3.1   LO1: Introduction to Time Value of Money 1) Which of

Question : 3.1   LO1: Introduction to Time Value of Money 1) Which of : 1907277

3.1   LO1: Introduction to Time Value of Money

1) Which of the following problems could not be addressed by using compounding or discounting techniques?

A) Finding an amount to be invested today to provide a given level of income during retirement

B) Determining how long it should take the population of China to double

C) Finding the growth rate in a firm's dividend payments 

D) Calculating the length of time needed for the supply and demand for lendable funds to equate if interest rates are above the equilibrium level

E) Deciding whether a bank paying interest compounded annually is giving you a better deal than a rate that compounds daily

2) What is the future value of $124.49 after earning simple interest for five years at an annual rate of 10%?

A) $162.25   

B) $186.74  

C) $200.49  

D) $136.94  

E) $175.00

3) Most people prefer to receive money today rather than ten years from now because

A) U.S. prices have been falling recently and a dollar received today will buy more than one received in the future.  

B) Future investment returns are expected to be less variable than current ones.

C) Receiving cash today enables one to take advantage of current investment opportunities.  

D) People are unsure about their future employment prospects and wish to provide themselves with a source of future income.  

E) Most people are afraid they will spend future cash payments foolishly.

4) The primary difference between simple and compound interest is that:

A) Simple interest is only paid at the end of the investment period.   

B) Compound interest entails receiving interest payments on previously earned interest.

C) Compound interest is paid up front and not when the investment matures.

D) Simple interest is not taxed by the federal government.

E) Simple interest earns a higher interest rate on reinvested interest than compound interest.

5) Compute the simple interest earned on a 1-year $200 deposit that earns 6% per year.

A) $6  

B) $60  

C) $120   

D) $12  

E) $200

6) The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.

A) effective   

B) nominal  

C) discounted  

D) continuous

7) The amount of money that would have to be invested today at a given interest rate over a specific period in order to equal a future amount is called:

A) Future value   

B) Present value  

C) Future value interest factor  

D) Present value interest factor

8) When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is called:

A) Discount interest   

B) Compound interest  

C) Primary interest  

D) Future value

9) A college received a contribution to its endowment fund of $2 million. They can never touch the principal, but they can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year?

A) $95,000  

B) $19,000   

C) $190,000  

D) $18,000

E) $9,500

10) If the present value of a perpetual income stream is increasing, the discount rate must be:

A) Increasing   

B) Decreasing  

C) Changing unpredictably  

D) Keeping pace with inflation


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