1. Which of the following statements is correct? Statement 1. Of all the techniques used in finance, the least important is the concept of the time value of money. Statement 2. Compounding is the process of converting today's values, which are termed present value, to future value. Statement 3. Cash flow time lines are used primarily for decisions involving paying off debt or investing in financial securities. They cannot be used when making decisions about investments in physical assets.

a. Statement 3 only.

b. Neither of the statements.

c. Statement 1 only.

d. Statement 2 only.

1. Present value is

a. The future value of interest payments times the discount factor.

b. The amount of money you would need to invest today to yield a given future amount.

c. The cost of a bond today, minus the future value of interest payments.

d. The future value of interest payments times the rate of discount.

1. Which of the following investments would have the highest future value (in year 5) if the discount rate is 12%?

a. A five-year ordinary annuity of P100 per year.

b. A five-year annuity due of P100 per year.

c. P700 to be received at year 5

d. P500 to be received TODAY.

1. The Tampa Bay Buccaneers just signed their next Tom Brady, the best quarterback ever, to a 5-year P500 million contract. Is this contract really worth P500 million?

No, it would only be worth P500 million if it were all paid out today.

Yes, because his agent told him so.

Yes, because the payments over time add up to P500 million.

No, it is worth more because he can invest the money.

1. All else equal, the future value of a lump-sum amount invested today will increase if the

Amount initially invested is lowered.

Number of compounding periods is increased.

Investment time period is shortened.

Interest rate that is earned is lowered.

Two or more of the above answers are correct.

1. As the interest rate increases, the present value of an amount to be received at the end of a fixed period

Increases.

Not enough information to tell.

Decreases.

Remains the same.

1. Which of the following statements is NOT correct? Statement 1. An annuity is a series of equal payments made at fixed equal-length intervals for a specified number of periods. Statement 2. The difference between an ordinary annuity and an annuity due is that each of the payments of the annuity due earns interest for one additional year (period). Statement 3. The difference between the PV of an annuity due and the PV of an ordinary annuity is that each of the payments of the annuity due is discounted by one more year.

All of the statements are correct.

Statement 3 only.

Statement 1 only.

Statement 2 only.

1. Which of the following statements is CORRECT?

Time lines are not useful for visualizing complex problems prior to doing actual calculations.

Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur in different time interval in the period.

Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

A time line is not meaningful unless all returns of cash flows are constant throughout the period.

1. Time lines can only be constructed for annuities where the payments occur at the beginning of the periods, i.e., for annuity due.

Everything else equal, which of the following conditions will result in the LOWEST PRESENT VALUE of an amount to be received in the future?

Quarterly compounding

Monthly compounding

Annual compounding

Daily compounding

1. Which of the following statements is correct? Statement 1. If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate. Statement 2. If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

None of the statements is correct.

Statement 2 only.

Statement 1 only.

Both statements are correct.

1. Which of the following statements is CORRECT?

Time lines are not useful at all in visualizing problems in time value of money.

Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

A time line is not meaningful unless all cash flows occur annually.

1. Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

In a number of periods, the present-value equation, PV = FV/(1+i)^n, the term (1+i)^n is known as

The rate of discount.

Future value.

Present value.

The discount factor.

1. Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will

Be higher.

Stay the same.

Be lower.

Be variable.

1. Increasing the number of periods will increase all of the following except

The future value of P1.

The present value of P1.

The future value of an annuity.

The present value of an annuity.

1. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.

All of the choices.

The discount rate increases.

The discount rate decreases.

None of the choices.

1. As the compounding rate becomes lower and lower, the future value of inflows approaches

The present value of the inflows

Need more information

Infinity

0

1. Suppose someone offered you your choice of two equally risky annuities, each paying P5,000 per year for 5 years. One is an annuity due, while the other is an ordinary annuity. If you are a rational wealth-maximizing investor which annuity would you choose?

The annuity due.

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

The ordinary annuity.

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

1. The present value of a series of payments is

Directly related to the discount factor.

Inversely related to the future value.

Directly related to the rate of discount.

Inversely related to the rate of discount.

1. Which of the following statements is TRUE? Statement 1. As you increase the interest rate, the future value of an investment increases. Statement 2. As you increase the length of the investment (to receive some lump sum), the present value of the investment increases. Statement 3. The present value of an ordinary annuity is larger than the present value of an annuity due.

Neither of the statements.

Statement 2 only.

Statement 3 only.

Statement 1 only.

1. In the equation, PV=1,000/(1+.01)^5 the number "1,000" represents

The number of periods before the cash flow is to be received.

The present value a cash flow to be received at a later date.

The future value a cash flow to be received at a later date.

The discount rate for the future cash flow.

1. Discounting is

None of the choices.

Calculating the present value of future cash flows.

Is necessary in order to pull present values to the future.

Calculating the future value of present cash flows.

1. What is the term used to describe an annuity with an infinite life?

Infinuity.

There is no special term for an infinite annuity.

Infinity due.

Perpetuity.

1. Which statement is FALSE concerning the time value of money?

The greater the compound frequency, the greater the Effective Annual Rate (EAR).

The stated interest rate is also referred to as the Annual Percentage Rate (APR).

An account that pays simple interest will have a lower future value than an account that pays compound interest.

The Effective Annual Rate (EAR) is always greater than the Annual Percentage Rate (APR).

1. Which of the following bank accounts has the HIGHEST EFFECTIVE ANNUAL RETURN?

An account that pays 7% nominal interest with daily (365-day) compounding.

An account that pays 8% nominal interest with daily (365-day) compounding.

An account that pays 8% nominal interest with monthly compounding.

An account that pays 7% nominal interest with monthly compounding.

An account that pays 8% nominal interest with annual compounding.

1. Which of the following statements is CORRECT?

In all cases where interest is added or payments are made more frequently than annually, the periodic rate is less than the annual rate.

Simple rates cannot be used in present value or future value calculations because they fail to account for compounding effects.

The periodic interest rate can be used directly in calculations as long as the number of payments per year is greater than or equal to the number of compounding periods per year.

If the compounding period is semiannual then the periodic rate will equal the effective annual rate divided by two.

Generally, the Annual Percentage Rate (APR) is greater than the Effective Annual Rate (EAR) as a result of compounding effects.

1. Which of the following bank accounts has the LOWEST EFFECTIVE ANNUAL RETURN?

An account that pays 8% nominal interest with daily (365-day) compounding.

An account that pays 8% nominal interest with monthly compounding.

An account that pays 8% nominal interest with annual compounding.

An account that pays 7% nominal interest with monthly compounding.

An account that pays 7% nominal interest with daily (365-day) compounding.

1. All else equal, if you expect to receive a certain amount in the future, say, P500 in ten (10) years, the PRESENT VALUE of that future amount will be LOWEST if the interest earned on such investments is compounded

Weekly

Quarterly

Annually

Daily

Monthly

1. As the time period until receipt increases, the present value of an amount at a fixed interest rate

Not enough information to tell.

Increases.

Decreases.

Remains the same.

1. According to the concepts underlying the present-value formula, would you prefer to receive (a) P75 one year from now, (b) P85 two years from now, or (c) P90 three years from now, if the relevant market interest rate is 10% and will remain at 10% for the next three years?

P90 three years from now

The present values of all three choices are identical

P85 two years from now

P75 one year from now

1. Earning interest on interest that was earned in prior years is called

Present valuing.

Discounting.

Compounding.

Bonding.

1. Which of the following statements is CORRECT?

A time line is not meaningful unless all cash flows occur annually.

Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

Time lines are useful for visualizing complex problems prior to doing actual calculations.

1. Which of the following statements is correct? Statement 1. The effective annual rate is less than the simple rate when we have monthly compounding. Statement 2. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. Statement 3. The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.

Statement 2 only.

Neither of the statements.

Statement 1 only.

Statement 3 only.

1. The amount that someone is willing to pay today, for a single cash flow in the future is

The present value of the cash flow.

The future value of the stream of cash flows.

The present value of the annuity of cash flows.

The future value of the cash flow.

1. You are to receive P12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

Future value of an annuity

Present value of P1

Future value of P1

Present value of an annuity of P1

1. Which of the following statement is CORRECT? Statement 1. The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant. Statement 2. The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.

Both of the statements are correct.

Statement 2 only.

None of the statements is correct.

Statement 1 only.

1. You have the choice between two investments that have the same maturity and the same nominal return. Investment A pays SIMPLE interest, investment B pays compounded interest. Which one should you pick?

A, because it has a higher effective annual return.

A and B offer the same return, thus they are equally as good.

Not enough information.

B, because it has higher effective annual return.

1. Which is NOT correct regarding an ordinary annuity and annuity due?

The present value of an ordinary annuity is less than the present value of an annuity due (assuming interest rate is positive).

As the length of the annuity increases, the future value of the annuity decreases.

An annuity is a series of equal payments.

As the interest rate increases, the present value of an annuity decreases.

1. Discounting is the process of dividing a future value by the ________ to obtain the ________ value.

Discount factor; past

Discount factor; present

Rate of discount; past

Rate of discount; present

1. The amount that someone is willing to pay today, for a single cash flow in the future is

The present value of the annuity of cash flows

The future value of the cash flow.

The future value of the stream of cash flows.

The present value of the cash flow.

1. Which of the following statements is correct? Statement 1. The effective annual rate is always greater than the simple rate as a result of compounding effects. Statement 2. Because we usually assume positive interest rates in time value analysis, the present value of a three-year annuity will always be less than the future value of a single lump sum, if the annuity payment equals the original lump sum investment. Statement 3. All else equal, a peso received sooner is worth more than a peso received at some later date, because the sooner the peso is received the more quickly it can be invested to earn a positive return.

None of the statements.

Statement 3 only.

Statement 2 only.

Statement 1 only.

1. The amount of money you would need to invest today to yield a given future amount is called

The rate of discount.

Future value.

The discount factor.

Present value.

1. Jullan sets aside P2,000 each year for 5 years. She then withdraws the funds on an equal annual basis for the next 4 years. If Jullan wishes to determine the amount of the annuity to be withdrawn each year, she should use the following two tables in this order:

Present value of an annuity of P1; future value of an annuity of P1

Future value of an annuity of P1; present value of an annuity of P1

Future value of an annuity of P1; future value of a P1

Future value of an annuity of P1; present value of a P1

1. By definition, what type of annuity best describes payments such as prepaid load for phones, dormitory rentals and magazine subscriptions (assuming the costs do not change over time)?

Annuity in arrears.

Ordinary annuity.

Annuity due.

Nonconstant annuity.

1. If you were evaluating an investment over a 10-year period that paid 8% compounded semiannually:

None of the choices.

You would need to divide the number of years by two and multiply the interest rate by two to properly adjust for the semiannual compounding.

You would need to divide the interest rate by two and multiply the number of years by two to properly adjust for the semiannual compounding.

You would not need to make any special adjustments because the semiannual compounding will not impact the investment's future value.

1. Which of the following payments (receipts) would probably NOT be considered an annuity due? Based on your knowledge and using logic, think about the timing of the payments.

Payments for a magazine subscription for a two-year period where the payments are made annually.

Annual payments associated with lottery winnings that are paid out as an annuity.

Interest receipts associated with a Certificate of Deposit that was bought today.

Rent payments associated with a five-year lease.

1. In a number of periods, the present-value equation, PV=FV/(1+i)^n, the term i is known as

The discount factor.

Future value.

The rate of discount.

Present value.

1. A peso today is worth more than a peso to be received in the future because

None of the choices.

Inflation will reduce purchasing power of a future peso.

Risk of nonpayment in the future.

The peso can be invested today and earn interest.

1. An annuity can best be described as

A set of payments to be received during a period of time.

An even stream of payments to be received at a common interval over the life of the payments.

A stream of payments to be received at a common interval over the life of the payments.

The present value of a set of payments to be received during a future period of time.

1. Which of the following statements is CORRECT about an annuity?

If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

The cash flows for an annuity due must all occur at the beginning of the periods.

If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.

The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.

1. Which of the following statements is CORRECT about an annuity?

If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.

The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

The cash flows for an annuity due must all occur at the ends of the periods.

1. The equation that allows us to compare peso amounts to be received or paid at different dates is the

Taylor rule.

Future-value formula.

Interest-rate parity equation.

Present-value formula.

1. What is the Effective Annual Return (EAR) for an investment that pays 10% compounded annually?

Less than 10 percent.

This question cannot be answered without knowing the peso amount of the investment.

Equal to 10 percent.

Greater than 10 percent.

1. To find the yield on investments which require the payment of a single amount initially, and which then return a single amount some time in the future, the correct table to use is

The future value of an annuity of P1

All of the choices

The future value of annuity due of P1

The future value of P1

1. Which of the following statements is TRUE?

A perpetuity will mature at some point in the future.

One cannot calculate the present value of a perpetuity.

In an annuity due payments occur at the end of the period.

In an ordinary annuity payments occur at the end of the period.

1. Under what conditions must a distinction be made between money to be received today and money to be received in the future?

When there is no risk of nonpayment in the future.

A period of recession.

When idle money can earn a positive return.

When current interest rates are different from expected future rates.

1. Which of the following statements is CORRECT? Statement 1. All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases. Statement 2. All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

Both of the statements are correct.

None of the statements are correct.

Statement 2 only.

Statement 1 only.

1. Which of the following cannot be calculated?

Future value of an annuity.

Present value of an annuity.

Present value of a perpetuity.

Future value of a perpetuity.

1. The shorter the length of time between a present value and its corresponding future value,

The lower the present value, relative to the future value.

The higher the interest rate used in the present-valuation.

None of the choices.

The higher the present value, relative to the future value.

1. A P250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?

The last payment would have a higher proportion of interest than the first payment.

The proportion of interest versus principal repayment would be the same for each of the 8 payments.

The annual payments would be larger if the interest rate were lower.

The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.

If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more pesos of interest under the 8-year amortization plan.

1. Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

The periodic rate of interest is 5% and the effective rate of interest is greater than 5%.

The periodic rate of interest is 2.5% and the effective rate of interest is 5%.

The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.

The periodic rate of interest is 5% and the effective rate of interest is also 5%.

1. The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. If the rate of interest that investors can earn on a 2-year investment is zero then

You will receive the same amount of money at maturity that you invested at the beginning of a 2-year investment.

All of the choices.

You will repay the same amount of money at the conclusion of a loan that you borrowed at the beginning of the 2-year loan.

The "cost" of using money for 2 years is zero.

1. The higher the rate used in determining the future value of a P1 annuity,

The smaller the future value at the end of the period.

The greater the future value at the end of a period.

The greater the present value at the beginning of a period.

None of the choices as the interest has no effect on the future value of an annuity.

1. Justine just signed a long-term lease on a condo unit in Baguio City (near SLU Mary Heights Campus) that requires her to make equal monthly payments for the next four years. The payments Justine has promised to make represent a(n) __________ for the landlord.

Annuity due

Ordinary annuity

Series of uneven cash flows

Perpetuity

1. Which of the following statements is NOT correct? Statement 1. The coupon rate is the rate of return you could earn on alternative investments of similar cash flows. Statement 2. A perpetuity is an annuity with perpetual payments. Statement 3. An amortized loan is a loan that requires equal payments over its life; its payments include both interest and repayment of the debt.

None of the statements.

Statement 2 only.

Statement 1 only.

Statement 3 only.

1. As the discount rate becomes higher and higher, the present value of inflows approaches

Need more information

Minus infinity

Plus infinity

0

1. In determining the future value of a single amount, one measures

The future value of an amount allowed to grow at a given interest rate.

The present value of periodic payments at a given interest rate.

The present value of an amount discounted at a given interest rate.

The future value of periodic payments at a given interest rate.

1. In the equation, PV=P1,000/(1+.05)^3, the exponent "3" represents

The future value of an investment.

The present value of an investment.

The annual rate of interest paid.

The number of periods that the present value is left on deposit.

1. At the end of 10 years, which of the following investments would have the HIGHEST FUTURE VALUE? Assume that the effective annual rate for all investments is the same and is greater than zero.

Investment C pays P125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays P2,500 at the end of 10 years (just one payment).

Investment E pays P250 at the end of every year for the next 10 years (a total of 10 payments).

Investment B pays P125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment A pays P250 at the beginning of every year for the next 10 years (a total of 10 payments).

1. The concept of time value of money is important to financial decision making because

All of the choices.

It emphasizes earning a return on invested capital.

It can be applied to future cash flows in order to compare different streams of income.

It recognizes that earning a return makes $1 worth more today than $1 received in the future.

1. An annuity may be defined as

A series of payments of unequal amount.

A payment at a fixed interest rate.

A series of consecutive payments of equal amounts.

A series of yearly payments.

1. If you hold the annual percentage rate constant while increasing the number of compounding periods per year, then

The effective interest rate will not change.

The effective interest rate will increase.

The effective interest rate will decrease.

None of the choices.

1. Of the following investments, which would have the LOWEST PRESENT VALUE? Assume that the effective annual rate for all investments is the same and is greater than zero.

Investment A pays P250 at the end of every year for the next 10 years (a total of 10 payments).

Investment E pays P250 at the beginning of every year for the next 10 years (a total of 10 payments).

Investment B pays P125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment C pays P125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays P2,500 at the end of 10 years (just one payment).

1. Which of the following statements is CORRECT?

A time line is not meaningful unless all cash flows occur annually.

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Time lines can present the annual returns of cash flows but must be constant throughout the period.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Time lines are not useful for visualizing complex problems prior to doing actual calculations.