(Test Bank) Principals Of Finance [Questions And Answers] Complete With All Chapters

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Financial managers use the time value of money to: A) make business decisions. B) compare cash flows of different projects. C) determine the price of common stock. D) both A and B. E) all of the above. D) both A and B.   The time value of money is created by: A) the existence of profitable investment alternatives and interest rates. B) the fact that the passing of time increases the value of money. C) the elimination of the opportunity cost as a consideration. D) the fact that the value of saving money for tomorrow could be more or less than spending it today. A) the existence of profitable investment alternatives and interest rates.   Which of the following statements is FALSE? A) Quarterly compounding has a higher annual percentage yield than monthly compounding. B) On monthly compounding loans, the annual percentage yield will be less than the nominal or quoted rate of interest. C) Compounding essentially means earning interest on interest on an initial balance. D) Perpetuities pay an equal payment forever. A) Quarterly compounding has a higher annual percentage yield than monthly compounding   An investment has a nominal interest rate of 12% annually, but interest on the investment is compounded monthly. Therefore, the annual percentage yield on the investment is: A) 12%. B) 12.68%. C) 13.89%. D) 12.36%. B) 12.68%.   An investment has a nominal interest rate of 12% annually, but interest on the investment is compounded semiannually. Therefore, the annual percentage yield on the investment is: A) 12%. B) 12.68%. C) 13.89%. D) 12.36%. D) 12.36%.   6) Which of the following provides the greatest annual interest? A) 10%, compounded annually B) 10%, compounded semiannually C) 10%, compounded quarterly D) 10%, compounded monthly E) 10%, compounded daily E) 10%, compounded daily   A bank pays a quoted annual (nominal) interest rate of 4.25%, compounded daily (365-day year). What is the annual percentage yield (APY)? A) 4.25% B) 5.56% C) 4.75% D) 6.20% E) 4.34% E) 4.34%   Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compounds) daily using a 365-day year. What is the effective annual rate of return (APY)? A) 4.75% B) 5.02% C) 3.61% D) 4.86% D) 4.86%   If you are an investor, which of the following would you prefer? A) Earnings on funds invested would compound annually. B) Earnings on funds invested would compound daily. C) Earnings on funds invested would compound monthly. D) Earnings on funds invested would compound quarterly. B) Earnings on funds invested would compound daily   You have $10,000 to invest. You do not want to take any risk, so you will put the funds in a savings account at the local bank. Of the following choices, which one will produce the largest sum at the end of 22 years? A) An account that compounds interest annually. B) An account that compounds interest daily. C) An account that compounds interest quarterly. D) An account that compounds interest monthly B) An account that compounds interest daily   Which of the following statements is true about the time value of money? A) The future value of a single sum will be greater if funds earn 5% instead of 10%. B) The future value of a single sum will be unaffected by the rate of return at which funds grow. C) The future value of a single sum will be greater if funds earn 12% instead of 6%. D) The future value of a single sum will be unaffected by the length of time funds are invested C) The future value of a single sum will be greater if funds earn 12% instead of 6%  Which of the following statements is true about the time value of money? A) The present value of a future amount will be greater if funds earn 5% instead of 10%. B) The present value of a single sum will be unaffected by the rate of return at which funds grow. C) The present value of a future amount will be greater if funds earn 12% instead of 6%. D) The present value of a future amount will be unaffected by how far in the future funds would be received. A) The present value of a future amount will be greater if funds earn 5% instead of 10%   If you are a borrower, which of the choices would lower your APR? A) Repay your loan in monthly installments B) Repay your loan in quarterly installments C) Repay your loan in semiannual installments D) Repay your loan in annual installments E) You would be indifferent to how frequent your loan payments are D) Repay your loan in annual installments   As the number of compounding periods increases, the ________ increases. A) quoted B) annual percentage yield C) effective annual rate D) both B and C D) both B and C   Which of the following statements is FALSE? A) The effective annual rate (APR) of a loan is always the same as the quoted rate. B) The payments of an ordinary annuity are made or received at the end of each period. C) The effective annual rate (APR) of a loan is always equal to or greater than the quoted rate. D) A perpetuity is a series of equal payments, which are made for an infinite period of time A) The effective annual rate (APR) of a loan is always the same as the quoted rate   Which of the following provides the lowest return to an investor? A) 12%, compounded annually B) 12%, compounded semiannually C) 12%, compounded quarterly D) 12%, compounded monthly E) 12%, compounded daily A) 12%, compounded annually   The discount rate for the time value of money should reflect delaying consumption TRUE/FALSE TRUE   Which of the following is the formula for compound value? A) FVn = P(1 + i)n B) FVn = (1 + i)/P C) FVn = P/(1 + i)n D) FVn = P(1 + i)-n A) FVn = P(1 + i)n   At 8% compounded annually, how long will it take $750 to double? A) 6.5 years B) 48 months C) 9 years D) 12 years C) 9 years   At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years? A) 6% B) 5% C) 7% D) 8% A) 6%   An increase in future value can be caused by an increase in the: A) annual interest rate. B) number of compounding periods. C) original amount invested. D) both A and B. E) all of the above. 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. A) $1,444 B) $1,604 C) $1,764 D) $1,283 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? A) $25,000 B) $31,060 C) $38,720 D) $34,310 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)? A) $72 B) $70 C) $71 D) $57 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)? A) $827 B) $833 C) $828 D) $1,176 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)? A) $648 B) $635 C) $634 D) $645 B) $635  Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years? A) 500(1 + .08)5 B) 500(1 + .08)20 C) 500(1 + .02)5 D) 500(1 + .02)20 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)? A) $1,048 B) $1,010 C) $1,038 D) $808 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)? A) 73 months B) 75 months C) 77 months D) 79 months 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. A) 10,000/(1 + .05)10 B) 10,000/(1 + .005)120 C) 10,000/(1 + .06)10 D) 10,000/(1 + .006)120 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%. A) 15.5% B) 4.2% C) 9.8% D) 10.6% 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). A) $1,120 B) $1,130 C) $1,110 D) $1,140 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). A) $64 B) $65 C) $66 D) $71 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)? A) $237 B) $191 C) $187 D) $179 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). A) $910 B) $890 C) $880 D) $860 C) $880   What will the dollar amount be in four years, assuming that interest is paid annually? A) $2,800 B) $3,100 C) $3,111 D) $3,148 D) $3,148   What will the dollar amount be if the interest is compounded semiannually for those four years? A) $3,100 B) $3,188 C) $3,240 D) $3,290 B) $3,188  How many periods would it take for the deposit to grow to $6,798 if the interest is compounded semiannually? A) 17 B) 19 C) 21 D) 25 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? A) 47% B) 4.7% C) 19% D) 12.8% 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? A) $7,401 B) $5,523 C) $7,128 D) $6,720 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? A) 1,560,000 B) 2,220,366 C) 2,100,000 D) 1,824,979 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? A) 8 years B) 10 years C) 11 years D) 13 years 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: A) $309.40. B) $318.80. C) $320.20. D) $296.00. B) $318.80.   The future value of a single sum: A) increases as the compound rate decreases. B) decreases as the compound rate increases. C) increases as the number of compound periods decreases. D) increases as the compound rate increases. E) none of the above. D) increases as the compound rate increases.   The future value of $500 deposited into an account paying 8% annually for three years is: A) $500. B) $630. C) $700. D) $620. 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? A) $9,621 B) $36,000 C) $22,419 D) $12,363 E) $7,619 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? A) $1,025,000 B) $954,719 C) $2,525,548 D) $4,085,920 E) $3,489,097 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? A) 83% B) 75% C) 20% D) 30% E) 50% D) 30%   At 8%, compounded annually, how long will it take $750 to double? A) 9 years B) 8 years C) 12 years D) 4 years E) 6 years 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 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 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 TRUE   The same basic formula is used for computing both the computation of future value and of present value. TRUE/FALSE TRUE  The more frequent the compounding periods in a year, the higher the future value TRUE/FALSE TRUE   The present value of a single future sum: A) increases as the number of discount periods increases. B) is generally larger than the future sum. C) depends upon the number of discount periods. D) increases as the discount rate increases. C) depends upon the number of discount periods   Assuming two investments have equal lives, a high discount rate tends to favor: A) the investment with large cash flow early. B) the investment with large cash flow late. C) the investment with even cash flow. D) neither investment since they have equal lives A) the investment with large cash flow early   Discounting is the opposite of: A) compounding. B) future value. C) opportunity costs. D) both A and C. D) both A and C   An increase in ________ will decrease present value. A) the discount rate per period B) the original amount invested C) the number of periods