TIME VALUE OF MONEY

(Difficulty: E = Easy, M = Medium, and T = Tough)

Multiple Choice: Problems

Easy:

FV of a single paymentAnswer: d Diff: E

.You deposit $2,000 in a savings account that pays 10 percent interest, compounded annually. How much will your account be worth in 15 years?

a.$2,030.21

b.$5,000.00

c.$8,091.12

d.$8,354.50

e.$9,020.10

FV of a single paymentAnswer: c Diff: E

.You deposit $1,000 in a savings account that pays 9 percent interest, compounded annually. How much will your account be worth in 6 years?

a.$1,054.00

b.$1,199.00

c.$1,677.10

d.$1,689.48

e.$7,523.33

PV of a single paymentAnswer: b Diff: E

.You can earn 8 percent interest, compounded annually. How much must you deposit today to withdraw $10,000 in 6 years?

a.$5,402.69

b.$6,301.70

c.$6,756.76

d.$8,432.10

e.$9,259.26

PV of a single paymentAnswer: e Diff: E

.You can earn 15 percent interest, compounded annually. How much must you deposit today to withdraw $4,000 in 10 years?

a.$525.11

b.$842.51

c.$869.57

d.$957.57

e.$988.74

Growth rateAnswer: d Diff: E

.In 1958 the average tuition for one year at an Ivy League school was $1,800. Thirty years later, in 1988, the average cost was $13,700. What was the growth rate in tuition over the 30-year period?

a.12%

b. 9%

c. 6%

d. 7%

e. 8%

Solving for the interest rate for a single paymentAnswer: e Diff: E .Suppose you invested $1,000 in stocks 10 years ago. If your account is now worth $2,839.42, what rate of return did your stocks earn?

a.15%

b. 14%

c. 13%

d. 12%

e. 11%

Time for a sum to doubleAnswer: d Diff: E

.You are currently investing your money in a bank account which has a nominal annual rate of 7.23 percent, compounded annually. How many years will it take for you to double your money?

a. 8.67 years

b. 9.15 years

c. 9.50 years

d. 9.93 years

e.10.25 years

Solving for N for a single paymentAnswer: b Diff: E

.You are currently investing your money in a bank account which has a nominal annual rate of 8 percent, compounded annually. If you invest $2,000 today, how many years will it take for your account to grow to $10,000?

a. 22.91 years

b. 20.91 years

c. 18.91 years

d. 16.91 years

e. 14.91 years

FV of a sumAnswer: b Diff: E

.You deposited $1,000 in a savings account that pays 8 percent interest, com¬pounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?

a.$1,171

b.$1,126

c.$1,082

d.$1,163

e.$1,008

FV of an annuityAnswer: e Diff: E

.What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

a.$ 670.44

b.$ 842.91

c.$1,169.56

d.$1,522.64

e.$1,348.48

PV of an annuityAnswer: a Diff: E

.What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

a.$ 670.43

b.$ 842.91

c.$1,169.56

d.$1,348.48

e.$1,522.64

PV of a perpetuityAnswer: c Diff: E

.You have the opportunity to buy a perpetuity which pays $1,000 annually. Your required rate of return on this investment is 15 percent. You should be essentially indifferent to buying or not buying the investment if it were offered at a price of

a.$5,000.00

b.$6,000.00

c.$6,666.67

d.$7,500.00

e.$8,728.50

Required annuity paymentsAnswer: b Diff: E

.If a 5-year ordinary annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment?

a.$240.42

b.$263.80

c.$300.20

d.$315.38

e.$346.87

Quarterly compoundingAnswer: a Diff: E

.If $100 is placed in an account that earns a nominal 4 percent,...