Chapter 5: Revision

Interest earned on a given deposit that has become part of the principal at the end of a specified period is called compound interest.

• True
• False

The future value increases with increases in the interest rate or the period of time funds are left on deposit.

• True
• False

The greater the potential return on an investment and the longer the period of time, the higher the present value.

• True
• False

Annuity due is an amount that occurs at the beginning of each period.

• True
• False

The ordinary annuity is an annuity for which the cash flow occurs at the beginning of each period.

• True
• False

The nominal (stated) annual rate is the rate of interest actually paid or earned.

• True
• False

Indicate which formula is correct to determine the future value of annuity due:

• FVAs = PMT x FVIFA_i,n
• FVAs = PMT x [FVIFA_i,n x (1 + i)] 
• FVAs = PMT x [FVIFA_i,n/(1 + i)] 
• FVAs = PMT x FVIFA_i,n + 1

The future value of RM100 received today and deposited at 6 percent for four years is

• RM126
• RM79
• RM124
• RM116

The present value of RM200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is:

• RM50
• RM200
• RM518
• RM77

Ali plans to fund his individual retirement account with the maximum contribution of RM2,000 at the end of each year for the next 20 years. If Ali can earn 12 percent on his contributions, how much will he have at the end of the twentieth (20th) year? 

• RM19,292
• RM14,938
• RM40,000
• RM144,104