Time Value of Money, Bonds, and Interest Rates Worksheet

Interest exists primarily because of which fundamental financial concept?

• The time value of money

• The supply of currency

• Government monetary policy

• The stock market cycle

A $10,000 investment earns 5% simple interest for 3 years. What is the total interest earned?

• $1,500

• $1,576.25

• $1,625

• $1,050

Using the same $10,000 at 5% but with annual compound interest for 3 years, what is the ending balance?

• $11,576.25

• $11,500.00

• $11,625.00

• $11,550.00

Which statement best describes the difference between simple and compound interest?

• Compound interest earns interest on both principal and previously accumulated interest

• Simple interest compounds monthly while compound interest compounds annually

• Compound interest only applies to government bonds

• Simple interest always produces higher returns over time

What effect does increasing the compounding frequency have on the growth of an investment?

• It produces faster growth due to more frequent interest-on-interest calculations

• It has no effect on total returns

• It reduces total returns due to administrative costs

• It only matters for investments over 30 years

What does present value (PV) measure?

• What a future sum of money is worth in today's dollars

• The total amount of interest earned over time

• The face value of a bond at maturity

• The highest price an investor has paid for an asset

If interest rates increase, what happens to the present value of a future cash flow?

• It decreases because future cash is discounted more heavily

• It increases because higher rates mean more money

• It stays the same since the future cash flow hasn't changed

• It increases initially then decreases over time

A bond's price is fundamentally determined by:

• The present value of all its future coupon payments plus the present value of its face value at maturity

• The face value printed on the bond certificate

• The credit rating of the issuer alone

• The original purchase price adjusted for inflation

Which type of debt instrument makes no periodic interest payments and is sold below face value?

• Discount (zero-coupon) bond

• Coupon bond

• Fixed-payment loan

• Simple loan

A fixed-payment loan is characterized by:

• Equal periodic payments that include both principal and interest

• A single lump-sum payment at maturity

• Variable payments that change with market rates

• Interest-only payments followed by a balloon payment