F4 Personal Finance ch1 supp ex

In terms of the time value of money, the initiate deposit and the accrued total balance of a one-year fixed deposit are known as _____________ and ___________, respectively

• future value; present value

• current value; future value

• present value; future value

• initial value; present value

Joe is considering saving $1,000,000 in a bank for one year. However, since he believes that interest rate will go up very soon, he has decided to wait. In terms of the time value of money, Joe is actually expecting a

• bigger discounting effect.

• bigger compounding effect.

• smaller discounting effect.

• smaller compounding effect.

John deposits $1,000 in a two-year bank deposit plan that pays 5% interest in the first year and 6% in the second year.

If John withdraws the interest income for consumption at the end of Year 1, what is the deposit balance at the end of Year 2?

• $1,000

• $1,050

• $1,060

• $1,100

John deposits $1,000 in a two-year bank deposit plan that pays 5% interest in the first year and 6% in the second year.

If John does not withdraw the interest income for consumption at the end of Year 1, what is the total interest on this two-year plan?

• $123

• $133

• $103

• $113

Which of the following statements about semi-annual compounding and annual compounding is correct?

• The total interest income earned and the future value calculated using semi-annual compounding are higher because interest is accumulated based on not only the principal amount, but also the total interest earned.

• The total interest income earned and the future value calculated using semi-annual compounding are higher because interest is accumulated based on a higher annual percentage rate.

• The total interest income earned and the future value calculated using semi-annual compounding are lower because interest will accumulate based on a lower effective percentage rate.

• The total interest income earned and the future value would not be different.

  
  

Johnathan wants to get married five years from now and expects to use $200,000 for his wedding. He has decided to deposit a sum of money in the bank to save up for it. Which of the following concepts will be helpful in calculating the amount he needs to deposit now?

• Discounting

• Compounding

• Opportunity cost

• Both A and B

Peter is considering taking out an instalment loan of $10,000 with either Bank A or Bank B. To minimize his interest cost, Peter should choose the bank loan with lowest

• effective annual rate.

• cost of capital.

• deposit rate.

• coupon rate.

If the net present value of a stream of investment cash inflows is positive,

• the present value of the income is lower than the investment cost.

• the rate of return is zero for the investment.

• the investment is attractive.

• the investment is not attractive.

Amanda wants to buy a second-hand car which will cost her $17,500 after two years. To save up for the purchase, she has decided to deposit a lump sum in her savings account for two years. The annual interest rate is 8% and the interest is compounded annually. How much money should she deposit today?

• $15,000

• $15,003.4

• $15,086.2

• $16,203.7

Mrs Chan is considering purchasing a new machine, which will cost her $60,000 initially, for her business. The total present value of the future cash inflows generated by this machine for the next three years will be $49,737.05. The PV of the machine’s market value at the end of Year 3 is $7,513.15. Should Mrs Chan buy this machine?

• Yes, because the NPV is $10,262.95.

• Yes, because the NPV is $2,749.8.

• No, because the NPV is -$17,776.1.

• No, because the NPV is -$2,749.8.