investment" #ection: 4"/ $o%ic: (nterest rate
!0.
Hou have Kust made your rst $-000 contri/ution to your individual retirement account. "ssuming you earn a percent rate of return and mae no additional contri/utions- 2hat 2ill your account /e 2orth 2hen you retire in ( years 3hat if you 2ait for years /efore contri/uting
". $'!-((.( $'(-011.!0 #. $'-(11.'0 $'8-*0(.04 C. $'-(11.'0 $''-!14.0* D. $'-*0.0* '1-!08.1 %. $(1-'41.80 $('-!14.0* 6uture value 6uture value
Hou are scheduled to receive $-00 in three years. 3hen you receive it- you 2ill invest it for eight more years at . percent per year. Jo2 much 2ill you have in eleven years
A. $1(-(!. 0* #. $14-4'*. 08 C. $1-110. '4 . $1!-11(. (( %. $1!-!1. 0
22'#B: 2nalytic Blooms: 2naly3e Difculty: ) .e!ium EO': 4"16 Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: &uture value
!'.
Hou e&pect to receive $'0-000 at graduation one year from no2. Hou plan on investing it at ! percent until you have $100-000. Jo2 long 2ill you 2ait from no2
". '.4 years #. '.1 years C. '. years . '*.4 years E. '*.!' years $100-000 9 $'0-000 ? <1 = 0.0!>t t 9 '.!' years 3ait time 9 1 = '.!' 9 '*.!' years
Learning Objective: 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: $ime %erio!
!(.
Hou have $-000 you 2ant to invest for the ne&t 4 years. Hou are oFered an investment plan that 2ill pay you ! percent per year for the ne&t 1 years and 10 percent per year for the last (0 years. Jo2 much 2ill you have at the end of the 4 years Jo2 much 2ill you have if the investment plan pays you 10 percent per year for the rst 1 years and ! percent per year for the ne&t (0 years
%&plain the time value of money principle and also identify the underlying assumption of that principle.
The time value of money principle states that a dollar is 2orth more today than it is tomorro2. If you have a dollar today- you can invest it and thus have more than a dollar tomorro2. The underlying assumption is that money can /e invested at a positive rate of return. 6eed/ac: Nefer to section 4.1.
22'#B: Re+ective thining Blooms: n!erstan! Difculty: ) .e!ium Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" #ection: 4"1 $o%ic: $ime value o money
!.
ra2 a graph that illustrates the relationship /et2een interest rates and the present value of $1-000 to /e received in one year.
+tudents should illustrate that higher interest rates lead to lo2er present values. 6eed/ac: Nefer to section 4.'.
22'#B: Re+ective thining Blooms: n!erstan! Difculty: 1 Easy Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" #ection: 4") $o%ic: *resent value
!!.
%&plain the Nule of '.
The Nule of ' allo2s you to estimate the length of time needed to dou/le your money given reasona/le rates of interest and annual compounding. It also allo2s you to estimate the interest rate needed to dou/le your money 2ithin a certain num/er of years. %&: 'Interest rate 9 Eum/er of years or 'Eum/er of years 9 Interest rate. 6eed/ac: Nefer to section 4.(.
Blooms: 2naly3e Difculty: 1 Easy Learning Objective: 04-0/ 'alculate the return on an investment" an! 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: Rule o )
!.
Identify the relationship /et2een each of the follo2ing pairs of varia/les as they relate to the time value of money: <"ssume all else constant> 5resent value and future value OOOOOOOOO 5resent value and interest rate OOOOOOOOO 5resent value and time OOOOOOOOO Time and interest rate OOOOOOOOO Time and future value OOOOOOOOO Interest rate and future value OOOOOOOOO
6eed/ac: Nefer to section 4.(.
22'#B: Re+ective thining Blooms: 2naly3e Difculty: ) .e!ium Learning Objective: 04-01 Determine the uture value o an investment ma!e to!ay" Learning Objective: 04-0) Determine the %resent value o cash to be receive! at a uture !ate" Learning Objective: 04-0/ 'alculate the return on an investment" Learning Objective: 04-04 *re!ict ho, long it taes or an investment to reach a !esire! value" #ection: 4"/ $o%ic: $ime value o money
