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Exam 9: The Time Value of Money

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Question 1

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If you invest $10,000 today at 10% interest, how much will you have in 10 years?

A) $13,860
B) $25,940
C) $3,860
D) $80,712

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Question 2

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

A) the present value of an annuity.
B) the present value of $1.
C) the future value of $1.
D) the future value of an annuity.

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Question 3

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In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of principal increases over the life of the mortgage.

Present value is the opposite of the future value.

When the inflation rate is zero, the present value of $1 is identical to the future value of $1.

Fishermen's Corp. is considering purchasing a boat. If the boat was purchased, it is expected to receive $20,000 at the end of the first year, $40,000 at the end of the second year, and $60,000 at the end of the third year within its business. What is the boat worth to Fishermen's Corp today, assume an 8% discount rate.

A major disadvantage to time value of money is that is only considers one item that changes the value of the dollar such as interest.

Joe Nautilus has $210,000 and wants to retire. What approximate return must his money earn so he may receive annual benefits of $30,000 for the next 10 years?

Using semiannual compounding rather than annual compounding will increase the future value of an annuity.

Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment and begins investing one year from now?

Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.

In evaluating capital investment projects, current outlays must be judged against the current value of future benefits.

Sara would like to evaluate the performance of her portfolio over the past 10 years. What compound annual rate of return has she achieved if she invested $12,000 ten years ago and now has $25,000?

After 10 years, some shares of stock originally purchased for $500 total were sold for $900 total. What was the yield on the investment? Choose the closest answer.

Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the next 5 years starting one year from now and expects to earn a 6% annual rate of return. How much money will his daughter have when she starts college?

You are to receive $12,000 at the end of each of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

Discounted at 6%, $1,000 received three years from now is worth less than $800 received today.

As the time period until receipt increases, the present value

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

The process of earning more interest on a previous period's interest is called future value.