Topic I Extra practice questions

1. The more frequent the compounding, the higher the future value, other things equal.
True or False? Answer: T
2. For a given amount, the lower the discount rate, the less the present value.
True or False? Answer: F
3. How much will accumulate in an account with an initial deposit of $100, and which earns 10%
interest compounded annually for three years?
A)
$130.00
B)
$132.55
C)
$133.10
D)
$134.49
E)
$313.84
Answer: C
4. How much will accumulate in an account with an initial deposit of $100, and which earns 10%
interest compounded quarterly for three years?
A)
$130.00
B)
$132.55
C)
$133.10
D)
$134.49
E)
$313.84
Answer: D
5. How much will accumulate in an account with an initial deposit of $100, and which earns 10%
interest compounded every 18 months for three years?
A)
$130.00
B)
$132.25
C)
$133.10
D)
$134.49
E)
$313.84
Answer: B
6. Suppose $1,000 is deposited into an account annually, beginning one year from today, and the
account earns 9% interest compounded annually for 40 years. How much is the present value of
this investment plan?
A)
$ 10,757.36
B)
$ 87,200.00
C)
$337,882.45
D)
$475,764.89
E)
$536,583.73
Answer: A

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7. How much can be accumulated for retirement in 40 years if $1,000 is deposited annually,
beginning one year from today, and the account earns 9% interest compounded annually?
A)
$ 10,757.36
B)
$ 87,200.00
C)
$337,882.45
D)
$475,764.89
E)
$536,583.73
Answer: C
8. How long must one wait for an initial investment of $2,000 to triple in value if the investment
earns 7% compounded annually?
A)
10.24
B)
14.27
C)
15
D)
15.27
E)
16.24
Answer: E
9.The present value of a perpetuity can be determined by:
A)
Multiplying the cash flow by the interest rate.
B)
Dividing the interest rate by the cash flow.
C)
Multiplying the cash flow by the number of payments to be made.
D)
Dividing the cash flow by the interest rate.
E)
None of the above.
Answer: D
10. Which of the following four statements regarding present and future values of streams of cash
payments are INCORRECT?
I. A stream of equal cash payments that continues indefinitely is known as an annuity; the one that
continues for a limited number of years is called a perpetuity.
II. The present value of a stream of cash flows is simply the sum of the present value of each
individual cash flow.
III. The future value of an annuity is the sum of the future value of each individual cash flow.
IV. Shortcut PV formulas make the calculations for perpetuities and annuities easy.
A)
B)
C)
D)
E)
A

I
II
III
IV
II and III

nswer: A
Answer: 1) T; 2) F; 3) C; 4) D; 5) B; 6) A; 7) C; 8) E; 9) D; 10) A.

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