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Explain the time value of money principle and also identify the underlying assumption of that principle.

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The time value of money principle states...

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Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value. I.Increase in the interest rate II.Decrease in the lump sum amount III.Increase in the investment time period IV.Decrease in the investment time period


A) I and III only
B) I and IV only
C) I, II, and III only
D) II and III only
E) II and IV only

F) B) and D)
G) C) and D)

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The relationship between the present value and the time period is best described as:


A) direct.
B) inverse.
C) unrelated.
D) ambiguous.
E) parallel.

F) B) and C)
G) B) and E)

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Twelve years ago,you deposited $3,400 into an account.Seven years ago,you added an additional $1,000 to this account.You earned 8 percent,compounded annually,for the first 5 years and 5.5 percent,compounded annually,for the last 7 years.How much money do you have in your account today?


A) $5,666.67
B) $6,717.29
C) $7,411.90
D) $8,708.15
E) $8,721.97

F) B) and D)
G) A) and B)

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Your friend claims that he invested $5,000 seven years ago and that this investment is worth $38,700 today.For this to be true,what annual rate of return did he have to earn? Assume the interest compounds annually.


A) 28.87 percent
B) 31.39 percent
C) 33.96 percent
D) 36.01 percent
E) 37.87 percent

F) B) and E)
G) A) and B)

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Suppose that in 2010,a $10 silver certificate from 1898 sold for $11,200.For this to have been true,what would the annual increase in the value of the certificate have been?


A) 6.47 percent
B) 6.81 percent
C) 7.23 percent
D) 7.49 percent
E) 7.97 percent

F) A) and E)
G) B) and C)

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Sara is investing $1,000 today.Which one of the following will increase the future value of that amount?


A) Shortening the investment time period.
B) Paying interest only on the principal amount.
C) Paying simple interest rather than compound interest.
D) Paying interest only at the end of the investment period rather than throughout the investment period.
E) Increasing the interest rate.

F) B) and E)
G) A) and E)

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Tom earned $120 in interest on his savings account last year.Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year.This process of earning interest on prior interest earnings is called:


A) discounting.
B) compounding.
C) duplicating.
D) multiplying.
E) indexing.

F) A) and E)
G) C) and E)

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Which one of the following is a correct statement,all else held constant?


A) The present value is inversely related to the future value.
B) The future value is inversely related to the period of time.
C) The period of time is directly related to the interest rate.
D) The present value is directly related to the interest rate.
E) The future value is directly related to the interest rate.

F) A) and B)
G) None of the above

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Lisa has $1,000 in cash today.Which one of the following investment options is most apt to double her money?


A) 6 percent interest for 3 years
B) 12 percent interest for 5 years
C) 7 percent interest for 9 years
D) 8 percent interest for 9 years
E) 6 percent interest for 10 years

F) B) and C)
G) A) and E)

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D

Your grandparents just gave you a gift of $15,000.You are investing this money for 12 years at 6 percent simple interest.How much money will you have at the end of the 12 years?


A) $15,900
B) $16,000
C) $17,375
D) $25,800
E) $26,938

F) None of the above
G) All of the above

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Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now.Which one of the following terms refers to the $3,626?


A) Present value
B) Compound value
C) Future value
D) Complex value
E) Factor value

F) C) and E)
G) A) and E)

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A

Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.


A) PV = $600 (1 + 6) 7
B) PV = $600 (1 + 0.07) 6
C) PV = $600 × (0.07 × 6)
D) PV = $600/(1 + 0.07) 6
E) PV = $600/(1 + 6) 0.07

F) A) and E)
G) B) and E)

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Martha is investing $5 today at 6 percent interest so she can have $10 later.The $10 is referred to as the:


A) true value.
B) future value.
C) present value.
D) discounted value.
E) complex value.

F) All of the above
G) A) and B)

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Lester had $6,270 in his savings account at the beginning of this year.This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year.This year,Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant.This $282.15 is best described as:


A) simple interest.
B) interest on interest.
C) discounted interest.
D) complex interest.
E) compound interest.

F) None of the above
G) A) and B)

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E

You just won $50,000 and deposited your winnings into an account that pays 5.5 percent interest,compounded annually.How long will you have to wait until your winnings are worth $100,000?


A) 11.24 years
B) 12.00 years
C) 12.29 years
D) 12.67 years
E) 12.95 years

F) All of the above
G) A) and B)

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Ten years from now,you will be inheriting $100,000.What is this inheritance worth to you today if you can earn 5.5 percent interest,compounded annually?


A) $58,543.06
B) $63,215.46
C) $72,419.05
D) $72,798.47
E) $74,003.15

F) None of the above
G) B) and E)

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Eric has $4,800 that he wants to invest for 4 years.He can invest this amount at his credit union and earn 4 percent simple interest.Or,he can open an account at Compass Bank and earn 3.65 percent interest,compounded annually.If he decides to invest at Copmpass Bank for 3 years,he will:


A) earn $15.02 more than if he had invested with his credit union.
B) earn $27.89 less than if he had invested with his credit union.
C) earn the same amount as if he had invested with the credit union.
D) have a total balance of $4,992 in his account after one year.
E) have a total balance of $4,876 in his account after one year.

F) D) and E)
G) C) and D)

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Skyline Industries will need $1.8 million 5 years from now to replace some equipment.Currently,the firm has some extra cash and would like to establish a savings account for this purpose.The account pays 5.25 percent interest,compounded annually.How much money must the company deposit today to fully fund the equipment purchase?


A) $1,279,947.20
B) $1,298,407.21
C) $1,350,868.47
D) $1,393,676.52
E) $1,412,308.18

F) B) and C)
G) A) and C)

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Which of the following will increase the future value of a lump sum investment? I.Decreasing the interest rate II.Increasing the interest rate III.Increasing the time period IV.Decreasing the amount of the lump sum investment


A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) II, III, and IV only

F) B) and E)
G) A) and E)

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