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You are on page 1of 9

1.

a.

b.

c.

d.

e.

2.

a.

b.

c.

d.

e.

3.

a.

b.

c.

d.

e.

4.

The amount an investment will worth after one or more periods of time is the _____

value.

future

present

principal

discounted

simple

The process of accumulating interest on an investment over time to earn more interest

is called:

growth.

compounding.

aggregation.

accumulation.

discounting.

Interest earned on the reinvestment of previous interest payments is called _____

interest.

free

annual

simple

interest on

compound

a.

b.

c.

d.

e.

Interest earned on both the initial principal and the interest reinvested from prior

periods is called _____ interest.

free

annual

simple

interest on

compound

5.

a.

b.

c.

d.

e.

Interest earned only on the original principal amount invested is called _____ interest.

free

annual

simple

interest on

compound

6.

a.

b.

c.

d.

e.

(1 + r)t.

(1 + rt).

(1 + r) t.

1 + r t.

(1+r) x rt.

7.

The current value of future cash flows discounted at the appropriate discount rate to

current time is called the _____ value.

principal

future

a.

b.

CHAPTER 5

c.

d.

e.

present

simple

compound

8.

a.

b.

c.

d.

e.

The process of finding the present value of some future amount is often called:

growth.

discounting.

accumulation.

compounding.

reduction.

9.

a.

b.

c.

d.

e.

1 (1 + r t).

1 (1 + rt).

1 (1 + r) (t).

1 (1 + r)t.

1 + r + t.

10. The interest rate used to calculate the present value of future cash flows is called the

_____ rate.

a. free

b. annual

c. compound

d. simple

e. discount

11. As the discount rate increases, the present value of $500 to be received six years from

now:

a. remains constant.

b. also increases.

c. decreases.

d. becomes negative.

e. will vary but the direction of the change is unknown.

12. Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000

five years from now. Which one of the following statements is correct if both Katie

and Wilt apply a 5 percent discount rate to these amounts?

a. The present value of Katie and Wilts money is equal.

b. The value of Wilts money will be greater than the value of Katies money six years

from now.

c. In todays dollars, Wilts money is worth more than Katies.

d. In five years, the value of Katies money will be equal to the value of Wilts money.

e. Katies money is worth more than Wilts money today.

13. Jamie deposits $1,000 into an account that pays 4 percent interest compounded

annually. Chris deposits $1,000 into an account that pays 4 percent simple interest.

Both deposits were made today. Which of the following statements are true concerning

these two accounts?

I.

At the end of one year, both Jamie and Chris will have the same amount in their

accounts.

CHAPTER 5

II.

At the end of five years, Chris will have more money in his account than Jamie has in

hers.

III. Chris will never earn any interest on interest.

IV. All else equal, Jamie made the better investment.

a. I and II only

b. III and IV only

c. I, II, and IV only

d. I, III, and IV only

e. II, III, and IV only

14. Nadine invests $1,000 at 8 percent when she is 25 years old. Neal invests $1,000 at 8

percent when he is 40 years old. Both investments compound interest annually. Both

Nadine and Neal retire at age 60. Which one of the following statements is

correct?

a. Nadine will have less money when she retires than Neal.

b. Neal will earn more interest on interest than Nadine.

c. Neal will earn more compound interest than Nadine.

d. If Neal waits to age 70 to retire, then he will have just as much money as Nadine.

e. Nadine will have more money when she retires than Neal.

15. Sun Lee has $500 today. Which one of the following statements is correct if she

invests this money at a positive rate of interest for five years?

a. The higher the interest rate she earns, the less money she will have in the future.

b. The higher the interest rate, the longer she has to wait for her money to grow to $1,000

in value.

c. If Sun Lee can earn 7 percent, she will have to wait about six years to have $1,000

total.

d. At the end of the five years Sun Lee will have less money if she invests at 5 percent

rather than at 7 percent.

e. At 10 percent interest Sun Lee should expect to have $1,000 in her account at the

end of the five years.

16. Thomas invests $100 in an account that pays 5 percent simple interest. How much

money will Thomas have at the end of five years?

a. $120.00

b. $123.68

c. $124.92

d. $125.00

e. $127.63

1 + (1*2*3)

17. Betty invests $500 in an account that pays 3 percent simple interest. How much money

will Betty have at the end of ten years?

a. $630.00

b. $633.33

c. $650.00

d. $671.96

e. $675.00

1+(1*2*3)

CHAPTER 5

18. Beatrice invests $1,000 in an account that pays 4 percent simple interest. How much

more could she have earned over a five-year period if the interest had

compounded

annually?

a. $15.45

b. $15.97

c. $16.65

d. $17.09

e. $21.67

1* (1+2)^3 - 1+(1*2*3)

19. Dale invests $500 in an account that pays 6 percent simple interest. How much more

could he have earned over a thirty year period if the interest had compounded

annually?

a. $1,471.75

b. $1,532.50

c. $1,621.25

d. $1,804.25

e. $2,371.75

1* (1+2)^3 - 1+(1*2*3)

20. What is the future value of $2,896 invested for twelve years at 6.5 percent

compounded annually?

a. $5,827.32

b. $6,023.44

c. $6,049.45

d. $6,165.86

e. $6,218.03

1* (1+3)^2

21. Today you earn a salary of $28,500. What will be your annual salary fifteen years from

now if you earn annual raises of 3.5 percent?

a. $47,035.35

b. $47,522.89

c. $47,747.44

d. $48,091.91

e. $48,201.60

1* (1+3)^2

22. You own a classic automobile that is currently valued at $39,500. If the value increases

by 6 percent annually, how much will the auto be worth ten years from now?

a. $64,341.34

b. $44,734.42

c. $69,843.06

d. $70,738.48

CHAPTER 5

e.

$74,146.93

1* (1+2)^3

23. You hope to buy your dream house six years from now. Today your dream house costs

$189,900. You expect housing prices to rise by an average of 4.5 percent per year over

the next six years. How much will your dream house cost by the time you are ready to

buy it?

a. $240,284.08

b. $246,019.67

c. $246,396.67

d. $246,831.94

e. $247,299.20

2* (1+3)^1

24. Your grandmother invested one lump sum 17 years ago at 4.25 percent interest.

Today, she gave you the proceeds of that investment which totaled $5,539.92. How

much did your grandmother originally invest?

a. $2,700.00

b. $2,730.30

c. $2,750.00

d. $2,768.40

e. $2,774.90

3* [1/ (1+2)^1]

25. What is the present value of $13,450 to be received four years from today if the

discount rate is 5.25 percent?

a. $10,854.20

b. $10,960.59

c. $10,974.21

d. $10,982.18

e. $11,003.14

1* [1/ (1+3)^2]

26. You would like to give your daughter $40,000 towards her college education thirteen

years from now. How much money must you set aside today for this purpose if you can

earn 6.3 percent on your funds?

a. $17,750.00

b. $17,989.28

c. $18,077.05

d. $18,213.69

e. $18,395.00

1* [1/ (1+3)^2]

27. One year ago, you invested $3,000. Today it is worth $3,142.50. What rate of interest

did you earn?

a. 4.63 percent

CHAPTER 5

b.

c.

d.

e.

4.68 percent

4.70 percent

4.73 percent

4.75 percent

2 = 1* (1+x)

28. Forty years ago, your father invested $2,500. Today that investment is worth $107,921.

What is the average rate of return your father earned on his investment?

a. 8.50 percent

b. 9.33 percent

c. 9.50 percent

d. 9.87 percent

e. 9.99 percent

3 = 2* (1+x)^1

29. Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today,

both Joe and Maries investments are each worth $8,500. Which one of the following

statements is correct concerning their investments?

a. Three years from today, Joes investment will be worth more than Maries.

b. Last year, Maries investment was worth more than Joes.

c. Joe has earned more interest on interest than Marie.

d. Marie earned an annual interest rate of 27.73 percent.

e. Joe earned an annual interest rate of 6.45 percent.

Joe: 5 = 2* (1+x)^1

Marie: 5 = 4* (1+x)^3

30. Alpha, Inc. is saving money to build a new factory. Six years ago they set aside

$250,000 for this purpose. Today, that account is worth $306,958. What rate of interest

is Alpha earning on this money?

a. 3.43 percent

b. 3.45 percent

c. 3.48 percent

d. 3.52 percent

e. 3.55 percent

3 = 2* (1+x)^1

31. Bob bought some land costing $14,990. Today that same land is valued at $55,000.

How long has Bob owned this land if the price of land has been increasing at 6 percent

per year?

a. 21.82 years

b. 21.98 years

c. 22.03 years

d. 22.31 years

e. 22.44 years

2 = 1* (1+3)^x

CHAPTER 5

32. On your tenth birthday, you received $100 which you invested at 4.5 percent interest,

compounded annually. That investment is now worth $3,000. How old are you today?

a. age 77

b. age 82

c. age 84

d. age 86

e. age 87

4 = 2* (1+3)^x

x+1=atsakymas

33. You want to have $10,000 saved ten years from now. How much less do you have to

deposit today to reach this goal if you can earn 6 percent rather than 5 percent on your

savings?

a. $555.18

b. $609.81

c. $615.48

d. $928.73

e. $1,046.22

1* [1/ (1+4)^2] - 1* [1/ (1+3)^2]

34. Your older sister deposited $5,000 today at 8 percent interest for five years. You would

like to have just as much money at the end of the next five years as your sister.

However, you can only earn 6 percent interest. How much more money must you

deposit today than your sister if you are to have the same amount at the end of five

years?

a. $201.80

b. $367.32

c. $399.05

d. $423.81

e. $489.84

[1* (1+2)^3] * [1/ (1+5)^3] - 1

35. When you retire forty years from now, you want to have $1 million. You think you can

earn an average of 8.5 percent on your money. To meet this goal, you are trying to

decide whether to deposit a lump sum today, or to wait and deposit a

lump sum five years from today. How much more will you have to deposit as a lump

sum if you wait for five years before making the deposit?

a. $18,001.06

b. $18,677.78

c. $18,998.03

d. $19,272.81

e. $21,036.83

2* [1/ (1+3)^(1-4)] - 2* [1/ (1+3)^1]

36. Antonette needs $20,000 as a down payment for a house five years from now. She

earns 4 percent on her savings. Antonette can either deposit one lump sum today

for

CHAPTER 5

a.

b.

c.

d.

e.

this purpose or she can wait a year and deposit a lump sum. How much additional

money must Antonette deposit if she waits for one year rather than making the deposit

today?

$639.19

$657.54

$658.23

$659.04

$800.00

37. Alpo, Inc. invested $500,000 to help fund a company expansion project scheduled for

eight years from now. How much additional money will they have eight years from

now if they can earn 9 percent rather than 7 percent on this money?

a. $58,829.69

b. $86,991.91

c. $118,009.42

d. $126,745.19

e. $137,188.23

1* (1+4)^2 - 1* (1+5)^2

38. You will be receiving $5,000 from your family as a graduation present. You have

decided to save this money for your retirement. You plan to retire thirty-five years

after graduating. How much additional money will you have at that time if you can

earn an average of 8.5 percent on your investment instead of just 8 percent?

a. $12,971.49

b. $13,008.47

c. $13,123.93

d. $13,234.44

e. $13,309.85

1* (1+3)^2 - 1* (1+4)^2

39. You deposit $3,000 in a retirement account today at 5.5 percent interest. How much

more money will you have if you leave the money invested for forty-five years rather

than forty years?

a. $7,714.91

b. $7,799.08

c. $7,839.73

d. $7,846.52

e. $7,858.19

1* (1+2)^3 - 1* (1+2)^4

40. You collect model cars. One particular model increases in value at a rate of 5

percent per year. Today, the model is worth $29.50. How much additional money can

you make if you wait ten years to sell the model rather than selling it five years from

now?

a. $9.98

b. $10.40

CHAPTER 5

c.

d.

e.

$10.86

$11.03

$11.24

2* (1+1)^3 - 2* (1+1)^4

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