9/29/23, 10:34 PM Chapter 3 Multiple-Choice Quiz

Multiple-Choice Quiz
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Chapter 3: The Time Value of Money

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1. You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years. You expect
annual interest rates will be 8 percent over that time period. The maximum price you would be willing to pay
for the annuity is closest to

$32,000.

$39,272.

$40,000.

$80,000.

2. With continuous compounding at 10 percent for 30 years, the future value of an initial investment of
$2,000 is closest to

$34,898.

$40,171.

$164,500.

$328,282.

3. In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value of
that future amount to you would

fall.

rise.

remain unchanged.

cannot be determined without more information.

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9/29/23, 10:34 PM Chapter 3 Multiple-Choice Quiz

4. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should
you prefer?

Year1 Year2 Year3 Year4

$400 $300 $200 $100

$100 $200 $300 $400

$250 $250 $250 $250

Any of the above, since they each sum to $1,000.

5. You are considering investing in a zero-coupon bond that sells for $250. At maturity in 16 years it will
be redeemed for $1,000. What approximate annual rate of growth does this represent?

8 percent.

9 percent.

12 percent.

25 percent.

6. To increase a given present value, the discount rate should be adjusted

upward.

downward.

True.

Fred.

7. For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly payment of $263.80
for 5 years. The compound annual interest rate implied by this arrangement is closest to

8 percent.

9 percent.

10 percent.

11 percent.

8. You are considering borrowing $10,000 for 3 years at an annual interest rate of 6%. The loan agreement
calls for 3 equal payments, to be paid at the end of each of the next 3 years. (Payments include both principal
and interest.) The annual payment that will fully pay off (amortize) the loan is closest to

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9/29/23, 10:34 PM Chapter 3 Multiple-Choice Quiz

$2,674.

$2,890.

$3,741.

$4,020.

9. When n = 1, this interest factor equals one for any positive rate of interest.
PVIF

FVIF

PVIFA

FVIFA

None of the above (you can't fool me!)

10. (1 + i)n
PVIF

FVIF

PVIFA

FVIFA

11. You can use to roughly estimate how many years a given sum of money must earn at a given
compound annual interest rate in order to double that initial amount .

Rule 415

the Rule of 72

the Rule of 78

Rule 144

12. In a typical loan amortization schedule, the dollar amount of interest paid each period .

increases with each payment

decreases with each payment

remains constant with each payment

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9/29/23, 10:34 PM Chapter 3 Multiple-Choice Quiz

13. In a typical loan amortization schedule, the total dollar amount of money paid each period .

increases with each payment

decreases with each payment

remains constant with each payment

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