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Theory Questions For Time Value of Money

The document contains several multiple choice questions about time value of money concepts: 1) Question asks about statements regarding present value of annuities and nominal vs effective interest rates. 2) Question asks about statements on effective interest rates when interest is compounded semiannually and types of annuity payments. 3) Question asks about statements on amortized loan payments and interest rates, as well as perpetuities and interest rates. 4) Question asks user to calculate future value after 18 months of an initial $1,000 deposit earning 8% interest compounded quarterly from a savings account.

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Kim Davillo
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98 views2 pages

Theory Questions For Time Value of Money

The document contains several multiple choice questions about time value of money concepts: 1) Question asks about statements regarding present value of annuities and nominal vs effective interest rates. 2) Question asks about statements on effective interest rates when interest is compounded semiannually and types of annuity payments. 3) Question asks about statements on amortized loan payments and interest rates, as well as perpetuities and interest rates. 4) Question asks user to calculate future value after 18 months of an initial $1,000 deposit earning 8% interest compounded quarterly from a savings account.

Uploaded by

Kim Davillo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Time value concepts Answer: e Diff: M

1. Which of the following is most correct?

a. The present value of a 5-year annuity due will exceed the present value of a 5-year
ordinary annuity. (Assume that both annuities pay $100 per period and there is no chance
of default.)
b. If a loan has a nominal rate of 10 percent, then the effective rate can never be less
than 10 percent.
c. If there is annual compounding, then the effective, periodic, and nominal rates of
interest are all the same.
d. Statements a and c are correct.
e. All of the statements above are correct.

Time value concepts Answer: c Diff: M


2. Which of the following statements is most correct?

a. An investment that compounds interest semiannually, and has a nominal rate of 10


percent, will have an effective rate less than 10 percent.
b. The present value of a 3-year $100 annuity due is less than the present value of a 3-
year $100 ordinary annuity.
c. The proportion of the payment of a fully amortized loan that goes toward interest
declines over time.
d. Statements a and c are correct.
e. None of the statements above is correct.
Time value concepts Answer: e Diff: T
3. Which of the following statements is most correct?

a. The first payment under a 3-year, annual payment, amortized loan for $1,000 will
include a smaller percentage (or fraction) of interest if the interest rate is 5 percent than if
it is 10 percent.
b. If you are lending money, then, based on effective interest rates, you should prefer
to lend at a 10 percent nominal, or quoted, rate but with semiannual payments, rather than
at a 10.1 percent nominal rate with annual payments. However, as a borrower you should
prefer the annual payment loan.
c. The value of a perpetuity (say for $100 per year) will approach infinity as the
interest rate used to evaluate the perpetuity approaches zero.
d. Statements b and c are correct.
e. All of the statements above are correct.

FV of a sum Answer: b Diff: E


4. You deposited $1,000 in a savings account that pays 8 percent interest,
com¬pounded quarterly, planning to use it to finish your last year in college.
Eighteen months later, you decide to go to the Rocky Mountains to become a ski
instructor rather than continue in school, so you close out your account. How much
money will you receive?

a. $1,171
b. $1,126
c. $1,082
d. $1,163
e. $1,008

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