Time Value of Money Quiz

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1. If an average home in your town currently costs $405,745.93

$350,000, and house prices are expected to grow at
an average rate of 3 percent per year, what will an
average house cost in "5" years?

2. When your investment compounds, your money will exponential

grow in a(n) __________ fashion.

3. You are offered a choice between $770 today and $815 one year from
$815 one year from today. Assume that interest rates today
are 4 percent. Which do you prefer?

4. People borrow money because they expect their purchases to

give them the satis-
faction in the future
that compensates
them for the interest
payments charged
on the loan.

5. The longer money can earn interest, the greater the com-
pounding effect.

6. How much would be in your savings account in 7 $140.71

years after depositing $100 today if the bank pays 5
percent interest per year?

7. What is the future value of $2,500 deposited for one $2,850

year earning a 14 percent interest rate annually?

8. Which of the following statements is correct? $100 to be received

in the future is worth
less than that today
since it could be in-
vested and earn in-
terest.

9. We call the process of earning interest on both the compounding

original deposit and on the earlier interest payments

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10. What is the future value of $600 deposited for four $910.84
years earning an 11 percent interest rate annually?

11. How much would be in your savings account in 12 $2,693.78

years if you deposited $1,500 today? Assume the
bank pays 5 percent per year.

12. How much would be in your savings account in 10 $98.36

years after depositing $50 today if the bank pays 7
percent interest per year?

13. Which of the following statements is incorrect with Interest rates are
respect to time lines? not included on our
time lines.

14. Compute the present value of $9,000 paid in four $7,693.95

years using the following discount rates: 4 percent
in year 1, 5 percent in year 2, 4 percent in year 3, and
3 percent in year 4.

15. Which of the following is the equivalent of $300 re- Seven hundred
ceived today? ninety-five dollars
ninety-nine cents to
be received 20
years in the future
assuming a 5 per-
cent annual interest
rate.

16. How are present values affected by changes in inter- The lower the inter-
est rates? est rate, the larg-
er the present value
will be.

17. Approximately how many years does it take to dou- 9 years

ble a $475 investment when interest rates are 8 per-
cent per year?

18. 12 years

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Approximately how many years does it take to dou-
ble a $600 investment when interest rates are 6 per-
cent per year?

19. Compute the present value of $3,000 paid in four $2,516.26

years using the following discount rates: 3 percent
in year 1, 4 percent in year 2, 5 percent in year 3, and
6 percent in year 4.

20. Compute the present value of $4,000 paid in five $2,679.15

years using the following discount rates: 10 percent
in year 1, 2 percent in year 2, 12 percent in year 3,
and 9 percent in years 4 and 5.

21. Approximately what interest rate is needed to double 12 percent

an investment over six years?

22. The interest rate, i, which we use to calculate present discount rate.
value, is often referred to as the

23. Approximately what interest rate is needed to double 9 percent

an investment over eight years?

24. What is the present value of a $500 payment made in $367.51

four years when the discount rate is 8 percent?

25. When calculating the number of years needed to the higher the inter-
grow an investment to a specific amount of money est rate, the short-
er the time period
needed to achieve
the growth.

26. Determine the interest rate earned on a $200 deposit 4 percent

when $208 is paid back in one year.

27. You double your money in five years. The reason it does not reflect
your return is not 20 percent per year is because: the effect of com-
pounding.

28. 5.56 percent

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Determine the interest rate earned on a $450 deposit
when $475 is paid back in one year.

29. In order to discount multiple cash flows to the pre- the appropriate dis-
sent, one would use count rate.

30. When saving for future expenditures, we can add the future value
________ of contributions over time to see what the
total will be worth at some point in time.

31. What is the future value of a $1,000 annuity payment $4,506.11

over 4 years if the interest rates are 8 percent?

32. The length of time of the annuity is very important in interest rate for
accumulating wealth within an annuity. What other compounding
factor also has this effect?

33. What is the future value of a $500 annuity payment $6,616.38

over eight years if interest rates are 14 percent?

34. Level sets of frequent, consistent cash flows are annuities.

called

35. Which of the following will increase the future value All of these choices
of an annuity? are correct.

36. When moving from the left to the right of a time line, compound interest
we are using to calculate future
values.

37. If the future value of an ordinary, 7-year annuity is $10,400.00

$10,000 and interest rates are 4 percent, what is the
future value of the same annuity due?

38. If the present value of an ordinary, 10-year annuity is $26,750.00

$25,000 and interest rates are 7 percent, what is the
present value of the same annuity due?

39. What is the present value, when interest rates are 10 $750.00
percent, of a $75 payment made every year forever?

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40. What is the present value of a $775 annuity payment $3,278.67
over six years if interest rates are 11 percent?

41. Many people who want to start investing for their annuities due.
future want to start today, which implies an annuity
stream that is paid at the beginning of the period.
Beginning-of-period cash flows are referred to as

42. A perpetuity, a special form of annuity, pays cash periodically forever.

flows

43. If the future value of an ordinary, 4-year annuity is $1,060.00

$1,000 and interest rates are 6 percent, what is the
future value of the same annuity due?

44. If the present value of an ordinary, 4-year annuity is $1,060.00

$1,000 and interest rates are 6 percent, what is the
present value of the same annuity due?

45. Which of the following will increase the present val- The interest rate de-
ue of an annuity? creases.

46. When you get your credit card bill, it will offer a usually only pays
minimum payment, which the accrued interest
and a small amount
of principal.

47. A loan is offered with monthly payments and a 6.5 6.697 percent
percent APR. What is the loan's effective annual rate
(EAR)?

48. When you get your credit card bill, if you make a you will reduce the
payment larger than the minimum payment payoff time.

49. Compounding monthly versus annually causes the grows.

interest rate to be effectively higher, and thus the
future value

50. Loan amortization schedules show

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both the principal
balance and interest
paid per period.

51. What is the future value of $700 deposited for one $728
year earning 4 percent interest rate annually?

52. If an average home in your town currently costs $488,688.39

$300,000, and house prices are expected to grow at
an average rate of 5 percent per year, what will an
average house cost in 10 years?

53. What is the future value of $2,000 deposited for one $2,120
year earning 6 percent interest rate annually?

54. Which of the following is NOT true when developing Cash outflows are
a time line? designated with a
positive number.

55. An average home in Chicago costs $295,000. If $341,985.85

house prices are expected to grow at an average rate
of 3 percent per year, what will a house cost in five
years?

56. A dollar paid (or received) in the future is not worth as much
as a dollar paid (or
received) today.

57. Approximately how many years does it take to dou- 9 years

ble a $300 investment when interest rates are 8 per-
cent per year?

58. Approximately what rate is needed to double an in- 14.4 percent

vestment over five years?

59. Approximately how many years does it take to dou- 18 years

ble a $500 investment when interest rates are 4 per-
cent per year?

60. $647.88
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What is the present value of a $750 payment made in
three years when the discount rate is 5 percent?

61. Approximately what interest rate is needed to double 18 percent

an investment over four years?

62. Determine the interest rate earned on a $1,500 de- 12.00 percent
posit when $1,680 is paid back in one year.

63. Determine the interest rate earned on an $800 de- 1 percent

posit when $808 is paid back in one year.

64. What is the future value of an $800 annuity payment $18,620.78

over 15 years if the interest rates are 6 percent?

65. Your credit rating and current economic conditions the interest rate that
will determine a lender will offer.

66. What is the present value of a $1,100 payment made $24,444.44

every year forever when interest rates are 4.5 per-
cent?

67. What is the present value of a $300 annuity payment $1,197.81

over 5 years if interest rates are 8 percent?

68. If the future value of an ordinary, 5-year annuity is $105,000.00

$100,000 and interest rates are 5 percent, what is the
future value of the same annuity due?

69. A loan is offered with monthly payments and a 10 10.47 percent

percent APR. What is the loan's effective annual rate
(EAR)?

70. The simple form of an annualized interest rate is more accurate mea-
called the annual percentage rate (APR). The effec- sure of the interest
tive annual rate (EAR) is a rate paid for monthly
compounding.

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