Finance Chapter 5

Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years? a. $13,020 b. $13,500 c. $12,650 d. $12,967 e. $13,256

a. $13,020

Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now? a. decreases b. cannot be determined from the information provided c. increases d. becomes negative e. remains constant

a. decreases

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: a. discounting b. growth analysis c. reducing d. accumulating e. compounding

a. discounting

At 6% compounded annually, approximately how long will it take $750 to double based on the Rule of 72? (Answer in years, rounded to 2 decimal places, e.g., 12.34)

Solve 72/(rate*100), note that the answer is an approximation. The correct answer is: 11.9 (12)

What is the present value of $150,000 to be received 10 years from today if the discount rate is 11 percent? a. $69,806.18 b. $64,141.41 c. $73,291.06 d. $52,827.67 e. $61,147.07

d. $52,827.67

Which one of the following will produce the highest present value interest factor? a. 8 percent interest for five years b. 6 percent interest for ten years c. 6 percent interest for eight years d. 6 percent interest for five years e. 8 percent interest for ten years

d. 6 percent interest for five years

What is the relationship between present value and future value interest factors? a. The future value factor is the exponent of the present value factor. b. There is no relationship between these two factors. c. The present value and future value factors are equal to each other. d. The factors are reciprocals of each other. e. The present value factor is the exponent of the future value factor.

d. The factors are reciprocals of each other.

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following? a. aggregation b. simplifying c. discounting d. compounding e. accumulation

d. compounding

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following? a. effective rate b. compound rate c. simple rate d. discount rate e. current yield

d. discount rate

You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now? a. discounted value b. principal amounts c. present value d. future value e. invested principal

d. future value

Which one of the following variables is the exponent in the present value formula? a. There is no exponent in the present value formula b. future value c. interest rate d. time e. present value

d. time

You own a classic automobile that is currently valued at %150,000. If the value increases by 6.5 percent annually, how much will the automobile be worth ten years from now? a. $291,480.18 b. $244,035.00 c. $251,008.17 d. $270,012.38 e. $281,570.62

e. $281,570.62

Today, you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent? a. $58,235.24 b. $59,122.08 c. $59,360.45 d. $57,414.06 e. $55,032.54

e. $55,032.54

Today, you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent? a. $59,360.45 b. $58,235.24 c. $57,414.06 d. $59,122.08 e. $55,032.54

e. $55,032.54

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Bard also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her earnings into her account. Given this, which one of the following statements is true? a. Andy will earn more interest in year three than Barb will. b. Barb will earn more interest in the first year than Andy will. c. After five years, Andy and Barb will both have earned the same amount of interest.. d. Andy will earn compound interest. e. Barb will earn interest on interest.

e. Barb will earn interest on interest.

future value

the amount of money an investment will to over some period of time at some given interest rate. The cash value of an investment at some time in the future. - the value of an asset later in time (the money you WILL have)

interest on interest

interest earned on the reinvestment of previous interest payments

Mickey & Minnie have $35 million in cash. Before they retire, they want the $35 million to grow to $86 million. How many years before Mickey & Minnie can retire if they earn 8.0% per annum on their stash of cash? Assume annual compounding. (Enter your answer in years to 2 decimal places, e.g., 12.34)

11.68

At 5% compounded annually, approximately how long will it take $750 to double based on the Rule of 72? (Answer in years, rounded to 2 decimal places, e.g., 12.34)

Solve 72/(rate*100), note that the answer is an approximation. The correct answer is: 14.40

You just purchased a parcel of land for $73,000. To earn a 12% annual rate of return on your investment, how much must you sell the land for in 8 years? Assume annual compounding. (Round to nearest penny, e.g. 1234.56)

Solve for FV. FV = PV * (1 + rate/m)^(years * m) where m = number of compounding periods per year. The correct answer is: 180745.31

You just purchased a parcel of land for $113,000. To earn a 13% annual rate of return on your investment, how much must you sell the land for in 6 years? Assume annual compounding. (Round to nearest penny, e.g. 1234.56)

Solve for FV. FV = PV * (1 + rate/m)^(years * m) where m = number of compounding periods per year. The correct answer is: 235260.55

You just purchased a parcel of land for $48,000. To earn a 8% annual rate of return on your investment, how much must you sell the land for in 5 years? Assume annual compounding. (Round to nearest penny, e.g. 1234.56)

Solve for FV. FV = PV * (1 + rate/m)^(years * m) where m = number of compounding periods per year. The correct answer is: 70527.75

What is the present value of $444,000 to be received in 14 years from today. Assume a per annum discount rate of 11%, compounded annually. (Round to nearest penny, e.g. 1234.56)

Solve for PV = FV/(1+r)^t, note that r = per annum rate/2 and t=years * 2 since compounding is semi-annual. The correct answer is: 103005.70

What is the present value of $302,000 to be received in 11 years from today. Assume a per annum discount rate of 9%, compounded annually. (Round to nearest penny, e.g. 1234.56)

Solve for PV = FV/(1+r)^t, note that r = per annum rate/2 and t=years * 2 since compounding is semi-annual. answer: 117034.92

You bought a painting 9 years ago as an investment. You originally paid $156,000 for it. If you sold it for $412,000, what is your annual return on the investment? Assume annual compounding. (Round to 100th of a percent and enter your answer as a percentage, e.g., 12.34 for 12.34%)

Solve for rate (r) where FV = PV * (1 + r)^n The correct answer is: 11.39

You bought a painting 5 years ago as an investment. You originally paid $168,000 for it. If you sold it for $342,000, what is your annual return on the investment? Assume annual compounding. (Round to 100th of a percent and enter your answer as a percentage, e.g., 12.34 for 12.34%)

Solve for rate (r) where FV = PV * (1 + r)^n The correct answer is: 15.28

Based on the rule of 72, what per annum interest rate must Oprah earn on her savings of $50 million to double these savings in 9 years? (Round to 100th of a percent and enter your answer as a percentage, e.g., 12.34 for 12.34%)

Solve for rate = 72/years. Note that this is an approximation. The correct answer is: 8

Based on the rule of 72, what per annum interest rate must Oprah earn on her savings of $50 million to double these savings in 8 years? (Round to 100th of a percent and enter your answer as a percentage, e.g., 12.34 for 12.34%)

Solve for rate = 72/years. Note that this is an approximation. The correct answer is: 9.00

Mickey & Minnie have $34 million in cash. Before they retire, they want the $34 million to grow to $101 million. How many years before Mickey & Minnie can retire if they earn 10.9% per annum on their stash of cash? Assume annual compounding. (Enter your answer in years to 2 decimal places, e.g., 12.34)

The correct answer is: 10.52

compounding

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest. Finance uses "compounding" as the verb for going into the future. The process of accumulating interest on an investment over time to earn more interest

You would like to give your daughter $75,000 towards her college education 17 years from now. How much money must you set aside today for this purpose if you can earn 8 percent on your investments? a. $20,270.17 b. $28,417.67 c. $32,488.37 d. $29,311.13 e. $18,388.19

a. $20,270.17

The process of determining the present value of the future cash flows in order to know their worth today is called which of the following? a. discounted cash flow valuation b. present value interest factoring c. compound interest valuation d. interest on interest computation e. complex factoring

a. discounted cash flow valuation

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. What type of interest is Sara earning? a. simple interest b. interest on interest c. complex interest d. compound interest e. free interest

a. simple interest

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Bard also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her earnings into her account. Given this, which one of the following statements is true? a. Barb will earn more interest in the first year than Andy will. b. Barb will earn interest on interest. c. After five years, Andy and Barb will both have earned the same amount of interest.. d. Andy will earn compound interest. e. Andy will earn more interest in year three than Barb will.

b. Barb will earn interest on interest.

Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true? a. The future value interest factor turned out to be higher than Martin expected. b. Martin ignored the Rule of 72 which caused his account to decrease in value. c. Martin earned a lower interest rate than he expected. d. Martin did not earn any interest on interest as he expected. e. Martin earned simple interest rather than compound interest.

c. Martin earned a lower interest rate than he expected.

Shelley won a lottery and will receive $1,00 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following? Select one: a. simple amount b. single amount c. present value d. compounded value e. future value

c. present value

Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years? a. $13,500 b. $13,256 c. $12,967 d. $13,020 e. $12,650

d. $13,020

Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest? a. $16,500.00 b. $17,999.45 c. $17,500.00 d. $17,444.86 e. $15,929.47

d. $17,444.86