1. One of the potential benefits of saving early for retirement is that an investor can receive greater benefits from the compounding of interest.

True

False

2. All else equal, a dollar received later is worth more than a dollar received sooner, because the sooner the dollar is received the more quickly it will be spent.

True

False

3. An increase in interest rate would increase the present value of a future-amount, since future dollars would be worth less today.

True

False

4. The present value interest factor for I percent and n periods is the inverse of the future value interest factor for I percent and n periods

True

False

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

True

False

6. An perpetuity is a series of equal payments made at fixed equal-length intervals of a specified number of periods.

False

True

7. You deposit $2,000 today in a savings account that pays 5% interest compounded annually, how much will your account be worth at the end of 10 years?

$1227.8; $15,443.5; $3000.00; $3257.8

8. What is the present value of your trust fund if it promises to pay you $10,000 on your 30^th birthday (9 years from today) and earns 8% compounded annually?

9. Dan plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 9 percent on his contributions, how much will he have at the end of the tenth year?

$20,000; $28,974; $30,385; $43,874

10. The future value of $100 received today and deposited at 10 percent compounded semi-annually for five years is.

A) $126

B) $ 79

C) $124

D) $116

11. How much equal amount must be saved annually, beginning one year from now, in order to accumulate $100,000 over the next 10 years, earning 8% annually?

$6,582; $6,903; $7,302; 10,000

12. Which of the following will increase the present value of an annuity, other things equal?

Increasing the interest rate; Decreasing the interest rate; Decreasing the number of payments; Decreasing the amount of the payment

13. All else equal, if you deposit a certain amount money today, say, $500, for ten (10) years, the future value of that amount will be highest if the interest earned on such investments is compounded.

Quarterly; Weekly; Monthly; Annually

14. Suppose someone offered you your choice of two equally risky annuities, each paying $1,000 per year for 10 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth-maximizing investor which annuity would you choose?

The annuity due

The deferred regular ordinary annuity

Either one, because as the problem is set up, they have the same present value.

Without information about the appropriate interest rate, we cannot find the values of the two annuities, hence we cannot tell which is better

15. What is the amount of each annuity payment for a 5-year $10,000 Loan if the interest rate is 10 percent? (Assume the first payment will be made a year from today)

$2402.2; $2638.0; $3002.0; $3153.8

16. Marion Makes annual end-of-year payments of $7,513.69 on a five-year loan with a 8 percent interest rate. The original principal amount was (round to the nearest dollar)

$23,375; $30,000; $37,568; 33,000

17.

18. A Steam of unlimited number of equal cash payments is termed:

An annuity;

an even cash flows

an installment plan

a perpetuity

19. The annual rate of return is variously referred to as the discount rate

20. You are considering two equally risk annuities, each of which pays $2000 per year for 10 years. Investment ORD is an ordinary (or deferred annuity, while Investment Due is an annuity. Which of the following statements is CORRECT?

The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future of DUE.

The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.

The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.

The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

21. You have the opportunity to buy a perpetuity which pays $1200 annually Your required rate of return on this investment is 6 percent. What is the present value of this perpetuity?

$15,000.00; $20;000.00; $10,000.00; $20,500.00

22. You want to buy a Toyota Prius on your 27^th birthday. You have priced these cars and found that they currently sell for $30,000. You believe that the price will increase to $36,000 in seven years when you are ready to buy. You can presently invest to earn 10 percent. If you just turned 20 years old, how much must you save at the end of each of the next 7 years to be able to purchase the Toyota Prius in 7 years?

Present value of $1 to be received at the end of n periods (I, per period interest rate)

PVIF (I,n)=

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

23. Prizes are often not worth as much as claimed. Place a value on a lottery prize of $1,000,000 which is to be received in 10 equal payments over 10 years, that is, $100,000 per year, with the first payment beginning a year from today. Assume annual interest rate of 8% over the 10 years. (hint: present value of an ordinary annuity).

24. You have provided your client with a legal service worth $8,300. Your client offers you the following cash flows instead of paying $8,300.00 today. Should you accept his offer if your opportunity cost is 9 percent.