The Time Value of Money
Q1: Both the future and present value of a sum of money are based on:
(A) interest rate
(B) number of time periods
(C) both a and b
(D) none of the above
Answer: (C) both a and b
Q2: An annuity is ___________________.
(A) more than one payment
(B) a series of unequal but consecutive payments
(C) a series of equal and consecutive payments
(D) a series of equal and non-consecutive payments
Answer: (C) a series of equal and consecutive payments
Q3: If you have $1000 and you plan to save it for 4 years with an interest rate of 10%, what is the future value of your savings?
(A) $1464.00
(B) $1000.00
(C) $1331.00
(D) cannot be determined
Answer: (C) $1331.00
Q4: Time value of money is an important finance concept because:
(A) it takes risk into account
(B) it takes time into account
(C) it takes compound interest into account
(D) all of the above
Answer: (D) all of the above
Q5: The present value of a dollar to be received in the future is:
(A) more than a dollar
(B) equal to a dollar
(C) less than a dollar
(D) none of the above
Answer: (C) less than a dollar
Q6: The future value of a dollar that you invest today is:
(A) more than a dollar
(B) equal to a dollar
(C) less than a dollar
(D) none of the above
Answer: (A) more than a dollar
Q7: The future value of an annuity is:
(A) less than each annuity payment
(B) equal to each annuity payment
(C) more than each annuity payment
(D) none of the above
Answer: (C) more than each annuity payment
Q8: The concepts of present value and future value are:
(A) directly related to each other
(B) not related to each other
(C) proportionately related to each other
(D) inversely related to each other
Answer: (D) inversely related to each other
Q9: If you win the lottery and you choose to have your proceeds distributed to you over a twenty-year time period, with the first payment coming to you one year from today, which calculation would you use to calculate the worth of those proceeds to you today?
(A) future value of a lump sum
(B) future value of an annuity
(C) present value of a lump sum
(D) present value of an annuity
Answer: (D) present value of an annuity
Q10: You have $1000 you want to save. If four different banks offer four different compounding methods for interest, which method should you choose to maximize your $1000?
(A) compounded daily
(B) compounded quarterly
(C) compounded semi-annually
(D) compounded annually
Answer: (A) compounded daily