personal finance test 1 ch 3
a stream of equal payments either received or paid at equal time intervals is a(n) ________.
annuity
The difference between an ordinary annuity and an annuity due is with an annuity due the payments occur at the ________ of each period
beginning
An annuity is a stream of equal payments that are received or paid at random periods of time.
false
The time value of money concept can help you determine how much money you need to save over a period of time to achieve a specific savings goal.
true
You wish to retire in 30 years and determine that you will need $1,000,000 to fund your retirement. If you can invest with a return of 8% you will need to invest ________ each year to reach your goal
$8827
A) diagrams that show payments over time B) factor multiplied by a payment to get the present value of an annuity C) series of equal payments at the beginning of each period 14) timelines Question Status: Previous edition 15) annuity due Question Status: Previous edition 16) present value of an annuity Question Status: Previous edition
14) A 15) C 16) B
A) process of obtaining present values B) factor multiplied by a future value to get a present value 16) present value interest factor Question Status: Previous edition 17) discounting Question Status: Previous edition
16) B 17) A
A) factor multiplied by a payment to get the future value of an annuity B) the process of obtaining future values C) factor multiplied by the present value to get the future value D) a business calculator that performs PV/FV calculations E) a series of equal payments 20) future value interest factor Question Status: Previous edition 21) financial calculator Question Status: Previous edition 22) annuity Question Status: Previous edition 23) compounding Question Status: Previous edition 24) future value of an annuity Question Status: Previous edition
20) C 21) D 22) E 23) B 24) A
If I deposit a sum of money today and wish it to double in 10 years, I will need to receive an interest rate of slightly above ________
7%
At what annual rate would $500 grow to $1,948 in 12 years? (Note—Solve as a Present Value problem.) A) 12.0 percent B) 13.0 percent C) 12.5 percent D) 11.0 percent
A
How many years will it take for $500 to grow to $1,039.50 if invested at 5% compounded annually? A) 15 B) 14 C) 13 D) 12
A
If you are presented with an offer to accept payment now or a greater amount in the future, you would use (assuming you can invest the money at a known rate) A) Present Value of $1. B) Future Value of $1. C) Present Value of an annuity. D) Future Value of an annuity.
A
If you invest $12,000 today at an interest rate of 10%, how much will you have in 10 years? A) $31,128 B) $25,940 C) $13,860 D) $40,712
A
Information can be easily found on Web sites that will assist you in determining all of the following except A) proceeds you will receive when selling your house. B) loan rates, length of loan, and principal. C) stock quotes and company information. D) credit card applications and information.
A
John would like to save $1,500,000 by the time he retires in 30 years and believes he can earn an annual return of 8%. How much does he need to invest each year to achieve his goal? A) $13,242 B) $18,900 C) $20,518 D) none of the above
A
Judy would like to have $200,000 saved in her retirement account in 20 years. At an interest rate of 10 percent, how much should she contribute each year? A) $3,491.92 B) $2,000.00 C) $2,576.11 D) $4,376.77
A
Money received today is worth more than the same amount of money received in the future. This is true because A) money received today can grow at a compounded rate. B) future inflation will devalue your current investments. C) all goods and services are likely to cost more in the future. D) unique investment opportunities exist today, which may not be available in the future.
A
Refer to Table 3.1 above. How much will you have if you deposit $1,000 today in an account paying 7% and you leave it on deposit for 5 years? A) $1,403 B) $713 C) $5,751 D) $4,100
A
Sandy wants to know how much she needs to save today to have $5,000 in five years at a 7% interest rate. Which of the following tables should she use? A) Present value $1 B) Present value ordinary annuity C) Future value $1 D) Future value ordinary annuity
A
Susie wants to know how much she needs to save today to have $5,000 in five years. Which of the following tables should she use? A) Present value $1 B) Present value ordinary annuity C) Future value $1 D) Future value ordinary annuity
A
The process of obtaining ________ values is referred to as discounting. A) present B) future C) current D) inflated
A
The time value of money implies that a dollar received today is worth ________ a dollar received tomorrow. A) more than B) less than C) the same as D) Insufficient data to answer.
A
Which of the following decisions would involve the use of the future value of $1? A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years B) You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday
A
Which of the following is not an example of a future value? A) The balance in your checking account today B) A savings account balance in five years C) A mortgage balance in ten years D) The value of a retirement account in 20 years
A
If you had just won $5,000,000 from a lottery, describe the advantages and disadvantages of receiving a lump sum today or a ten-year annuity. Discuss other factors that are relevant or needed to make this decision. No interest rate is given, however different interest rates can be assumed if necessary to answer this problem.
A lump sum would incur a large tax liability. In contrast, an annuity may lower the overall tax liability and would provide yearly payments. This problem does not state an interest rate, so actual computations could be done at different interest rates. This could depend upon a person's ability to invest and wisely use the money. In general, if a person can invest the lump sum winnings at a higher interest rate than implied by the annuity, she/he should prefer the lump sum.
Aaron wants to put $200 per month into an IRA account at 15% for four years. What is he solving for using his financial calculator? A) Present value B) Future value C) Interest rate D) Payment
B
An ordinary annuity can be defined as A) a series of unequal payments at the beginning of each period. B) a series of equal payments at the end of each period. C) a lump sum. D) intermittent payments for ordinary expenses.
B
How much must you invest today at 8% interest in order to see your investment grow to $15,000 in 10 years? A) $6,330 B) $6,945 C) $7,620 D) $7,500
B
If Jim wants $25,000 in five years and can earn an 8% interest rate, how much does he need to invest today? (Note—Solve as a Present Value problem.) A) $16,108 B) $17,025 C) $15,158 D) $17,829
B
If Joe has $5,600 today and invests it at a 10% interest rate, how much will he have in 12 years? (Note—Solve as a Future Value problem.) A) $17,393.60 B) $17,572.80 C) $15,770.49 D) $12,320.00
B
In order to take advantage of the time value of money you should do all of the following except A) pay bills electronically so you can delay payments and still ensure on-time payment. B) pay bills a little later than the due dates to take advantage of month-ending interest on your savings account. C) use settings on many bill-paying Web sites that allow you to set a future date for payment once you receive a bill. D) make use of your money while you have it, but always make payments by the obligation dates.
B
Mr. Berkey invests $10,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much interest will he earn on his investment during this time period? A) $17,140 B) $7,140 C) $17,180 D) $7,180
B
Mr. Wolf is borrowing $500,000 to expand his business. The loan will be for ten years at 12% interest and will be repaid in equal quarterly installments. What will the quarterly installments be? A) $88,496 B) $21,631 C) $25,510 D) $60,650
B
Refer to Table 3.1 above. How much will you need to deposit today in an account paying 7% if you wish to have $1,000 in 5 years? A) $1,403 B) $713 C) $5,751 D) $4,100
B
The future value of an annuity assumes that the payments are received A) at the beginning of the year and the last payment does not compound. B) at the end of the year and the last payment does not compound. C) at the beginning of the year and the last payment is compounded. D) at the end of the year and the last payment is compounded.
B
The higher the rate used in determining the future value of an annuity, A) the smaller the future value at the end of the period. B) the greater the future vale at the end of the period. C) the greater the present value at the beginning of the period. D) none of these - the interest has no effect on the future value of the annuity.
B
The process of obtaining ________ values is referred to as compounding. A) present B) future C) current D) inflated
B
To determine how long it would take an investment to double at 10 percent, you could scan down the 10% column until you reach a factor of approximately 2.0 on the ________ table. A) Present Value of $1 B) Future Value of $1 C) Present Value of an annuity D) Future Value of an annuity
B
Which of the following decisions would involve the use of the present value of a $1 ordinary annuity table? A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years B) You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college 4 years hence D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday
B
As the time period until receipt increases, the present value of an amount at a fixed interest rate A) remains the same. B) increases. C) decreases. D) not enough information to make a decision.
C
At what annual rate would $200.00 grow to $497.60 in five years? A) 19 percent B) 18 percent C) 20 percent D) 22 percent
C
Byron is investigating a mutual fund that claims that $1,000 today will be worth $5,000 in five years. What is he solving for? A) Present value B) Future value C) Interest rate D) Payment
C
How many years will it take for $35 to grow to $53.87 if invested at 9% compounded annually? A) 6.0 B) 5.5 C) 5.0 D) 4.0
C
If Art wants $35,000 in 10 years and can earn a 12% interest rate, how much does he need to invest today? A) $10,538 B) $10,310 C) $11,270 D) $14,375
C
If Sandy has $7,000 today and invests it for five years at a 5% interest rate, how much will she have in five years? A) $8,750 B) $7,850 C) $8,932 D) $8,857
C
Jack is 35 years old and is planning to retire at age 65. Based on a variety of factors, he is planning a retirement of 20 years. Jack determines that he will need $20,000 during his 20 years of retirement. If he can invest at 9 percent, how much will he need to save beginning today to reach his goal? A) $11,428.57 B) $6,086.00 C) $1,339.47 D) $20,000.00
C
Refer to Table 3.1 above. How much will you have if you deposit $1,000 each year for the next 5 years in an account paying 7%? A) $1,403 B) $713 C) $5,751 D) $4,100
C
The accumulation of interest over time is called A) an annuity. B) an ordinary annuity. C) compounding. D) present value.
C
The concept of time value of money is based on A) inflation. B) taxes. C) interest earned. D) the Dow Jones Industrial Average.
C
The state lottery has just informed you that you have won $1 million to be paid out in the amount of $50,000 per year for the next 20 years. With a discount rate of 12%, what is the present value of your winnings? A) $221,950 B) $398,150 C) $373,450 D) $392,150
C
To compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years, you would need to use the A) Future Value of an annuity. B) Present Value of an annuity. C) both Future and Present Value of an annuity. D) both Present and Future Value of $1.
C
To save for her newborn son's college education, Kelli Peterson will invest $1,500 at the end of each year for the next 18 years. The interest rate she expects to earn on her investment is 9%. How much money will she have saved by the time her son turns 18?
C
Which of the following decisions would involve the use of the present value of $1? A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years B) You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday
C
Carol would like to have $500,000 saved in her retirement account in 30 years at an interest rate of 10 percent. How much should she contribute each year? A) $2,182.00 B) $2,000.00 C) $1,956.20 D) $3,039.70
D
Don wants to know how much he needs to save every year to amass $15,000 in five years at a 5% interest rate. What is he calculating using his financial calculator? A) Present value B) Future value C) Interest rate D) Payment
D
Everything else being equal, the ________ the interest rate, the ________ the final accumulation of money. A) higher; higher B) lower; lower C) higher; lower D) A and B are both correct.
D
Future and present values are dependent upon all of the following except A) time. B) the interest rate. C) a present or the future value interest factor, depending on the problem. D) annual income.
D
Jerry wants to know how much he needs to save every year to accumulate $15,000 in five years at a 10% interest rate. Which of the following tables should he use? A) Present value $1 B) Present value ordinary annuity C) Future value $1 D) Future value ordinary annuity
D
Present and future values concepts are applied to which of the following decisions except A) purchase of a home. B) calculation of withdrawals needed during retirement. C) calculation of savings for a large purchase. D) annual cash inflows.
D
Present and future values concepts are not applied to which of the following? A) Payments on a home B) Calculation of withdrawals needed during retirement C) Calculation of savings for a large purchase D) The balance of your checking account today
D
Table 3.1 4) Refer to Table 3.1 above. How much will you need to deposit today to enable you to withdraw $1,000 each year for the next 5 years if the money is invested at 7%? A) $1,403 B) $713 C) $5,751 D) $4,100
D
The concept of time value of money is important to financial decision making because A) it emphasizes earning a return of interest on the money you invested. B) it recognizes that $1 today has more value than $1 received a year from now. C) it can be applied to future cash flows in order to compare different streams of income. D) all of these.
D
The future value of your savings and debt affect all except which of the following? A) Financial planning tools B) Protecting your wealth C) Liquidity management D) Marketing management
D
The time value of money can be applied to all of the following except A) bond valuation. B) stock valuation. C) current market value of your home. D) investment valuation.
D
The time value of money refers to A) personal opportunity costs such as time lost on an activity. B) financial decisions that require borrowing funds from a bank. C) changes in interest rates due to changes in the supply and demand for money in the national economy. D) the difference in values of money as to when it is received.
D
To determine how much you would need to save each year to reach a specific goal, you would use A) Present Value of $1. B) Future Value of $1. C) Present Value of an annuity. D) Future Value of an annuity.
D
Which of the following decisions would involve the use of the future value of a $1 ordinary annuity table? A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years B) You win a lawsuit and are offered a lump sum payment today of $100,000 or $15,000 a year for 20 years C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday
D
Which of the following it not an annuity? A) Equal monthly payments to your investment account B) Lottery winnings of $100 per month for life C) Mortgage payments for a fixed rate loan D) Monthly utility bills
D
Yogi Berra Jr. has agreed to play for the New York Mets for $4 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars? A) Present value of a single amount B) Future value of an annuity C) Future value of a single amount D) Present value of an annuity
D
Compounding is the process of obtaining present values; discounting is the process of obtaining future values.
false
If the payment in an ordinary annuity changes over time, you cannot determine the future value of the payment stream.
false
In order to maximize the use of your money, you may want to delay payment of your bills slightly beyond their due dates.
false
In the tables for the future value of a single sum, the future value factors are all less than one.
false
It is always better to choose a lump sum rather than to choose periodic payments over time. This is why nearly all lottery winners choose the lump sum payment.
false
The process of obtaining present values is known as compounding.
false
The time period over which you save money has very little impact on its growth.
false
Time value of money computations relate to future value of lump sum cash flows only.
false
Time value of money is only applied to single dollar amounts.
false
To determine how much you must save each year to have enough for your daughter's college education, you would use the present value of $1 tables.
false
When money accumulates interest, it is said to be discounting.
false
Your utility bill, which varies each month, is an example of an annuity.
false
The concept that a dollar received today has more value than a dollar received in the future because of the interest it can earn is called the ________.
time value of money
An annuity due differs from an ordinary annuity in that the payments occur at the beginning of the period instead of at the end of the period.
true
An annuity is a stream of equal payments that are received or paid at equal intervals in time.
true
By paying bills electronically, you can delay payments and still ensure on-time payment.
true
It is better to spend your money today than wait a year because you will be able to buy more with it today than in one year.
true
The Present Value Interest Factor (PVIF) becomes lower as the number of years increases.
true
The cash flows of an annuity due occur at the beginning of each period.
true
The periodic interest rate, the number of periods in which your money will be invested, and the initial payment amount, must be known to estimate the future value using a financial calculator.
true
The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and then summing the resulting present values.
true
The process of obtaining present values is known as discounting
true
The same tables can be used to figure future values and present values of $1.
true
The time value of money can be used to estimate future savings with periodic drawing of funds.
true
There are two sets of present and future value tables: one set for lump sums and one set for annuities.
true
Time value concepts can be applied to lottery winnings. The winner can usually choose an annuity or a lump sum.
true
Time value of money calculations, such as present and future value amounts, can be used for many day-to-day decisions.
true
To determine how much money you would need to save to withdraw $10,000 a year for five years, you would use the present value of an annuity tables
true
When money earns interest on interest, it is said to be compounding
true
You utilize present and future value concepts in investment, purchase, and retirement decisions.
true