Chapter 4 Questions

You are due to receive a lump-sum payment of $1,650 in five years. Assuming a discount rate of 3.5 percent interest, what would be the value of the payment in Year 3? $1,488.21 $1,540.29 $1594.20 $1,389.26 $1,296.89

$1,540.29

Today, Georgia is investing $24,000 at 5.5 percent, compounded annually, for 6 years. How much additional income could she earn if she had invested this amount at 6.5 percent, compounded annually? $1,515.04 $1,927.19 $2,007,49 $2,515.04 $2.927.19

$1,927.19

Precision Engineering invested $95,000 at 5.5 percent interest, compounded annually for 2 years. How much interest did the company earn over this period of time? $95,000 $10,737.38 $10,450.00 $2,612.50 $10,931.36

$10,737.38

You have $12,500 you want to invest for the next 30 years. You are offered an investment plan that will pay you 7 percent per year for the next 10 years and 9.5 percent per year for the last 20 years. How much will you have at the end of the 30 years? $101,516.38 $119,874.49 $151,018.51 $190,253.91 $209,092.54

$151,018.51

You are due to receive a lump-sum payment of $2,350 in seven years. Assuming a discount rate of 2.5 percent interest, what would be the value of the payment in Year 4? $1,976.97 $2,182.21 $2,128.98 $2,236.76 $2,292.68

$2,182.21

You are due to receive a lump-sum payment of $1,350 in four years and an additional lump-sum payment of $1,450 in five years. Assuming a discount rate of 2.0 percent interest, what would be the value of the payments today? $2,663.31 $2,536.05 $2,586.77 $2,560.50 $2,205.50

$2,560.50

Travis invests $5,500 today into a retirement account. He expects to earn 9.2 percent, compounded annually, on his money for the next 13 years. After that, he wants to be more conservative, so only expects to earn 6 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account? $29,411.20 $34,747.80 $34,616.56 $41,919.67 $42,003.12

$34,747.80

Today, you deposit $2,500 in a bank account that pays 3.6 percent simple interest. How much interest will you earn over the next 5 years? $90.00 $120.00 $450.00 $483.59 $492.27

$450.00 2,500 x 0.036 = 90 90 x 5 = 450

You and your sister are planning a large anniversary party 3 years from today for your parents' 50th wedding anniversary. You have estimated that you will need $6,500 for this party. You can earn 2.6 percent compounded annually on your savings. How much would you and your sister have to deposit today in one lump sum to pay for the entire party? $6,076.55 $6,018.26 $6,308.16 $5,934.90 $5,868.81

$6,018.26

When you were born, your parents opened an investment account in your name and deposited $1,500 into the account. The account has earned an average annual rate of return of 5.3 percent. Today, the account is valued at $42,856. How old are you? 71.47 years 70.67 years 61.08 years 67.33 years 64.91 years

64.91 years

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 9 percent interest. Approximately how long must you wait for your investment to double in value? 6 years 7 years 8 years 12 years 14 years

8 years

You are scheduled to receive $5,000 in two years. When you receive it, you will invest it at 6.5 percent per year. How much will your investment be worth eight years from now? $7,295.71 $8,274.98 $6,850.43 $10,665.75 $7,302.27

$7,295.71

Stephen claims that he invested $6,000 six years ago and that this investment is worth $28,700 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounded annually. 28.87 percent 31.39 percent 29.80 percent 26.01 percent 27.87 percent

29.80 percent

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount? Shortening the investment time period Paying interest only on the principal amount Paying simple interest rather than compound interest Paying interest only at the end of the investment period rather than throughout the investment period Increasing the interest rate

Increasing the interest rate

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: simple interest. interest on interest. discounted interest. complex interest. compound interest.

compound interest.

The interest rate used to compute the present value of a future cash flow is called the: prime rate. current rate. discount rate. compound rate. simple rate.

discount rate.

Computing the present value of a future cash flow to determine what that cash flow is worth today is called: compounding. factoring. time valuation. simple cash flow valuation. discounted cash flow valuation.

discounted cash flow valuation.

South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today: is the same regardless of which bank you choose because they both pay the same rate of interest. is the same regardless of which bank you choose because they both pay simple interest. is the same regardless of which bank you choose because the time period is the same for both banks. will be greater if you invest with South Central Bank. will be greater if you invest with Northern Bank.

will be greater if you invest with Northern Bank.

How long will it take to double your savings if you earn 6.4 percent interest, compounded annually? 11.89 years 12.02 years 11.39 years 11.17 years 10.58 years

11.17 years

At 10 percent interest, how long does it take to triple your money? 14.33 years 11.53 years 9.67 years 10.36 years 10.56 years

11.53 years

You want to have $32,000 for a down payment on a house 5 years from now. If you can earn 4.3 percent, compounded annually on your savings, how much do you need to deposit today to reach your goal? $25,925.58 $28,179.77 $21,639.73 $21,970.21 $24,625.44

$25,925.58

What is the future value of $8,000 invested today and held for 15 years at 8.5 percent compounded annually? $25,377.35 $27,197.94 $29,139.86 $29,509.77 $27,179.49

$27,197.94

Your coin collection contains ten 1949 silver dollars. If your grandparents purchased the coins for their face value when they were new, how much will your collection be worth when you retire in 2065, assuming the coins appreciate at an annual rate of 5.1 percent? $3,440.63 $2,329.29 $3,348.98 $3,205.64 $2,644.29

$3,205.64 Future value = $10 x(1 + .051)(2065-1949)= $3,205.64

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years: Both Stacey and Kurt will have accounts of equal value. Kurt will have twice the money saved that Stacey does. Kurt will earn exactly twice the amount of interest that Stacey earns. Kurt will have a larger account value than Stacey will. Stacey will have more money saved than Kurt.

Kurt will have a larger account value than Stacey will.

The future value of a lump-sum investment will increase if you: decrease the interest rate. decrease the number of compounding periods. increase the time period. decrease the time period. decrease the lump-sum amount.

increase the time period.

By definition, a bank that pays simple interest on a savings account will pay interest: only at the beginning of the investment period. on interest. only on the principal amount originally invested. on both the principal amount and the reinvested interest. only if all previous interest payments are reinvested.

only on the principal amount originally invested.

Given an interest rate of zero percent, the future value of a lump sum invested today will always: remain constant, regardless of the investment time period. decrease if the investment time period is shortened. decrease if the investment time period is lengthened. be equal to $0. be infinite in value.

remain constant, regardless of the investment time period.