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Exam 2: Tools for Financial Planning - Applying Time Value Concepts

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Question 41

Multiple Choice

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If you want to save $40 000 for a down payment on a home in five years, assuming an interest rate of 4.5 percent compounded annually, how much money do you need to save each month?

A) $666
B) $697
C) $662
D) $597

E) None of the above
F) B) and C)

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Question 42

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The future value of $100 will increase with a particular interest rate, but the longer the period of time, the smaller the future value.

A) True
B) False

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Question 43

Multiple Choice

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Financial institutions quote rates with different compounding periods. What is the term for the actual interest rate paid or earned?

Present value of the first year is determined by the future value divided by (1 + i).

Nick invests $50 000 today and the fund guarantees an annuity of $12 345 for six years. What is the approximate rate of return?

Ordinary annuity is a series of equal amounts of cash flow happening at equal intervals at the end of a period.

Mary deposits $4000 at the beginning of each year and the money will grow to $1 081 170 in 30 years with 12 percent compounded annually.

Discount refers to the process of earning interest on interest.

The amount to be invested today at a given interest rate over a specified period in order to equal a future amount is called

Future value interest factor (FVIF)bases $1.00 to calculate the $1.00 over time with a given interest rate and the number of periods the $1.00 is compounded.

ABC Bank offers term deposits with 8 percent compounded semi-annually, while XYZ Bank offers term deposits with 7.9 percent compounded monthly. We are sure that ABC Bank offers a higher annualized rate of return.

To convert the table from ordinary annuity to annuity due is to multiple the annuity payment by (1+ i).

The process of obtaining a present value is called discounting.

Approximately what is the present value needed to receive $200 ten years from today, with an annual interest rate of ten percent?

Dividend is the rent charged for the use of money.

Aleem needs to figure out how much interest he would save if he paid off his mortgage over 15 years instead of 30 years? His mortgage is $100 000 at six percent interest calculated semi-annually.

Assuming a discount rate of 14 percent per year, Peter wants to know the market value of his investment today based on the following cash flows: Year Cash flows 1 to 5 $20 000 per year 6 to 10 $35 000 per year

Compound interest is the process used to earn interest on interest.

An investment of $2500 grows to $108 945 at 10 percent per annum.

The higher the interest rate, the higher the future value, other things being equal.