Time Value of Money (Quiz 2)

10 questions

1. 1. You make an initial deposit of $5,000 in an investment account and after that you make monthly contributions of $50. The account earns an annual interest of 4% compounded monthly. How many years will it take for the account to be worth $10,000?
   4.38 years5.59 years8.33 years
2. 2. Annuity A makes an annual payment of $1,200 and Annuity B makes monthly payments of $100. Assuming the same discount rate and the same number of years over which the payments will be received, which of the following is TRUE?
   Present value of A is greater than present value of BPresent value of A is less than present value of BBoth will have the same present value
3. 3. An annuity due pays $1,000 every year for the next 10 years. The expected rate of return is 6% per annum. Calculate the future value of the annuity.
   $13,180.79$13,425.19$13,971.64
4. 4. An annuity due pays $1,000 every year for the next 10 years. The expected rate of return is 6% per annum. Calculate the present value of the annuity.
   $7,801.69$7,360.09$13,971.64
5. 5. You are planning to buy a house for which you want to accumulate a down payment of $15,000 over the next four years. You plan to do that by putting a certain sum of money in a savings account on the first of every month for the next 4 years. The account credits interest every month at the annual rate of 6%. Calculate the required monthly deposit.
   $275.89$277.27$285.74
6. 6. You have borrow $10,000 at the annual interest rate of 9%, and you are required to pay it back in 60 equal monthly instalments, the first one is due at the end of the first month. How much is the monthly instalment?
   $206.03$207.58$403.53

7. 7. As a result of an injury settlement with your insurance you have the choice between

   8. Receiving $5,000 today or

   9. $6,500 in three years

   You know that you can invest your money at 8% compounded annually. Which option should you pick?

   Choice 1, because it has a higher PV.You are indifferent between the two choices.Choice 2, because it has a higher PV
8. 8. If you hold the annual percentage rate constant while increasing the number of compounding periods per year, then
   The effective interest rate will increase.The effective interest rate will decrease.The effective interest rate will not change.
9. 9. Which of the following statements are FALSE?

   Statement I: As you increase the interest rate, the future value of an investment increases.

   Statement II: As you increase the length of the investment (to receive some lump sum), the present value of the investment increases.

   Statement III: The present value of an ordinary annuity is larger than the present value of an annuity due. (All else equal)

   Statement I and IIStatements II and III Statements I and III
10. 10. Which of the following cannot be calculated?
    Present value of an annuity.Future value of an annuity.Future value of perpetuity.