Multiple Choice Answers

1. If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1000 per year and lasts 20 years is closest to:
$9818
$45761
18519
20000

2. Dan buys a property for $250000. He is offered a 20-year loan by the bank, at an interest rate of 6% per year. What is the annual loan payment Dan must make?
$32,684.66
$66,486.34
$24,864.98
$21,796.14

3. Which of following statements is FALSE?
A dollar in the future is worth more than a dollar today
Its only possible to compare or combine values at the same point in time
The process of moving a value or cash flow forward in time is known as compounding
The effect of earning interest on interest is known as compound interest

4. Which of the following statements regarding perpetuities is FALSE?
a. To find the value of perpetuity one cash flow at a time would take forever
b. One example of a perpetuity is the British government bond called a consol
c. PV of a perpetuity= r/C
d. A perpetuity is a steam of equal cash flows that occurs at regular intervals and lasts forever

5. Consider the following timeline detailing a stream of cash flows:

Date
0                              1                                2                                3                                4                                5

         
         

$100                       $200                       $300                       $400                       $500                             ?
Cash flow

If the current market rate of interest is 6%, then the future value (FV) of this stream of cash flows is closest to:
$1723
$1500
$1288
$1626

6. Sara wants to have $500,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $500,000 in 20 years time?
a. $144,616
b.$180,884
c.$107,274
d.$231,480

7. If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment?
a. 5 years
b.12 years
c. 9 years
d.6 years

8. Owen expects to receive $20,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 7.5%, how much money can he borrow from the bank on the basis of this information?
a. $18,605
b.$11,428
c.$15,000
d.$21,500

9.On the day Harry was born, his parents put $1000 into an investment account that promises to pay a fixed interest rate of 4% per year. How much money will Harry have in this account when he returns 18?
a.$2,026
b.$1,720
c.$4,806
d.$2,804

10. Stella deposits $5,000 in a savings account at a bank that offers interest of 5.5% on such accounts. What is the value of the money in her savings account in one year’s time?
a. $5275
b.$5135
c.$4739
d. $7750

11. An annuity pays $50 per year for 20 years. What is the future value (FV) of this annuity at the end of those 20 years, given that the discount rate is 7%?
a. $1524.24
b. $684.76
c. $326.44
d. $2049.77

12. What is the present value (PV) of $80,000 received ten years from now, assuming the interest rate is 5% per year?
a. $49,113.06
b. $38,422.76
c. $76,000.00
d. $40,000.00

13. What is the present value (PV) of an investment that will pay $400 in one year’s time, and $400 every year after that, when the interest rate is 5%?
a. $2400
b. $7200
c. $3600
d. $8000

14. Date
0                              1                                2                                3                                4

       
       

?                              $100                       $100                       $200                       $200

Cash Flow

Consider the timeline detailing a stream of cash flows:
If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to:
$287
$674
$600
$460

15. What is the future value (FV) of 20,000 in four years, assuming the interest rate is 12% per year?
a. $32,020.64
b. $17,096.08
c. $28,292.66
d. $31,470.39

16. The timeline shown below best describes the cash flow of the following people?
Date (years)
0
1
2
3
4
Cash Flows
-$3500
$1000
$1000
$1000
$1000
Karen, who loans a friend $3500, which friend then pays back the loan in four annual installments of $1000
Joe, who puts down $3500 to buy a car, and then makes annual payments of $1000
Harry, who borrows $3500, and then receives an annual payment of $1000
Leo, who borrows $3500, and then pays back the loan in four annual payments of $1000

17.  An annuity pays $12 per year for 100 years. What is the present value (PV) of this annuity given that the discount rate is 8%?
a. $151.45
b. $144.62
c. $149.93
d. $146.63

18. Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $4000 per year. If he can get a five- year loan with an interest rate of 7.5%, what is the maximum price he can pay for the car?
a. $21,674
b. $18,243
c. $20,324
d. $16,184

19. A perpetuity has a PV of $32,000. If the interest rate is 10%, how much will the perpetuity pay every year?
a. $3520
b. $3200
c. $3100
d. $2909

20. If the risk- free rate of interest is 6%, then you should be indifferent between receiving $250 in one year or
a. $235.85 today
b. $250.00 today
c. $265.00 today
d. none of the above