POF Chapter 5&6

Which one of the following variables is the exponent in the present value formula?

• Present value  

• Future value

• Interest rate

• Number of time periods

• There is no exponent in the present value formula.

Assume you intend to retire 47 years from today. Your current salary is $80,000 per year, and you expect to earn salary increases of 3.25 percent each year. What annual salary do you expect to earn 47 years from today?

• $359,685        

• ) $364,051

• $7,436,927

• $7,489,677

• $8,605,705

Assume you own two coins, each of which is valued at $100 today. One coin is expected to appreciate by 5.2 percent annually while the other coin should appreciate by 5.7 percent annually. What will be the difference in the value of the two coins 50 years from now?

• $337.43

• $318.04

• $191.79

• $128.32

• $380.15

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years?

• $33,588          

• $408,671

• $106,905

• $159,654

• $404,305

You hope to buy your dream car five years from now. Today, that car costs $62,500. You expect the price to increase by an average of 2.9 percent per year. How much will your dream car cost by the time you are ready to buy it?

• $73,340.00     

•  $68,666.67

• $72,103.59

• $66,818.02

• $69,023.16

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

• Free interest

• Complex interest

• Simple interest

• Interest on interest

• Compound interest

Sophia and Mallory are the same age. At age 25, Sophia invests $6,000 at 7 percent, compounded annually. At age 30, Mallory invests $6,000 at 7 percent, compounded annually. All else constant, when they both reach age 60:

• Sophia will have less money when she retires than Mallory.

• Mallory will earn more interest on interest than Sophia.

• Mallory will earn more compound interest than Sophia.

• they must wait 10 more years to have equal amounts of savings.
  
  

• Sophia will have more money than Mallory.

The process of determining the present value of future cash flows in order to know their value today is referred to as:

• compound interest valuation. 

• interest on interest valuation.

• discounted cash flow valuation.

• future value interest factoring.

• complex factoring.
             

Assume you deposited $6,000 into a retirement savings account today. The account will earn 8 percent interest per year, compounded annually. You will not withdraw any principal or interest until you retire in 48 years. Which one of the following statements is correct?

• The interest you earn in Year 7 will equal the interest you earn in Year 14.
  
  

• The interest amount you earn will double in value every year.
  
  

• The total amount of interest you will earn will equal $6,000 × .08 × 48.

• The present value of this investment is equal to $6,000.

• The future value of this amount is equal to $6,000 × (1 + 48)^.08.

Which one of the following statements correctly defines a time value of money relationship?

• Time and future values are inversely related, all else held constant.

• Interest rates and time are positively related, all else held constant.
  
  

• An increase in a positive discount rate increases the present value.

• An increase in time increases the future value given a zero rate of interest.
  
  

• Time and present value are inversely related, all else held constant.