Time Value of Money: Multiple Choice Questions
Chapter 5: Time Value of Money
Multiple Choice Questions
1. What is the total amount accumulated after three years if someone invests $1,000 today with a simple annual interest rate of 5 percent? With a compound annual interest rate of 5 percent? A. $1,150, $1,103 B. $1,110, $1,158 C. $1,150, $1,158 D. $1,110, $1,103 Level of difficulty: Easy Solution: C. Simple interest rate: $1,000 + ($1,000)(5%)(3) = $1,150 Compound interest rate: $1,000(1.05)3 = $1,158
2. Which of the following has the largest future value if $1,000 is invested today? A. Five years with a simple annual interest rate of 10 percent B. 10 years with a simple annual interest rate of 8 percent C. Eight years with a compound annual interest rate of 8 percent D. Eight years with a compound annual interest rate of 7 percent Level of difficulty: Easy Solution: C. A) $1,000 + ($1,000)(10%)(5) = $1,500 B) $1,000 + ($1,000)(8%)(10) = $1,800 C) $1,000(1.08)8 = $1,851 D) $1,000(1.07)8 = $1,718 Therefore, C is the largest.
Interest rates in the following questions are compound rates unless otherwise stated
3. Suppose an investor wants to have $10 million to retire 45 years from now. How much would she have to invest today with an annual rate of return equal to 15 percent? A. $18,561 B. $17,844 C. $20,003 D. $21,345 Level of difficulty: Medium Solution: A. PV=$10,000,000/(1.15)45=10,000,000/538.7693=$18,561 Or using a financial calculator (TI BAII Plus), N=45, I/Y=15, PMT=0, FV=10,000,000, CPT PV= –18,561
4. Which of the following is false? A. The longer the time period, the smaller the present value, given a $100 future value and holding the interest rate constant. B. The greater the interest rate, the greater the present value, given a $100 future value and holding the time period constant. C. A future dollar is always less valuable than a dollar today if interest
Multiple Choice Questions
1. What is the total amount accumulated after three years if someone invests $1,000 today with a simple annual interest rate of 5 percent? With a compound annual interest rate of 5 percent? A. $1,150, $1,103 B. $1,110, $1,158 C. $1,150, $1,158 D. $1,110, $1,103 Level of difficulty: Easy Solution: C. Simple interest rate: $1,000 + ($1,000)(5%)(3) = $1,150 Compound interest rate: $1,000(1.05)3 = $1,158
2. Which of the following has the largest future value if $1,000 is invested today? A. Five years with a simple annual interest rate of 10 percent B. 10 years with a simple annual interest rate of 8 percent C. Eight years with a compound annual interest rate of 8 percent D. Eight years with a compound annual interest rate of 7 percent Level of difficulty: Easy Solution: C. A) $1,000 + ($1,000)(10%)(5) = $1,500 B) $1,000 + ($1,000)(8%)(10) = $1,800 C) $1,000(1.08)8 = $1,851 D) $1,000(1.07)8 = $1,718 Therefore, C is the largest.
Interest rates in the following questions are compound rates unless otherwise stated
3. Suppose an investor wants to have $10 million to retire 45 years from now. How much would she have to invest today with an annual rate of return equal to 15 percent? A. $18,561 B. $17,844 C. $20,003 D. $21,345 Level of difficulty: Medium Solution: A. PV=$10,000,000/(1.15)45=10,000,000/538.7693=$18,561 Or using a financial calculator (TI BAII Plus), N=45, I/Y=15, PMT=0, FV=10,000,000, CPT PV= –18,561
4. Which of the following is false? A. The longer the time period, the smaller the present value, given a $100 future value and holding the interest rate constant. B. The greater the interest rate, the greater the present value, given a $100 future value and holding the time period constant. C. A future dollar is always less valuable than a dollar today if interest