TEST BANK:

TIME VALUE OF MONEY

(Difficulty: E = Easy, M = Meiu!, a" T = T#u$%&
FV of an annuity Answer: e Diff: E
1
. What is the future value of a 5-year ordinary annuity with annual
payments of $200, evaluated at a 15 percent interest rate?
a. $ 60.!!
". $ #!2.$1
c. $1,16$.56
d. $1,522.6!
e. $1,%!#.!#
PV of an annuity Answer: a Diff: E
2
. What is the present value of a 5-year ordinary annuity with annual
payments of $200, evaluated at a 15 percent interest rate?
a. $ 60.!%
". $ #!2.$1
c. $1,16$.56
d. $1,%!#.!#
e. $1,522.6!
PV of a perpetuity Answer: c Diff: E
%
. &ou have the opportunity to "uy a perpetuity which pays $1,000 annually.
&our re'uired rate of return on this investment is 15 percent. &ou
should "e essentially indifferent to "uyin( or not "uyin( the investment
if it were offered at a price of
a. $5,000.00
". $6,000.00
c. $6,666.6
d. $,500.00
e. $#,2#.50
Required annuity payments Answer: b Diff: E
!
. )f a 5-year ordinary annuity has a present value of $1,000, and if the
interest rate is 10 percent, what is the amount of each annuity payment?
a. $2!0.!2
". $26%.#0
c. $%00.20
d. $%15.%#
e. $%!6.#
Quarterly compounding Answer: a Diff: E
5
. )f $100 is placed in an account that earns a nominal ! percent,
compounded 'uarterly, what will it "e worth in 5 years?
a. $122.02
Chapter 2 - Page 1
". $105.10
c. $1%5.!1
d. $120.$0
e. $11.!#
Effective annual rate Answer: b Diff: E
6
. &ou recently received a letter from *ut-to-the-*hase +ational ,an- that
offers you a new credit card that has no annual fee. )t states that the
annual percenta(e rate ./012 is 1# percent on outstandin( "alances. What
is the effective annual interest rate? .3int4 1emem"er these companies
"ill you monthly.2
a. 1#.#15
". 1$.565
c. 1$.255
d. 20.005
e. 1#.005
Medium:
FV of an annuity Answer: b Diff:

. /ssume you are to receive a 20-year annuity with annual payments of $50.
6he first payment will "e received at the end of &ear 1, and the last
payment will "e received at the end of &ear 20. &ou will invest each
payment in an account that pays 10 percent. What will "e the value in
your account at the end of &ear %0?
a. $6,%5!.#1
". $,!2.#%
c. $,$22.%%
d. $#,5$1.00
e. $6,52.!6
FV of annuity due Answer: b Diff:
#
. &our uncle has a(reed to deposit $%,000 in your "ro-era(e account at the
"e(innin( of each of the ne7t five years .t 8 0, t 8 1, t 8 2, t 8 % and
t 8 !2. &ou estimate that you can earn $ percent a year on your
investments. 3ow much will you have in your account four years from now
.at t 8 !2? ./ssume that no money is withdrawn from the account until
t 8 !.2
a. $1%,1$.%$
". $1,$5!.1%
c. $1$,50.00
d. $21,!%0.!5
e. $22,!%6.12
FV under mont!ly compounding Answer: e Diff:
$
. &ou 9ust put $1,000 in a "an- account which pays 6 percent nominal
annual interest, compounded monthly. 3ow much will you have in your
account after % years?
a. $1,006.00
". $1,056.!5
Chapter 2 - Page 2
c. $1,1#0.%2
d. $1,1$1.00
e. $1,1$6.6#
'(A)TE* +
ANS,E*S AND SOLUTIONS
Chapter 2 - Page 3
1"
2" PV of an annuity Answer: a Diff: E
6ime :ine4
0
155
1 2 % ! 5 &ears
;<<<<<<<<<=<<<<<<<<<=<<<<<<<<=<<<<<<<<<=<<<<<<<<<>
0? 8 ? 200 200 200 200 200
+umerical solution4
0? 8 $200..1-.1@1.15
5
22@.152 8 $200 %.%522 8 $60.!!.
Ainancial calculator solution4
)nputs4 + 8 5B ) 8 15B 0C6 8 200B A? 8 0. Dutput4 0? 8 -$60.!%.
%
" PV of a perpetuity Answer: c Diff: E
? 8 0C6@i 8 $1,000@0.15 8 $6,666.6.
!" Required annuity payments Answer: b Diff: E
6ime :ine4
0
105
1 2 % ! 5 &ears
E E E E E E
0? 8 1,000 0C6 8 ? 0C6 0C6 0C6 0C6
+umer
ical solution4
$1,000 8 0C6..1-.1@1.1
5
22@.12
0C6 8 $1,000@%.$0# 8 $26%.#0.
Ainancial calculator solution4
)nputs4 + 8 5B ) 8 10B 0? 8 -1,000B A? 8 0. Dutput4 0C6 8 $26%.#0.
5
" Quarterly compounding Answer: a Diff: E
6ime :ine4
0
15
1 2 % ! 5 6 # $ 10 11 12 1% 1! 15 16 1 1# 1$ 20 Ftrs
;<<<=<<<=<<<<=<<=<<<=<<<=<<<=<<<=<<<<=<<=<<<<=<<=<<<=<<<=<<<<=<<<=<<=<<<=<<<=<<>
-100 A? 8 ?
+umerical solution4
$100.1.01
20
2 8 $100.1.22022 8 $122.02.
Ainancial calculator solution4
)nputs4 + 8 20B ) 8 1B 0? 8 -100B 0C6 8 0. Dutput4 A? 8 $122.02.
6" Effective annual rate Answer: b Diff: E
Gse the formula for calculatin( effective rates from nominal rates as
follows4
H/1 8 .1 I 0.1#@122
12
- l 8 0.1$56 or 1$.565.

" FV of an annuity Answer: b Diff:

.
#
$