ACC 3008

Finance 1

Quiz 2
Multiple Choice Chapter 5

1. Compound interest means that you earn: 

A. Interest only on the initial amount invested.
B. Interest on both the principal and prior reinvested interest.
C. A decreasing amount of interest each year.
D. The same amount of interest each year.

2. Calculating the present value of a future cash flow to determine its value today is called: 
A. The discount rate.
B. Future value compounding.
C. Present value compounding.
D. Discounted cash flow valuation.
 

3. The rate used to find the present value of a future payment is called the: 
A. Discount rate.
B. Compound rate.
C. Future value rate.
D. Loan rate.

4. The discounted value of money is called the: 

A. Compound value.
B. Simple value.
C. Future value.
D. Present value.

5. The rate of return used when computing a present value is referred to as the ______ rate while
the rate used when computing a future value is referred to as the _____ rate. 
A. Compound; discount
B. Compound; simple
C. Compound; compound
D. Discount; compound
 

6. On a financial calculator, the symbol "N" represents the: 

A. Time periods.
B. Future value.
C. Rate of simple interest.
D. Rate of compound interest.

 7. The
present value equation is: 
A. PV = FVt + (1 + r)t.
B. PV = FVt - (1 + r)t.
C. PV = FVt / (1 + r)t.
D. PV = FVt * (1 + r)t.
 

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

A. present
B. principal
C. discounted
D. future

9. The process of accumulating interest on an investment over time to earn more interest is
called: 
A. compounding.
B. aggregation.
C. accumulation.
D. discounting.

10. Interest earned on the reinvestment of previous interest payments is called _____ interest. 
A. free
B. annual
C. interest on
D. intermediary
 

11. Interest earned on both the initial principal and the interest reinvested from prior periods is
called _____ interest. 
A. free
B. annual
C. simple
D. compound
 
12. Interest earned only on the original principal amount invested is called _____ interest. 
A. free
B. simple
C. interest on
D. compound
 

13. The current value of future cash flows discounted at the appropriate discount rate to current
time is called the _____ value. 
A. principal
B. present
C. simple
D. compound 

14. The process of finding the present value of some future amount is often called: 
A. discounting.
B. accumulation.
C. compounding.
D. reduction.
 

15. The interest rate used to calculate the present value of future cash flows is called the _____
rate. 
A. free
B. annual
C. compound
D. discount

16. Future value is best defined as: 

A. an amount of money received each period for a stated number of periods.
B. the amount an investment is worth in today's dollars.
C. the amount an investment is worth at the end of some stated period of time.
D. the cash value of an investment in today's dollars based on a stated rate of interest.

 17. The term interest-on-interest refers to: 

A. the interest earned on previous interest earnings which were reinvested.
B. earning interest on an investment for a period greater than one year.
C. earning interest only on the principal amount invested.
D. the process of accumulating interest on an investment over time to earn more interest.
 

18. Present value is defined as the: 

A. amount of money invested each time period for a stated number of periods.
B. value of future cash flows in today's dollars given a specific discount rate.
C. compounded value of a principal amount given a specific rate of interest.
D. value of an investment given simple interest for a specific period of time.
 
19. Compound interest is best defined as the interest earned: 
B. on a simple basis for multiple years.
C. on the initial investment for a stated number of periods.
D. on both the interest reinvested from prior periods and the initial investment.
E.  on prior year's interest which was reinvested.
 

20. You are choosing between investments offered by two different banks. One promises a return
of 10% for three years using simple interest while the other offers a return of 10% for three years
using compound interest. You should: 
A. Choose the compound interest option because it provides a higher return.
C. Choose the compound interest option only if the compounding is for monthly periods.
D. Choose the simple interest option only if compounding occurs more than once a year.
E. Choose the compound interest option only if you are investing less than $5,000.
 

21. Suppose you are trying to find the present value of two different cash flows using the same
interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years
from now. Which of the following is true about the discount factors used in these valuations? 

A. Both discount factors are greater than one.

B. Regardless of the interest rate, the discount factors are such that the present value of the
$1,000 will always be greater than the present value of the $800.
C. Since the payments are different, no statement can be made regarding the discount factors.
D. The discount factor for the cash flow ten years away is always less than or equal to the
discount factor for the cash flow that is received seven years from now.

 22. Given r and t greater than zero:

I. Present value interest factors are less than one.
II. Future value interest factors are less than one.
III. Present value interest factors are greater than future value interest factors.
IV. Present value interest factors grow as t grows, provided r is held constant. 
A. I and III only
B. I and IV only
C. II and III only
D.  I only

 
23. Which of the following statements is/are accurate? All else the same, ______________.
I. present values increase as the discount rate increases
II. present values increase the further away in time the future value
III. present values are always smaller than future values when both r and t are positive 
A. I only
B. I and II only
C. lll only
D. II and III only

24. Fresh out of college, you are negotiating with your prospective new employer. They offer
you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from
now. If you can earn 7% on your invested funds, which of the following is true? 
A. Take the signing bonus because it has the lower present value.
B. Take the lump sum because it has the higher present value.
C. Take the lump sum because it has the lower future value.
D. Based on these numbers, you are indifferent between the two. 

25. Mary plans on saving $1,000 a year for ten years. She would like to know the value of these
savings today. Mary should solve for the: 
B. Present value factor.
C. Future value.
D. Future value factor.
E. Present value.

26. As long as the interest rate is greater than zero, the present value of a single sum will always: 
A.  Be less than the future value.
B. Decrease as the period of time decreases.
C. Equal the future value if the time period is one year.
D. Increase as the number of periods increases.

27. Which of the following statements is (are) true concerning the present value of a single sum?
I. The higher the discount rate, the higher the present value.
II. The longer the time period, the higher the present value.
III. The larger the future value, the larger the present value.
IV. The larger the present value factor, the larger the present value. 
A. IV only
B. III and IV only
C. I, III, and IV only
D. I, II, III, and IV

28. The greater the number of years, the: 

A. Smaller the future value of a single sum.
B. Larger the present value of a single sum.
C. Larger the present value factor.
D. Greater the compounding effect.
 

29. Monika has $6,000 in her investment account. She wants to withdraw her funds when her
account reaches $10,000. A decrease in the rate of return she earns will: 
A. Cause her to wait longer before withdrawing her money.
B. Cause the present value of her account to decrease.
C. Allow her to withdraw more money sooner.
D. Cause the compounding effect to increase.
 

30. Tom and Antonio both want to open savings accounts today. Tom wants to have $1,000 in
his savings account six years from now. Antonio wants to have $1,000 in his savings account
three years from now. Which of the following statements is(are) correct assuming that both
Antonio and Tom earn the same rate of interest?

I. Tom needs to deposit more money into his account today than does Antonio.
II. Tom will need to deposit twice the amount of money today as Antonio.
III. Antonio needs to deposit more money into his account today than does Tom.
IV. Antonio needs to deposit twice the amount of money today as Tom. 
A. III only
B. I and II only
C. III and IV only
D. II only