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Commerce and BusinessbackBusinessbackCorporate Finance/Financial ManagementbackFundamentals of Corporate FinancebackPractice Set 2491back

Introduction To Valuation: The Time Value Of Money

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Question 1
Free
Multiple Choice

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?

Choose correct answer/s
A

future value

B

present value

C

principal amounts

D

discounted value

E

invested principal

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Question 2
Free
Multiple Choice

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?

Choose correct answer/s
A

simplifying

B

compounding

C

aggregation

D

accumulation

E

discounting

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Question 3
Free
Multiple Choice

Steve invested $100 two years ago at 10 percent interest.The first year,he earned $10 interest on his $100 investment.He reinvested the $10.The second year,he earned $11 interest on his $110 investment.The extra $1 he earned in interest the second year is referred to as:

Choose correct answer/s
A

free interest.

B

bonus income.

C

simple interest.

D

interest on interest.

E

present value interest.

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Question 4
Free
Multiple Choice

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

Choose correct answer/s
A

free interest.

B

dual interest.

C

simple interest.

D

interest on interest.

E

compound interest.

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Question 5
Free
Multiple Choice

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.Which type of interest is Sara earning?

Choose correct answer/s
A

free interest

B

complex interest

C

simple interest

D

interest on interest

E

compound interest

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Question 6
Multiple Choice

Shelley won a lottery and will receive $1,000 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?

Choose correct answer/s
A
single amount
B
future value
C
present value
D
simple amount
E
compounded value
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Question 7
Multiple Choice

Terry is calculating the present value of a bonus he will receive next year.The process he is using is called:

Choose correct answer/s
A
growth analysis.
B
discounting.
C
accumulating.
D
compounding.
E
reducing.
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Question 8
Multiple Choice

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?

Choose correct answer/s
A
current yield
B
effective rate
C
compound rate
D
simple rate
E
discount rate
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Question 9
Multiple Choice

The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?

Choose correct answer/s
A
compound interest valuation
B
interest on interest computation
C
discounted cash flow valuation
D
present value interest factoring
E
complex factoring
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Question 10
Multiple Choice

Andy deposited $3,000 this morning into an account that pays 5 percent interest,compounded annually.Barb 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 interest earnings into her account.Given this,which one of the following statements is true?

Choose correct answer/s
A
Barb will earn more interest the first year than Andy will.
B
Andy will earn more interest in year three than Barb will.
C
Barb will earn interest on interest.
D
After five years, Andy and Barb will both have earned the same amount of interest.
E
Andy will earn compound interest.
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Question 11
Multiple Choice

Sue and Neal are twins.Sue invests $5,000 at 7 percent when she is 25 years old.Neal invests $5,000 at 7 percent when he is 30 years old.Both investments compound interest annually.Both Sue and Neal retire at age 60.Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

Choose correct answer/s
A
Sue will have less money when she retires than Neal.
B
Neal will earn more interest on interest than Sue.
C
Neal will earn more compound interest than Sue.
D
If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings.
E
Sue will have more money than Neal as long as they retire at the same time.
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Question 12
Multiple Choice

Samantha opened a savings account this morning.Her money will earn 5 percent interest,compounded annually.After five years,her savings account will be worth $5,600.Assume she will not make any withdrawals.Given this,which one of the following statements is true?

Choose correct answer/s
A
Samantha deposited more than $5,600 this morning.
B
The present value of Samantha's account is $5,600.
C
Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest.
D
Samantha would have had to deposit more money to have $5,600 in five years if she could have earned 6 percent interest.
E
Samantha will earn an equal amount of interest every year for the next five years.
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Question 13
Multiple Choice

This afternoon,you deposited $1,000 into a retirement savings account.The account will compound interest at 6 percent annually.You will not withdraw any principal or interest until you retire in forty years.Which one of the following statements is correct?

Choose correct answer/s
A
The interest you earn six years from now will equal the interest you earn ten years from now.
B
The interest amount you earn will double in value every year.
C
The total amount of interest you will earn will equal $1,000 × .06 × 40.
D
The present value of this investment is equal to $1,000.
E
The future value of this amount is equal to $1,000 × (1 + 40).06.
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Question 14
Multiple Choice

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?

Choose correct answer/s
A
remains constant
B
increases
C
decreases
D
becomes negative
E
cannot be determined from the information provided
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Question 15
Multiple Choice

Luis is going to receive $20,000 six years from now.Soo Lee is going to receive $20,000 nine years from now.Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

Choose correct answer/s
A
The present values of Luis and Soo Lee's monies are equal.
B
In future dollars, Soo Lee's money is worth more than Luis' money.
C
In today's dollars, Luis' money is worth more than Soo Lee's.
D
Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money.
E
Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.
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Question 16
Multiple Choice

Which one of the following variables is the exponent in the present value formula?

Choose correct answer/s
A
present value.
B
future value.
C
interest rate.
D
time.
E
There is no exponent in the present value formula.
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Question 17
Multiple Choice

You want to have $1 million in your savings account when you retire.You plan on investing a single lump sum today to fund this goal.You are planning on investing in an account which will pay 7.5 percent annual interest.Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire?
I)Invest in a different account paying a higher rate of interest.
II)Invest in a different account paying a lower rate of interest.
III)Retire later.
IV)Retire sooner.

Choose correct answer/s
A
I only
B
II only
C
I and III only
D
I and IV only
E
II and III only
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Question 18
Multiple Choice

Which one of the following will produce the highest present value interest factor?

Choose correct answer/s
A
6 percent interest for five years
B
6 percent interest for eight years
C
6 percent interest for ten years
D
8 percent interest for five years
E
8 percent interest for ten years
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Question 19
Multiple Choice

What is the relationship between present value and future value interest factors?

Choose correct answer/s
A
The present value and future value factors are equal to each other.
B
The present value factor is the exponent of the future value factor.
C
The future value factor is the exponent of the present value factor.
D
The factors are reciprocals of each other.
E
There is no relationship between these two factors.
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Question 20
Multiple Choice

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?

Choose correct answer/s
A
Martin earned simple interest rather than compound interest.
B
Martin earned a lower interest rate than he expected.
C
Martin did not earn any interest on interest as he expected.
D
Martin ignored the Rule of 72 which caused his account to decrease in value.
E
The future value interest factor turned out to be higher than Martin expected.
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