Chapter 5 Time Value of Money-The Basics: Financial Management: Principles and Applications, 11e (Titman)

Financial Management: Principles and Applications, 11e (Titman)
Chapter 5 Time Value of Money-The Basics

5.1 Using Timelines to Visualize Cash Flows
1) Financial managers use the time value of money to:
A) mae !usiness "ecisions.
#) com$are cash flows of "ifferent $ro%ects.
C) "etermine the $rice of common stoc.
&) !oth A an" #.
') all of the a!ove.
Answer: &
&iff: 1
To$ic: 5.1 Using Timelines to Visualize Cash Flows
(eywor"s: time value of money
)rinci$les: )rinci$le 1: *oney +as a Time Value
,) The time value of money is create" !y:
A) the e-istence of $rofita!le investment alternatives an" interest rates.
#) the fact that the $assing of time increases the value of money.
C) the elimination of the o$$ortunity cost as a consi"eration.
&) the fact that the value of saving money for tomorrow coul" !e more or less than s$en"ing it
to"ay.
Answer: A
&iff: ,
.) /hich of the following statements is FA01'2
A) 3uarterly com$oun"ing has a higher annual $ercentage yiel" than monthly com$oun"ing.
#) 4n monthly com$oun"ing loans5 the annual $ercentage yiel" will !e less than the nominal or
6uote" rate of interest.
C) Com$oun"ing essentially means earning interest on interest on an initial !alance.
&) )er$etuities $ay an e6ual $ayment forever.
Answer: A
&iff: ,
(eywor"s: com$oun" interest
1
Co$yright 7 ,811 )earson '"ucation5 9nc.
:) An investment has a nominal interest rate of 1,; annually5 !ut interest on the investment is
com$oun"e" monthly. Therefore5 the annual $ercentage yiel" on the investment is:
A) 1,;.
#) 1,.<=;.
C) 1..=>;.
&) 1,..<;.
Answer: #
&iff: ,
5) An investment has a nominal interest rate of 1,; annually5 !ut interest on the investment is
com$oun"e" semiannually. Therefore5 the annual $ercentage yiel" on the investment is:
A) 1,;.
#) 1,.<=;.
C) 1..=>;.
&) 1,..<;.
Answer: &
&iff: ,
<) /hich of the following $rovi"es the greatest annual interest2
A) 18;5 com$oun"e" annually
#) 18;5 com$oun"e" semiannually
C) 18;5 com$oun"e" 6uarterly
&) 18;5 com$oun"e" monthly
') 18;5 com$oun"e" "aily
Answer: '
&iff: 1
?) A !an $ays a 6uote" annual @nominal) interest rate of :.,5;5 com$oun"e" "aily @.<5A"ay
year). /hat is the annual $ercentage yiel" @A)B)2
A) :.,5;
#) 5.5<;
C) :.?5;
&) <.,8;
') :..:;
Answer: '
&iff: ,
,
=) Corthwest #an $ays a 6uote" annual @nominal) interest rate of :.?5;. +owever5 it $ays
interest @com$oun"s) "aily using a .<5A"ay year. /hat is the effective annual rate of return
@A)B)2
A) :.?5;
#) 5.8,;
C) ..<1;
&) :.=<;
Answer: &
&iff: ,
>) 9f you are an investor5 which of the following woul" you $refer2
A) 'arnings on fun"s investe" woul" com$oun" annually.
#) 'arnings on fun"s investe" woul" com$oun" "aily.
C) 'arnings on fun"s investe" woul" com$oun" monthly.
&) 'arnings on fun"s investe" woul" com$oun" 6uarterly.
Answer: #
&iff: 1
18) Bou have D185888 to invest. Bou "o not want to tae any ris5 so you will $ut the fun"s in a
savings account at the local !an. 4f the following choices5 which one will $ro"uce the largest
sum at the en" of ,, years2
A) An account that com$oun"s interest annually.
#) An account that com$oun"s interest "aily.
C) An account that com$oun"s interest 6uarterly.
&) An account that com$oun"s interest monthly.
Answer: #
&iff: 1
11) /hich of the following statements is true a!out the time value of money2
A) The future value of a single sum will !e greater if fun"s earn 5; instea" of 18;.
#) The future value of a single sum will !e unaffecte" !y the rate of return at which fun"s grow.
C) The future value of a single sum will !e greater if fun"s earn 1,; instea" of <;.
&) The future value of a single sum will !e unaffecte" !y the length of time fun"s are investe".
Answer: C
&iff: 1
.
1,) /hich of the following statements is true a!out the time value of money2
A) The $resent value of a future amount will !e greater if fun"s earn 5; instea" of 18;.
#) The $resent value of a single sum will !e unaffecte" !y the rate of return at which fun"s grow.
C) The $resent value of a future amount will !e greater if fun"s earn 1,; instea" of <;.
&) The $resent value of a future amount will !e unaffecte" !y how far in the future fun"s woul"
!e receive".
Answer: A
&iff: ,
1.) 9f you are a !orrower5 which of the choices woul" lower your A)E2
A) Ee$ay your loan in monthly installments
#) Ee$ay your loan in 6uarterly installments
C) Ee$ay your loan in semiannual installments
&) Ee$ay your loan in annual installments
') Bou woul" !e in"ifferent to how fre6uent your loan $ayments are.
Answer: &
&iff: ,
1:) As the num!er of com$oun"ing $erio"s increases5 the FFFFFFFF increases.
A) 6uote"
#) annual $ercentage yiel"
C) effective annual rate
&) !oth # an" C
Answer: &
&iff: ,
15) /hich of the following statements is FA01'2
A) The effective annual rate @A)E) of a loan is always the same as the 6uote" rate.
#) The $ayments of an or"inary annuity are ma"e or receive" at the en" of each $erio".
C) The effective annual rate @A)E) of a loan is always e6ual to or greater than the 6uote" rate.
&) A $er$etuity is a series of e6ual $ayments5 which are ma"e for an infinite $erio" of time.
Answer: A
&iff: ,
:
1<) /hich of the following $rovi"es the lowest return to an investor2
A) 1,;5 com$oun"e" annually
#) 1,;5 com$oun"e" semiannually
C) 1,;5 com$oun"e" 6uarterly
&) 1,;5 com$oun"e" monthly
') 1,;5 com$oun"e" "aily
Answer: A
&iff: 1
1?) The "iscount rate for the time value of money shoul" reflect "elaying consum$tion.
Answer: TEU'
&iff: ,
1=) /hy is the conce$t of the time value of money so im$ortant to financial managers2
Answer: The conce$t of the time value of money is im$ortant to financial managers !ecause it is
this conce$t that "rives managerial "ecision maing. *anagement "ecisions are "riven !y cash
flow an" these cash flows must !e a"%uste" for the time value of money. This woul" !e most
closely reflecte" in the $ro%ect evaluation. 9n a""ition5 the value of a firmGs common stoc is
"riven !y "iscounte" cash flows. *anagement $ays close attention as to how their "ecisions
affect the value of ownershi$ in their firm.
&iff: ,
(eywor"s: cash flow
5., Com$oun"ing an" Future Value
1) /hich of the following is the formula for com$oun" value2
A) FV
n
H )@1 I i)
n

#) FV
n
H @1 I i)J)
C) FV
n
H )J@1 I i)
n

&) FV
n
H )@1 I i)
An

Answer: A
&iff: 1
To$ic: 5., Com$oun"ing an" Future Value
5
,) At =; com$oun"e" annually5 how long will it tae D?58 to "ou!le2
A) <.5 years
#) := months
C) > years
&) 1, years
Answer: C
&iff: ,
.) At what rate must D:88 !e com$oun"e" annually for it to grow to D?1<.:8 in 18 years2
A) <;
#) 5;
C) ?;
&) =;
Answer: A
&iff: ,
:) An increase in future value can !e cause" !y an increase in the:
A) annual interest rate.
#) num!er of com$oun"ing $erio"s.
C) original amount investe".
&) !oth A an" #.
') all of the a!ove.
Answer: &
&iff: ,
5) A frien" $lans to !uy a !igAscreen TVJentertainment system an" can affor" to set asi"e D15.,8
towar" the $urchase to"ay. 9f your frien" can earn 5.8;5 com$oun"e" yearly5 how much can
your frien" s$en" in four years on the $urchase2 Eoun" off to the nearest D1.
A) D15:::
#) D15<8:
C) D15?<:
&) D15,=.
Answer: #
&iff: ,
<
<) Bou %ust $urchase" a $arcel of lan" for D185888. 9f you e-$ect a 1,; annual rate of return on
your investment5 how much will you sell the lan" for in 18 years2
A) D,55888
#) D.158<8
C) D.=5?,8
&) D.:5.18
Answer: #
&iff: ,
?) 9f you $lace D58 in a savings account with an interest rate of ?; com$oun"e" weely5 what
will the investment !e worth at the en" of five years @roun" to the nearest "ollar)2
A) D?,
#) D?8
C) D?1
&) D5?
Answer: C
&iff: ,
=) 9f you $ut D?88 in a savings account with a 18; nominal rate of interest com$oun"e"
monthly5 what will the investment !e worth in ,1 months @roun" to the nearest "ollar)2
A) D=,?
#) D=..
C) D=,=
&) D151?<
Answer: #
&iff: ,
>) 9f you $ut D<88 in a savings account that yiel"s an =; rate of interest com$oun"e" weely5
what will the investment !e worth in .? wees @roun" to the nearest "ollar)2
A) D<:=
#) D<.5
C) D<.:
&) D<:5
Answer: #
&iff: ,
?
18) /hich of the following formulas re$resents the future value of D588 investe" at =;
com$oun"e" 6uarterly for five years2
A) 588@1 I .8=)
5

#) 588@1 I .8=)
,8

C) 588@1 I .8,)
5

&) 588@1 I .8,)
,8

Answer: &
&iff: ,
11) /hat is the value of D?58 investe" at ?.5; com$oun"e" 6uarterly for :.5 years @roun" to the
nearest D1)2
A) D158:=
#) D15818
C) D158.=
&) D=8=
Answer: A
&iff: ,
1,) 1horty Kones wants to !uy a oneAway !us ticet to *uleA1nort5 )ennsylvania. The ticet
costs D1:,5 !ut *r. Kones has only D=8. 9f 1horty $uts the money in an account that $ays >;
interest com$oun"e" monthly5 how many months must 1horty wait until he has D1:, @roun" to
the nearest month)2
A) ?. months
#) ?5 months
C) ?? months
&) ?> months
Answer: C
&iff: ,
=
1.) 9f you want to have D185888 in 18 years5 which of the following formulas re$resents how
much money you must $ut in a savings account to"ay2 Assume that the savings account $ays <;
an" it is com$oun"e" monthly.
A) 185888J@1 I .85)
18

#) 185888J@1 I .885)
1,8

C) 185888J@1 I .8<)
18

&) 185888J@1 I .88<)
1,8

Answer: #
&iff: ,
(eywor"s: future value
1:) &awn 1wift "iscovere" that ,8 years ago5 the average tuition for one year at an 9vy 0eague
school was D:5588. To"ay5 the average cost is D,>5888. /hat is the growth rate in tuition cost
over this ,8Ayear $erio"2 Eoun" off to the nearest 8.1;.
A) 15.5;
#) :.,;
C) >.=;
&) 18.<;
Answer: C
&iff: ,
15) 9f you want to have D15?88 in seven years5 how much money must you $ut in a savings
account to"ay2 Assume that the savings account $ays <; an" it is com$oun"e" 6uarterly @roun"
to the nearest D18).
A) D151,8
#) D151.8
C) D15118
&) D151:8
Answer: A
&iff: 1
>
1<) 9f you want to have D>8 in four years5 how much money must you $ut in a savings account
to"ay2 Assume that the savings account $ays =.5; an" it is com$oun"e" monthly @roun" to the
nearest D1).
A) D<:
#) D<5
C) D<<
&) D?1
Answer: A
&iff: 1
1?) +ow much money must !e $ut into a !an account yiel"ing 5.5; @com$oun"e" annually) in
or"er to have D,58 at the en" of five years @roun" to nearest D1)2
A) D,.?
#) D1>1
C) D1=?
&) D1?>
Answer: #
&iff: 1
1=) 9f you want to have D15,88 in ,? months5 how much money must you $ut in a savings
account to"ay2 Assume that the savings account $ays 1:; an" it is com$oun"e" monthly @roun"
to the nearest D18).
A) D>18
#) D=>8
C) D==8
&) D=<8
Answer: C
&iff: ,
18
Use the following information to answer the following question(s).
A *a-5 9nc. "e$osite" D,5888 in a !an account that $ays 1,; interest annually.
1>) /hat will the "ollar amount !e in four years5 assuming that interest is $ai" annually2
A) D,5=88
#) D.5188
C) D.5111
&) D.51:=
Answer: &
&iff: ,
,8) /hat will the "ollar amount !e if the interest is com$oun"e" semiannually for those four
years2
A) D.5188
#) D.51==
C) D.5,:8
&) D.5,>8
Answer: #
&iff: ,
,1) +ow many $erio"s woul" it tae for the "e$osit to grow to D<5?>= if the interest is
com$oun"e" semiannually2
A) 1?
#) 1>
C) ,1
&) ,5
Answer: C
&iff: ,
11
,,) Bou !ought a $ainting 18 years ago as an investment. Bou originally $ai" D=55888 for it. 9f
you sol" it for D:=:58585 what was your annual return on investment2
A) :?;
#) :.?;
C) 1>;
&) 1,.=;
Answer: C
&iff: ,
(eywor"s: return on investment
,.) Bou "e$osit D55888 to"ay in an account "rawing 1,; com$oun"e" 6uarterly. +ow much will
you have in the account at the en" of , 1J, years2
A) D?5:81
#) D555,.
C) D?51,=
&) D<5?,8
Answer: &
&iff: 1
,:) *i""letown5 U1A currently has a $o$ulation of 1.5 million $eo$le. 9t has !een one of the
fastest growing cities in the nation5 growing !y an average of :; $er year for the last five years.
9f this cityGs $o$ulation continues to grow at :; $er year5 what will the $o$ulation !e 18 years
from now2
A) 155<85888
#) ,5,,85.<<
C) ,51885888
&) 15=,:5>?>
Answer: #
&iff: ,
1,
,5) +ow many years will it tae for an initial investment of D,88 to grow to D5:: if it is investe"
to"ay at =; com$oun"e" annually2
A) = years
#) 18 years
C) 11 years
&) 1. years
Answer: &
&iff: 1
,<) The future value of D,88 "e$osite" to"ay in an account for four years $aying semiannual
interest when the annual interest rate is 1,; is:
A) D.8>.:8.
#) D.1=.=8.
C) D.,8.,8.
&) D,><.88.
Answer: #
&iff: 1
,?) The future value of a single sum:
A) increases as the com$oun" rate "ecreases.
#) "ecreases as the com$oun" rate increases.
C) increases as the num!er of com$oun" $erio"s "ecreases.
&) increases as the com$oun" rate increases.
') none of the a!ove.
Answer: &
&iff: ,
,=) The future value of D588 "e$osite" into an account $aying =; annually for three years is:
A) D588.
#) D<.8.
C) D?88.
&) D<,8.
Answer: #
&iff: ,
1.
,>) 9f you were to "e$osit D,5888 in an 9EA that woul" earn interest of ?.5;5 com$oun"e"
6uarterly for 1= years5 how much woul" you have accumulate"2
A) D>5<,1
#) D.<5888
C) D,,5:1>
&) D1,5.<.
') D?5<1>
Answer: '
&iff: ,
.8) /hen Leorge /ashington was $resi"ent of the Unite" 1tates in 1?>?5 his salary was
D,55888. 9f you assume an annual rate of inflation of ,.5;5 how much woul" his salary have
!een in 1>>?2
A) D158,55888
#) D>5:5?1>
C) D,55,555:=
&) D:58=55>,8
') D.5:=>58>?
Answer: '
&iff: ,
.1) 9f you $urchase" a share of *ico.com stoc on *arch 15 1>>. for D:5 an" you sol" the stoc
at D1<= on Fe!ruary ,=5 1>>=5 what was your annual rate of return on the stoc2
A) =.;
#) ?5;
C) ,8;
&) .8;
') 58;
Answer: &
&iff: ,
(eywor"s: return on investment
1:
.,) At =;5 com$oun"e" annually5 how long will it tae D?58 to "ou!le2
A) > years
#) = years
C) 1, years
&) : years
') < years
Answer: A
&iff: 1
..) The future value of a lum$ sum "e$osite" to"ay increases as the num!er of years of
com$oun"ing at a $ositive rate of interest "eclines.
Answer: FA01'
&iff: 1
.:) 9f we invest money for 18 years at =; interest5 com$oun"e" semiAannually5 we are really
investing money for ,8 si-Amonth $erio"s5 "uring which we receive :; interest each $erio".
Answer: TEU'
&iff: 1
.5) &etermining the s$ecifie" amount of money that you will receive at the maturity of an
investment is an e-am$le of a future value e6uation.
Answer: TEU'
&iff: 1
.<) The same !asic formula is use" for com$uting !oth the com$utation of future value an" of
$resent value.
Answer: TEU'
&iff: ,
15
.?) The more fre6uent the com$oun"ing $erio"s in a year5 the higher the future value.
Answer: TEU'
&iff: ,
.=) #riefly "iscuss how nonAannual com$oun"ing @more than one com$oun"ing $erio" $er year)
is $refera!le to annual com$oun"ing if you are an investor.
Answer: ConAannual com$oun"ing is $refera!le to annual com$oun"ing !ecause with nonA
annual com$oun"ing5 interest is com$oun"e" more fre6uently within a year $erio". This means
that more interest on interest woul" !e generate" on a given investment.
&iff: 1
.>) 9f you "e$osit D15888 each year in a savings account earning :;5 com$oun"e" annually5 how
much will you have in 18 years2
Answer: FVM18N H D15888@1,.88<) H D1,588<
&iff: 1
:8) Bour !an has agree" to loan you D.5888 if you agree to $ay a lum$ sum of D55??5 in five
years. /hat annual rate of interest will you !e $aying2
Answer: FV9FM2 ;5 5 yrN D.5888 H D55??5
FV9FM2 ;5 5 yrN H D1.>,5
i H 1:;
&iff: ,
:1) 'arnings $er share for OBP5 9nc. grew constantly from D?.>> in 1>?: to D1,.<= in 1>=8.
/hat was the com$oun" annual growth rate in earningsA$erAshare over the $erio"2
Answer: D1,.<= H D?.>> FV9FM2 ;5 < yrN
1.5=? H FV9FM2 ;5 < yrN
g H =;
&iff: ,
1<
:,) 9f you invest D:58 to"ay an" it increases to D<51=5 at the en" of ,8 years5 what rate of return
have you earne"2
Answer: D<51=5 H D:58 FV9FM2 ;5 ,8 yrN
1..?:. H FV9FM2 ;5 ,8 yrN
i H 1:;
&iff: 1
5.. &iscounting an" )resent Value
1) The $resent value of a single future sum:
A) increases as the num!er of "iscount $erio"s increases.
#) is generally larger than the future sum.
C) "e$en"s u$on the num!er of "iscount $erio"s.
&) increases as the "iscount rate increases.
Answer: C
&iff: ,
To$ic: 5.. &iscounting an" )resent Value
(eywor"s: $resent value
,) Assuming two investments have e6ual lives5 a high "iscount rate ten"s to favor:
A) the investment with large cash flow early.
#) the investment with large cash flow late.
C) the investment with even cash flow.
&) neither investment since they have e6ual lives.
Answer: A
&iff: ,
.) &iscounting is the o$$osite of:
A) com$oun"ing.
#) future value.
C) o$$ortunity costs.
&) !oth A an" C.
Answer: &
&iff: 1
1?
:) An increase in FFFFFFFF will "ecrease $resent value.
A) the "iscount rate $er $erio"
#) the original amount investe"
C) the num!er of $erio"s
&) !oth A an" C
') all of the a!ove
Answer: &
&iff: ,
5) /hat is the $resent value of D15888 to !e receive" 18 years from to"ay2 Assume that the
investment $ays =.5; an" it is com$oun"e" monthly @roun" to the nearest D1).
A) D=>.
#) D.518<
C) D:,>
&) D=..
Answer: C
&iff: 1
<) /hat is the $resent value of D1,5588 to !e receive" 18 years from to"ay2 Assume a "iscount
rate of =; com$oun"e" annually an" roun" to the nearest D18.
A) D55?>8
#) D1155?:
C) D>5,18
&) D1?5818
Answer: A
&iff: ,
?) Three years from now5 #ar!ara /aters will $urchase a la$to$ com$uter that will cost D,5,58.
Assume that #ar!ara can earn <.,5; @com$oun"e" monthly) on her money. +ow much shoul"
she set asi"e to"ay for the $urchase2 Eoun" off to the nearest D1.
A) D15,58
#) D>88
C) D15=<<
&) D.5??5
Answer: C
&iff: ,
1=
=) 9f you want to have D=?5 in ., months5 how much money must you $ut in a savings account
to"ay2 Assume that the savings account $ays 1<; an" it is com$oun"e" monthly @roun" to the
nearest D18).
A) D<.8
#) D5?8
C) D<58
&) D<<8
Answer: #
&iff: ,
>) Bou are consi"ering two investments: A an" #. #oth investments $rovi"e a cash flow of D188
$er year for n years. +owever5 investment A receives the cash flow at the !eginning of each year5
while investment # receives the cash at the en" of each year. 9f the $resent value of cash flows
from investment A is )5 an" the "iscount rate is c5 what is the $resent value of the cash flows
from investment #2
A) )J@1 I c)
#) )@1 I c)
C) )J@1 I c)
n

&) )@1 I c)
n

Answer: A
&iff: ,
18) All else constant5 the future value of an investment will increase if:
A) the investment involves more ris.
#) the investment is com$oun"e" for fewer years.
C) the investment is com$oun"e" at a higher interest rate.
&) !oth # Q C.
Answer: C
&iff: ,
1>
11) To com$oun" D188 6uarterly for ,8 years at =;5 we must use:
A) :8 $erio"s at :;.
#) five $erio"s at 1,;.
C) 18 $erio"s at :;.
&) =8 $erio"s at ,;.
Answer: &
&iff: ,
1,) California 9nvestors recently a"vertise" the following claim: 9nvest your money with us at
,1;5 com$oun"e" annually5 an" we guarantee to "ou!le your money sooner than you imagine.
9gnoring ta-es5 how long woul" it tae to "ou!le your money at a nominal rate of ,1;5
com$oun"e" annually2 Eoun" off to the nearest year.
A) A$$ro-imately two years
#) A$$ro-imately four years
C) A$$ro-imately si- years
&) A$$ro-imately eight years
Answer: #
&iff: ,
1.) +ow much money "o 9 nee" to $lace into a !an account which $ays a <; rate in or"er to
have D588 at the en" of seven years2
A) D..,.5.
#) D.=1.=,
C) D:,..??
&) D:=>.5,
Answer: A
&iff: ,
,8
1:) #o!!yGs gran"mother "e$osite" D188 in a savings account for him when he was !orn. The
money has !een earning an annual rate of 1,; interest5 com$oun"e" 6uarterly for the last ,5
years. +e is getting marrie" an" woul" lie to tae his new !ri"e on a fa!ulous honeymoon. +ow
much "oes he have in this account to use2
A) D:51<5
#) D15?88
C) D55851
&) D15>,,
Answer: &
&iff: ,
15) /hat is the $resent value of the following uneven stream of cash flows2 Assume a <;
"iscount rate an" en"AofA$erio" $ayments. Eoun" to the nearest whole "ollar.
Bear Cash Flow
1 D.5888
, D:5888
. D55888
A) )V H D.5888JM1.8<N
1
I D:5888JM1.8<N
,
I D55888JM1.8<N
.

#) )V H D.5888M1.8<N
1
I D:5888M1.8<N
,
I D55888M1.8<N
.

C) )V H D.5888JM1.8<N
8
I D:5888JM1.8<N
1
I D55888JM1.8<N
,

&) )V H D.5888M1.8<N
A8
I D:5888M1.8<N
A1
I D55888M1.8<N
A,

Answer: A
&iff: ,
1<) The $resent value of D:88 to !e receive" at the en" of 18 years5 if the "iscount rate is 5;5 is:
A) D:88.88.
#) D,:=.:8.
C) D.1..<8.
&) D,:5.<8.
Answer: &
&iff: 1
,1
1?) The $resent value of D15888 to !e receive" at the en" of five years5 if the "iscount rate is
18;5 is:
A) D<,1.
#) D?=:.
C) D<1:.
&) D588.
Answer: A
&iff: 1
1=) /hat is the $resent value of an investment that $ays D:88 at the en" of three years an" D?88
at the en" of 18 years if the "iscount rate is 5;2
A) D15188.88
#) D<?5..8
C) D??5.:8
&) D:,:.<8
Answer: C
&iff: ,
1>) The $resent value of a single sum:
A) increases as the "iscount rate "ecreases.
#) "ecreases as the "iscount rate "ecreases.
C) increases as the num!er of "iscount $erio"s increases.
&) increases as the "iscount rate increases.
') none of the a!ove.
Answer: A
&iff: ,
,8) As the "iscount rate increases5 the $resent value of future cash flows increases.
Answer: FA01'
&iff: ,
,,
,1) As the com$oun" interest rate increases5 the $resent value of future cash flows "ecreases.
Answer: TEU'
&iff: 1
,,) The $resent value of a future sum of money increases as the num!er of years !efore the
$ayment is receive" increases.
Answer: FA01'
&iff: 1
,.) The $resent value of the future sum of money is inversely relate" to !oth the num!er of years
until $ayment is receive" an" the o$$ortunity rate.
Answer: TEU'
&iff: ,
5.: *aing 9nterest Eates Com$ara!le
1) /hich of the following $rovi"es the greatest annual interest2
A) 18; com$oun"e" annually
#) >.5; com$oun"e" monthly
C) >; com$oun"e" 6uarterly
&) =.5; com$oun"e" "aily
Answer: A
&iff: ,
To$ic: 5.: *aing 9nterest Eates Com$ara!le
,) The effective annual rate increases when the FFFFFFFF increases.
A) num!er of com$oun"ing $erio"s in a year
#) num!er of years investe"
C) 6uote" rate
&) !oth A an" C
') all of the a!ove
Answer: &
&iff: ,
,.
.) /hat is the annual com$oun"e" interest rate of an investment with a state" interest rate of <;
com$oun"e" 6uarterly for seven years @roun" to the nearest .1;)2
A) 51.?;
#) <.?;
C) 18.>;
&) <.1;
Answer: &
&iff: ,
:) Bou are consi"ering two investments. 9nvestment A yiel"s 18; com$oun"e" 6uarterly.
9nvestment # yiel"s r; com$oun"e" semiannually. #oth investments have e6ual annual yiel"s.
Fin" r.
A) 1>.=?5;
#) 18;
C) 18..=;
&) 18.1,5;
Answer: &
&iff: .
5) The annual $ercentage yiel" is also referre" to as the:
A) 6uote" rate.
#) nominal rate.
C) effective annual rate.
&) all of the a!ove.
Answer: C
&iff: 1
(eywor"s: effective annual rate
<) 9t is easy to choose a "iscount rate in an international setting "ue to sta!ility of inflation.
Answer: FA01'
&iff: ,
(eywor"s: "iscount rate
,:
?) As the num!er of com$oun"ing $erio"s $er year increase5 the nominal rate of interest
increases.
Answer: FA01'
&iff: ,
=) The annual $ercentage yiel" is e6ual to the nominal rate of interest.
Answer: FA01'
&iff: 1
>) The nominal interest rate on two "ifferent investments will e6ual the annual $ercentage yiel"
on the two investments only if interest on !oth investments is com$oun"e" annually.
Answer: TEU'
&iff: ,
,5

Chapter 5 Time Value of Money-The Basics: Financial Management: Principles and Applications, 11e (Titman)

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Chapter 5 Time Value of Money-The Basics: Financial Management: Principles and Applications, 11e (Titman)

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Chapter 5 Time Value of Money-The Basics

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