Time Value of Money Quiz 4

Which of the following is the best description of the relationship between present and future values?

FV - PV = (interest earned)

The effective annual rate of interest is always equal to the nominal interest rate.

False

The __________ is the true interest rate earned over a one-year period. It is the actual change expected over the one-year period.

effective annual interest rate

The future value of an annuity due will:

exceed the future value of an ordinary annuity (assuming all else equal).

The price at which investors are indifferent between buying or selling a security is called the:

fair (equilibrium) value.

You plan to borrow $229,000 now and repay it in 8 equal annual installments (payments will be made at the end of each year). If the annual interest rate is 14%, how much will your annual payments be?

$49,365.54

You are valuing an investment that will pay you $25,000 per year for the first 5 years, $35,000 per year for the next 10 years, $74,000 per year the next 16 years, and $66,000 per year for the following 10 years (all payments are at the end of each year). If the appropriate annual discount rate is 6.00%, what is the value of the investment to you today?

$689,640.39

You are offered an investment with a quoted annual interest rate of 10% with weekly compounding of interest. What is your effective annual interest rate?

10.51%

You are told that if you invest $13,900 per year for 14 years (all payments made at the beginning of each year) you will have accumulated $511,000 at the end of the period. What annual rate of return is the investment offering?

12.16%

Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value.

True

The annual nominal (quoted) rate of interest is the stated annual rate of interest and will equal the effective annual rate of interest only if interest is compounded annually.

True

The effective annual rate of interest is the actual percentage return to be received over a one year period. It is the annual rate that would produce the same ending (future) value if annual compounding of interest had been used.

True

The future value of a single sum will increase if the interest rate increases.

True

The future value of an annuity due will exceed the future value of an ordinary annuity (assuming all else equal).

True

The present value (future value) of an uneven cash flow stream is just the sum of the present values (future values) of each of the individual cash flows.

True

The present value (future value) of an uneven cash flow stream is the sum of the present values (future values) of each of the individual cash flows.

True

The present value of a set of uneven cash flows decreases as the interest rate (discount rate) increases.

True

Disregarding risk, if money has time value, the present value of a given sum:

will be less than its future value

The rate of return on the best available investment of equal risk is called:

the opportunity cost rate

The present value of a perpetuity cannot be found since it is an annuity that goes on forever. (THE ANSWER TO THIS QUESTION IS "FALSE." The present value of each future cash flow gets smaller and smaller as the time to receipt increases. In math terms, the present value of each individual cash flow approaches zero as the number of cash flows approaches infinity. You calculate the present value of the set of cash flows by taking the limit of the series.)

False

The present value of a set of uneven cash flows increases as the interest rate (discount rate) increases.

False

The present value of a single sum to be received in the future increases as the interest rate (discount rate) increases.

False

Which of the following investment opportunities would yield the highest return?

Quoted annual rate of 6% with monthly compounding.

Frank Lewis has a 30-year, $100,000 mortgage with a nominal interest rate of 10 percent and monthly compounding. Which of the following statements regarding his mortgage is most correct?

The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan.

Comparisons of investment alternatives should be made based on the effective annual rate of interest since it represents "true" the rate of return expected each year.

True

The present value of an annuity due will:

exceed the present value of an ordinary annuity (assuming all else equal).

The effective annual rate of interest is:

greater than or equal to the nominal interest rate.

A loan that is repaid in equal payments over its life with each payment including a portion of interest and principal is:

an amortized loan

If you wish to accumulate $205,000 in 11 years, how much must you deposit today in an account that pays a quoted annual interest rate of 15% with daily compounding of interest?

$39,383.58

You plan to buy a car that has a total "drive-out" cost of $26,500. You will make a down payment of $2,120. The remainder of the car's cost will be financed over a period of 6 years. You will repay the loan by making equal monthly payments. Your quoted annual interest rate is 12% with monthly compounding of interest. (The first payment will be due one month after the purchase date.) What will your monthly payment be?

$476.63

At what annual interest rate must $232,000 be invested so that it will grow to be $452,000 in 14 years?

4.88%

All comparisons of investment alternatives should be made based on the nominal interest rates.

False

The effective annual rate of interest is always equal to the nominal interest rate. Group of answer choices

False

The future value of an ordinary annuity will exceed the future value of an annuity due (assuming all else equal).

False

The present value of a perpetuity cannot be found since it is an annuity that goes on forever.

False

The present value of a sum due in the future increases as the years to receipt increases.

False

The present value of an annuity increases as the interest rate (discount rate) increases.

False

The present value of an ordinary annuity will exceed the present value of an annuity due (assuming all else equal).

False

The present value of a single sum to be received in the future decreases as the interest rate (discount rate) increases.

True

The present value of a sum due in the future diminishes as the years to receipt increases.

True

The present value of an annuity decreases as the interest rate (discount rate) increases.

True

The present value of an annuity due will exceed the present value of an ordinary annuity (assuming all else equal).

True

A table showing precisely how a loan will be repaid which gives the required payment each due date and a breakdown of interest versus principal is:

an amortization schedule

An annuity whose payments occur at the end of each period is called:

an ordinary annuity.

The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied (interest-on-interest) is called:

compounding

The present value of a single sum to be received in the future:

decreases as the interest rate (discount rate) increases

The present value of a sum due in the future:

decreases as the years to receipt increases

The process of finding the present value of a cash flow or a series of cash flows is called:

discounting

Comparisons of investment alternatives with different compounding periods should be made based on the:

effective annual interest rate.

The future value of a single sum will:

increase if the interest rate increases.