Finance Multiple Choice Assignment Solution

If you want to have $90 in four years, how much money must you put in a savings account today? Assume that the savings account pays 8.5% and it is compounded monthly (round to the nearest $1).

1. $64
2. $65
3. $66
4. $71

Answer: A) $64

How much money must be put into a bank account yielding 5.5% (compounded annually) in order to have $250 at the end of five years (round to nearest $1)?

1. $237
2. $191
3. $187
4. $179

Answer: B) $191

If you want to have $1,200 in 27 months, how much money must you put in a savings account today? Assume that the savings account pays 14% and it is compounded monthly (round to the nearest $10).

1. $910
2. $890
3. $880
4. $860

Answer: C) $880

What will the dollar amount be in four years, assuming that interest is paid annually?

1. $2,800
2. $3,100
3. $3,111
4. $3,148

Answer: D) $3,148

What will the dollar amount be if the interest is compounded semiannually for those four years?

1. $3,100
2. $3,188
3. $3,240
4. $3,290

Answer: B) $3,188

How many periods would it take for the deposit to grow to $6,798 if the interest is compounded semiannually?

1. 17
2. 19
3. 21
4. 25

Answer: C) 21

You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?

1. 47%
2. 4.7%
3. 19%
4. 12.8%

Answer: C) 19%

You deposit $5,000 today in an account drawing 12% compounded quarterly. How much will you have in the account at the end of 2 1/2 years?

1. $7,401
2. $5,523
3. $7,128
4. $6,720

Answer: D) $6,720

Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years. If this city's population continues to grow at 4% per year, what will the population be 10 years from now?

1. 1,560,000
2. 2,220,366
3. 2,100,000
4. 1,824,979

Answer: B) 2,220,366

How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually?

1. 8 years
2. 10 years
3. 11 years
4. 13 years

Answer: D) 13 years

The future value of $200 deposited today in an account for four years paying semiannual interest when the annual interest rate is 12% is:

1. $309.40.
2. $318.80.
3. $320.20.
4. $296.00.

Answer: B) $318.80.

The future value of a single sum:

1. increases as the compound rate decreases.
2. decreases as the compound rate increases.
3. increases as the number of compound periods decreases.
4. increases as the compound rate increases.
5. none of the above.

Answer: D) increases as the compound rate increases.

The future value of $500 deposited into an account paying 8% annually for three years is:

1. $500.
2. $630.
3. $700.
4. $620.

Answer: B) $630.

If you were to deposit $2,000 in an IRA that would earn interest of 7.5%, compounded quarterly for 18 years, how much would you have accumulated?

1. $9,621
2. $36,000
3. $22,419
4. $12,363
5. $7,619

Answer: E) $7,619

When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much would his salary have been in 1997?

1. $1,025,000
2. $954,719
3. $2,525,548
4. $4,085,920
5. $3,489,097

Answer: E) $3,489,097

If you purchased a share of Mico.com stock on March 1, 1993 for $45 and you sold the stock at $168 on February 28, 1998, what was your annual rate of return on the stock?

1. 83%
2. 75%
3. 20%
4. 30%
5. 50%

Answer: D) 30%

At 8%, compounded annually, how long will it take $750 to double?

1. 9 years
2. 8 years
3. 12 years
4. 4 years
5. 6 years

Answer: A) 9 years

The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest declines. TRUE/FALSE

Answer: FALSE

If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, during which we receive 4% interest each period. TRUE/FALSE

Answer: TRUE

Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation TRUE/FALSE

Answer: TRUE

The same basic formula is used for computing both the computation of future value and of present value. TRUE/FALSE

Answer: TRUE

The more frequent the compounding periods in a year, the higher the future value TRUE/FALSE

Answer: TRUE

The present value of a single future sum:

1. increases as the number of discount periods increases.
2. is generally larger than the future sum.
3. depends upon the number of discount periods.
4. increases as the discount rate increases.

Answer: C) depends upon the number of discount periods

Assuming two investments have equal lives, a high discount rate tends to favor:

1. the investment with large cash flow early.
2. the investment with large cash flow late.
3. the investment with even cash flow.
4. neither investment since they have equal lives

Answer: A) the investment with large cash flow early

Discounting is the opposite of:

1. compounding.
2. future value.
3. opportunity costs.
4. both A and C.

Answer: D) both A and C

An increase in ________ will decrease present value.

1. the discount rate per period
2. the original amount invested
3. the number of periods
4. both A and C
5. all of the above

Answer: D) both A and C

What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).

1. $893
2. $3,106
3. $429
4. $833

Answer: C) $429

What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.

1. $5,790
2. $11,574
3. $9,210
4. $17,010

Answer: A) $5,790

Three years from now, Barbara Waters will purchase a laptop computer that will cost $2,250. Assume that Barbara can earn 6.25% (compounded monthly) on her money. How much should she set aside today for the purchase? Round off to the nearest $1.

1. $1,250
2. $900
3. $1,866
4. $3,775

Answer: C) $1,866

If you want to have $875 in 32 months, how much money must you put in a savings account today? Assume that the savings account pays 16% and it is compounded monthly (round to the nearest $10).

1. $630
2. $570
3. $650
4. $660

Answer: B) $570

You are considering two investments: A and B. Both investments provide a cash flow of $100 per year for n years. However, investment A receives the cash flow at the beginning of each year, while investment B receives the cash at the end of each year. If the present value of cash flows from investment A is P, and the discount rate is c, what is the present value of the cash flows from investment B?

1. P/(1 + c)
2. P(1 + c)
3. P/(1 + c)n
4. P(1 + c)n

Answer: A) P/(1 + c)

All else constant, the future value of an investment will increase if:

1. the investment involves more risk.
2. the investment is compounded for fewer years.
3. the investment is compounded at a higher interest rate.
4. both B & C.

Answer: C) the investment is compounded at a higher interest rate.

To compound $100 quarterly for 20 years at 8%, we must use:

1. 40 periods at 4%.
2. five periods at 12%.
3. 10 periods at 4%.
4. 80 periods at 2%.

Answer: D) 80 periods at 2%.

California Investors recently advertised the following claim: Invest your money with us at 21%, compounded annually, and we guarantee to double your money sooner than you imagine. Ignoring taxes, how long would it take to double your money at a nominal rate of 21%, compounded annually? Round off to the nearest year.

1. Approximately two years
2. Approximately four years
3. Approximately six years
4. Approximately eight years

Answer: B) Approximately four years

How much money do I need to place into a bank account which pays a 6% rate in order to have $500 at the end of seven years?

1. $332.53
2. $381.82
3. $423.77
4. $489.52

Answer: A) $332.53

Bobby's grandmother deposited $100 in a savings account for him when he was born. The money has been earning an annual rate of 12% interest, compounded quarterly for the last 25 years. He is getting married and would like to take his new bride on a fabulous honeymoon. How much does he have in this account to use?

1. $4,165
2. $1,700
3. $5,051
4. $1,922

Answer: D) $1,922

What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments. Round to the nearest whole dollar.

Year Cash Flow

1 $3,000

2 $4,000

3 $5,000

1. PV = $3,000/[1.06]1 + $4,000/[1.06]2 + $5,000/[1.06]3
2. PV = $3,000[1.06]1 + $4,000[1.06]2 + $5,000[1.06]3
3. PV = $3,000/[1.06]0 + $4,000/[1.06]1 + $5,000/[1.06]2
4. PV = $3,000[1.06]-0 + $4,000[1.06]-1 + $5,000[1.06]-2

Answer: A) PV = $3,000/[1.06]1 + $4,000/[1.06]2 + $5,000/[1.06]3

The present value of $400 to be received at the end of 10 years, if the discount rate is 5%, is:

1. $400.00.
2. $248.40.
3. $313.60.
4. $245.60.

Answer: D) $245.60.

The present value of $1,000 to be received at the end of five years, if the discount rate is 10%, is:

1. $621.
2. $784.
3. $614.
4. $500.

Answer: A) $621.

What is the present value of an investment that pays $400 at the end of three years and $700 at the end of 10 years if the discount rate is 5%?

1. $1,100.00
2. $675.30
3. $775.40
4. $424.60

Answer: C) $775.40

The present value of a single sum:

1. increases as the discount rate decreases.
2. decreases as the discount rate decreases.
3. increases as the number of discount periods increases.
4. increases as the discount rate increases.
5. none of the above.

Answer: A) increases as the discount rate decreases.

As the discount rate increases, the present value of future cash flows increases TRUE/FALSE

Answer: FALSE

As the compound interest rate increases, the present value of future cash flows decreases TRUE/FALSE

Answer: TRUE

The present value of a future sum of money increases as the number of years before the payment is received increases TRUE/FALSE

Answer: FALSE

The present value of the future sum of money is inversely related to both the number of years until payment is received and the opportunity rate TRUE/FALSE

Answer: TRUE

Which of the following provides the greatest annual interest?

1. 10% compounded annually
2. 9.5% compounded monthly
3. 9% compounded quarterly
4. 8.5% compounded daily

Answer: A) 10% compounded annually

The effective annual rate increases when the ________ increases.

1. number of compounding periods in a year
2. number of years invested
3. quoted rate
4. both A and C
5. all of the above

Answer: D) both A and C

What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)?

1. 51.7%
2. 6.7%
3. 10.9%
4. 6.1%

Answer: D) 6.1%

You are considering two investments. Investment A yields 10% compounded quarterly. Investment B yields r% compounded semiannually. Both investments have equal annual yields.

Find r.

1. 19.875%
2. 10%
3. 10.38%
4. 10.125%

Answer: D) 10.125%

The annual percentage yield is also referred to as the:

1. quoted rate.
2. nominal rate.
3. effective annual rate.
4. all of the above.

Answer: C) effective annual rate.

It is easy to choose a discount rate in an international setting due to stability of inflation TRUE/FALSE

Answer: FALSE

As the number of compounding periods per year increase, the nominal rate of interest increases. TRUE/FALSE

Answer: FALSE

The annual percentage yield is equal to the nominal rate of interest TRUE/FALSE

Answer: FALSE

The nominal interest rate on two different investments will equal the annual percentage yield on the two investments only if interest on both investments is compounded annually TRUE/FALSE

Answer: TRUE