TIME VALUE OF MONEY QUIZ

1.    Which of the following statements is (are) true?     (Note: more than one answer may be correct)

1. For a specific dollar amount today (the present value or PV), the associated future value (FV) will be larger, given a positive rate of return (or a positive interest rate).

2. For a specific dollar amount at some point in the future (a future value or FV), the present value today (or PV) will be larger, given a positive rate of return (or a positive interest rate).

3. For a specific dollar amount at some point in the future (a future value or FV), the present value today (or PV) will be smaller, given a positive rate of return (or a positive interest rate).

4. For a specific dollar amount today (the present value or PV), the associated future value (FV) will be snaller, given a positive rate of return (or a positive interest rate).

5. none of the above

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  • Correct answers are 'a' and 'c'

2.    A home mortgage loan and the related financial calculations are an example of _____.

1. a present value of a dollar problem

2. a future value of a dollar problem

3. a present value of an annuity problem

4. a future value of an annuity problem

5. none of the above

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  • Correct answer is 'c'

3.    All business investment decisions should be made on _____ .

1. a basis that maximizes profitability

2. a discounted cash flow basis

3. an accounting profit basis

4. a collaborative basis

5. none of the above

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  • Correct answer is 'b'

4.    Which of the following decisions can be made using time value of money problems?

1. personal investing decisions

2. small business investment decisions

3. home mortgage refinancing decisions

4. franchise investment decisions

5. retirement investment decisions

6. all of the above

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  • Correct answer is 'f'

5.    Which of the following statements is false?

1. A discount rate is nothing more than an interest rate that is used when calculating present values.

2. Compound Value Interest Factors are the same thing as Present Value Interest Factors.

3. When calculating compound interest the assumption is made that past interest earnings are reinvested.

4. Compound interest is the norm for time value of money calculations.

5. In simple interest calculations, it is assumed that past interest earned has not been reinvested.

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  • Correct answer is 'b'

6.    Which of the following statements is (are) false?

1. An annuity is a stream of equal payments.

2. An annuity due has the payments made at the beginning of each period.

3. An ordinary annuity has the payments made at the end of each period.

4. All annuities have the payments made in the middle of the payment period.

5. Annuity tables usually found in finance texts provide annuity interest rate factors for ordinary annuity streams.

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  • Correct answer is 'd'

7.    If you invest $1,000 for 3 years at 7% simple interest, how much will you have at the end of the 3 years?

1. $1,000.00

2. $1,070.00

3. $1,210.00

4. $1,225.04

5. cannot calculate with given information

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  • Correct answer is 'c'

8.    If you invest $1,000 for 3 years at 7% compound interest, how much will you have at the end of the 3 years?

1. $1,000.00

2. $1,070.00

3. $1,210.00

4. $1,225.04

5. cannot calculate with given information

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  • Correct answer is 'd'

9.    In a sinking fund, a firm makes a series of equal payments into a savings account in order to have a certain dollar amount available at some point in the future.  What type of time value problem is this?

1. a present value of a dollar problem

2. a future value of a dollar problem

3. a present value of an annuity problem

4. a future value of an annuity problem

5. none of the above

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  • Correct answer is 'd'

10.   Assume you will work for the next 20 years and at the end of each year you will deposit $20,000 into a savings account.  At the end of that 20 year period you will start withdrawing your retirement living expenses from that account at the beginning of every year.  This financial plan involves a _____ problem while you are working and a _____ problem while you are in retirement.

1. a present value of a dollar, future value of a dollar

2. a future value of an annuity due, a present value of an annuity due 

3. a future value of an annuity due, a present value of an ordinary annuity

4. a future value of an ordinary annuity, a present value of an annuity due 

5. a future value of an ordinary annuity, a present value of an ordinary annuity

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  • Correct answer is 'd'

These study questions only cover the online class notes.  You should also be able to answer any of the assigned discussion questions and problems in the text book assignments.

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