# Finance Multiple Choice Assignment Solution Sample Assignment

An increase in future value can be caused by an increase in the:

- annual interest rate.
- number of compounding periods.
- original amount invested.
- both A and B.
- all of the above.

**Answer:** D) both A and B.

A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1.

- $1,444
- $1,604
- $1,764
- $1,283

**Answer:** B) $1,604

You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?

- $25,000
- $31,060
- $38,720
- $34,310

**Answer:** B) $31,060

If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?

- $72
- $70
- $71
- $57

**Answer:** C) $71

If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)?

- $827
- $833
- $828
- $1,176

**Answer:** B) $833

If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the investment be worth in 37 weeks (round to the nearest dollar)?

- $648
- $635
- $634
- $645

**Answer:** B) $635

Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?

- 500(1 + .08)5
- 500(1 + .08)20
- 500(1 + .02)5
- 500(1 + .02)20

**Answer:** D) 500(1 + .02)20

What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?

- $1,048
- $1,010
- $1,038
- $808

**Answer:** A) $1,048

Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?

- 73 months
- 75 months
- 77 months
- 79 months

**Answer:** C) 77 months

If you want to have $10,000 in 10 years, which of the following formulas represents how much money you must put in a savings account today? Assume that the savings account pays 6% and it is compounded monthly.

- 10,000/(1 + .05)10
- 10,000/(1 + .005)120
- 10,000/(1 + .06)10
- 10,000/(1 + .006)120

**Answer:** B) 10,000/(1 + .005)120

Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $4,500. Today, the average cost is $29,000. What is the growth rate in tuition cost over this 20-year period? Round off to the nearest 0.1%.

- 15.5%
- 4.2%
- 9.8%
- 10.6%

**Answer:** C) 9.8%

If you want to have $1,700 in seven years, how much money must you put in a savings account today? Assume that the savings account pays 6% and it is compounded quarterly (round to the nearest $10).

- $1,120
- $1,130
- $1,110
- $1,140

**Answer:** A) $1,120

If you want to have $90 in four years, how much money must you put in a savings account today? Assume that the savings account pays 8.5% and it is compounded monthly (round to the nearest $1).

- $64
- $65
- $66
- $71

**Answer:** A) $64

How much money must be put into a bank account yielding 5.5% (compounded annually) in order to have $250 at the end of five years (round to nearest $1)?

- $237
- $191
- $187
- $179

**Answer:** B) $191

If you want to have $1,200 in 27 months, how much money must you put in a savings account today? Assume that the savings account pays 14% and it is compounded monthly (round to the nearest $10).

- $910
- $890
- $880
- $860

**Answer:** C) $880

What will the dollar amount be in four years, assuming that interest is paid annually?

- $2,800
- $3,100
- $3,111
- $3,148

**Answer:** D) $3,148

What will the dollar amount be if the interest is compounded semiannually for those four years?

- $3,100
- $3,188
- $3,240
- $3,290

**Answer:** B) $3,188

How many periods would it take for the deposit to grow to $6,798 if the interest is compounded semiannually?

- 17
- 19
- 21
- 25

**Answer:** C) 21

You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?

- 47%
- 4.7%
- 19%
- 12.8%

**Answer:** C) 19%

You deposit $5,000 today in an account drawing 12% compounded quarterly. How much will you have in the account at the end of 2 1/2 years?

- $7,401
- $5,523
- $7,128
- $6,720

**Answer:** D) $6,720

Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years. If this city's population continues to grow at 4% per year, what will the population be 10 years from now?

- 1,560,000
- 2,220,366
- 2,100,000
- 1,824,979

**Answer:** B) 2,220,366

How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually?

- 8 years
- 10 years
- 11 years
- 13 years

**Answer:** D) 13 years

The future value of $200 deposited today in an account for four years paying semiannual interest when the annual interest rate is 12% is:

- $309.40.
- $318.80.
- $320.20.
- $296.00.

**Answer:** B) $318.80.

The future value of a single sum:

- increases as the compound rate decreases.
- decreases as the compound rate increases.
- increases as the number of compound periods decreases.
- increases as the compound rate increases.
- none of the above.

**Answer:** D) increases as the compound rate increases.

The future value of $500 deposited into an account paying 8% annually for three years is:

- $500.
- $630.
- $700.
- $620.

**Answer:** B) $630.

If you were to deposit $2,000 in an IRA that would earn interest of 7.5%, compounded quarterly for 18 years, how much would you have accumulated?

- $9,621
- $36,000
- $22,419
- $12,363
- $7,619

**Answer:** E) $7,619

When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much would his salary have been in 1997?

- $1,025,000
- $954,719
- $2,525,548
- $4,085,920
- $3,489,097

**Answer:** E) $3,489,097

If you purchased a share of Mico.com stock on March 1, 1993 for $45 and you sold the stock at $168 on February 28, 1998, what was your annual rate of return on the stock?

- 83%
- 75%
- 20%
- 30%
- 50%

**Answer:** D) 30%

At 8%, compounded annually, how long will it take $750 to double?

- 9 years
- 8 years
- 12 years
- 4 years
- 6 years

**Answer:** A) 9 years

The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest declines. TRUE/FALSE

**Answer:** FALSE

If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, during which we receive 4% interest each period. TRUE/FALSE

**Answer:** TRUE

Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation TRUE/FALSE

**Answer:** TRUE

The same basic formula is used for computing both the computation of future value and of present value. TRUE/FALSE

**Answer:** TRUE

The more frequent the compounding periods in a year, the higher the future value TRUE/FALSE

**Answer:** TRUE

The present value of a single future sum:

- increases as the number of discount periods increases.
- is generally larger than the future sum.
- depends upon the number of discount periods.
- increases as the discount rate increases.

**Answer:** C) depends upon the number of discount periods

Assuming two investments have equal lives, a high discount rate tends to favor:

- the investment with large cash flow early.
- the investment with large cash flow late.
- the investment with even cash flow.
- neither investment since they have equal lives

**Answer:** A) the investment with large cash flow early

Discounting is the opposite of:

- compounding.
- future value.
- opportunity costs.
- both A and C.

**Answer:** D) both A and C

An increase in ________ will decrease present value.

- the discount rate per period
- the original amount invested
- the number of periods
- both A and C
- all of the above

**Answer:** D) both A and C

What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).

- $893
- $3,106
- $429
- $833

**Answer:** C) $429

What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.

- $5,790
- $11,574
- $9,210
- $17,010

**Answer:** A) $5,790

Three years from now, Barbara Waters will purchase a laptop computer that will cost $2,250. Assume that Barbara can earn 6.25% (compounded monthly) on her money. How much should she set aside today for the purchase? Round off to the nearest $1.

- $1,250
- $900
- $1,866
- $3,775

**Answer:** C) $1,866

If you want to have $875 in 32 months, how much money must you put in a savings account today? Assume that the savings account pays 16% and it is compounded monthly (round to the nearest $10).

- $630
- $570
- $650
- $660

**Answer:** B) $570

You are considering two investments: A and B. Both investments provide a cash flow of $100 per year for n years. However, investment A receives the cash flow at the beginning of each year, while investment B receives the cash at the end of each year. If the present value of cash flows from investment A is P, and the discount rate is c, what is the present value of the cash flows from investment B?

- P/(1 + c)
- P(1 + c)
- P/(1 + c)n
- P(1 + c)n

**Answer:** A) P/(1 + c)

All else constant, the future value of an investment will increase if:

- the investment involves more risk.
- the investment is compounded for fewer years.
- the investment is compounded at a higher interest rate.
- both B & C.

**Answer:** C) the investment is compounded at a higher interest rate.

To compound $100 quarterly for 20 years at 8%, we must use:

- 40 periods at 4%.
- five periods at 12%.
- 10 periods at 4%.
- 80 periods at 2%.

**Answer:** D) 80 periods at 2%.

California Investors recently advertised the following claim: Invest your money with us at 21%, compounded annually, and we guarantee to double your money sooner than you imagine. Ignoring taxes, how long would it take to double your money at a nominal rate of 21%, compounded annually? Round off to the nearest year.

- Approximately two years
- Approximately four years
- Approximately six years
- Approximately eight years

**Answer:** B) Approximately four years

How much money do I need to place into a bank account which pays a 6% rate in order to have $500 at the end of seven years?

- $332.53
- $381.82
- $423.77
- $489.52

**Answer:** A) $332.53

Bobby's grandmother deposited $100 in a savings account for him when he was born. The money has been earning an annual rate of 12% interest, compounded quarterly for the last 25 years. He is getting married and would like to take his new bride on a fabulous honeymoon. How much does he have in this account to use?

- $4,165
- $1,700
- $5,051
- $1,922

**Answer:** D) $1,922

What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments. Round to the nearest whole dollar.

**Year Cash Flow**

1 $3,000

2 $4,000

3 $5,000

- PV = $3,000/[1.06]1 + $4,000/[1.06]2 + $5,000/[1.06]3
- PV = $3,000[1.06]1 + $4,000[1.06]2 + $5,000[1.06]3
- PV = $3,000/[1.06]0 + $4,000/[1.06]1 + $5,000/[1.06]2
- PV = $3,000[1.06]-0 + $4,000[1.06]-1 + $5,000[1.06]-2

**Answer:** A) PV = $3,000/[1.06]1 + $4,000/[1.06]2 + $5,000/[1.06]3

The present value of $400 to be received at the end of 10 years, if the discount rate is 5%, is:

- $400.00.
- $248.40.
- $313.60.
- $245.60.

**Answer:** D) $245.60.

The present value of $1,000 to be received at the end of five years, if the discount rate is 10%, is:

- $621.
- $784.
- $614.
- $500.

**Answer:** A) $621.

What is the present value of an investment that pays $400 at the end of three years and $700 at the end of 10 years if the discount rate is 5%?

- $1,100.00
- $675.30
- $775.40
- $424.60

**Answer:** C) $775.40

The present value of a single sum:

- increases as the discount rate decreases.
- decreases as the discount rate decreases.
- increases as the number of discount periods increases.
- increases as the discount rate increases.
- none of the above.

**Answer:** A) increases as the discount rate decreases.

As the discount rate increases, the present value of future cash flows increases TRUE/FALSE

**Answer:** FALSE

As the compound interest rate increases, the present value of future cash flows decreases TRUE/FALSE

**Answer:** TRUE

The present value of a future sum of money increases as the number of years before the payment is received increases TRUE/FALSE

**Answer:** FALSE

The present value of the future sum of money is inversely related to both the number of years until payment is received and the opportunity rate TRUE/FALSE

**Answer:** TRUE

Which of the following provides the greatest annual interest?

- 10% compounded annually
- 9.5% compounded monthly
- 9% compounded quarterly
- 8.5% compounded daily

**Answer:** A) 10% compounded annually

The effective annual rate increases when the ___________ increases.

- number of compounding periods in a year
- number of years invested
- quoted rate
- both A and C
- all of the above

**Answer:** D) both A and C

What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)?

- 51.7%
- 6.7%
- 10.9%
- 6.1%

**Answer:** D) 6.1%

You are considering two investments. Investment A yields 10% compounded quarterly. Investment B yields r% compounded semiannually. Both investments have equal annual yields.

Find r.

- 19.875%
- 10%
- 10.38%
- 10.125%

**Answer:** D) 10.125%

The annual percentage yield is also referred to as the:

- quoted rate.
- nominal rate.
- effective annual rate.
- all of the above.

**Answer:** C) effective annual rate.

It is easy to choose a discount rate in an international setting due to stability of inflation TRUE/FALSE

**Answer:** FALSE

As the number of compounding periods per year increase, the nominal rate of interest increases. TRUE/FALSE

**Answer:** FALSE

The annual percentage yield is equal to the nominal rate of interest TRUE/FALSE

**Answer:** FALSE

The nominal interest rate on two different investments will equal the annual percentage yield on the two investments only if interest on both investments is compounded annually TRUE/FALSE

**Answer:** TRUE