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    Multiple choice questions on Time Value of Money

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    1. What is the future value (approx.), where present value=1000, r=6% and n=1?
    a. 1060.00
    b. 1600.00
    c. 943.40
    d. 900.00

    2. What is the future value (approx.), where present value=1000, r=6% and n=10?
    a. 1600.00
    b. 400.00
    c. 1790.85
    d. 1645.32

    3. What is the present value (approx.), where future value = 1000, r=6% and n=1?
    a. 1060.00
    b. 1600.00
    c. 943.40
    d. 900.00

    4. What is the present value (approx.), where future value = 1000, r=6% and n=5?
    a. 1300.00
    b. 747.26
    c. 545.38
    d. 700.00

    5. What is the present value (approx.), where future value = 1000, r=6% and n=10?
    a. 558.39
    b. 1600.00
    c. 400.00
    d. 428.32

    6. Calculate the interest rate implied (approx.), where PV=1000, n=5, FV=1436.
    a. 5.6%
    b. 6.2%
    c. 7.5%
    d. 9.2%

    7. Calculate the interest rate implied (approx.), where PV=1000, n=11, FV=1750.
    a. 5.2%
    b. 3.7%
    c. 7.5%
    d. 9.2%

    8. How long (approx.) will it take for $500 to grow to $1,000 at 8% per year?
    a. 6 yrs
    b. 7
    c. 8
    d. 9

    9. How long (approx.) will it take for $500 to grow to $700 at 5% per year?
    a. 6.9 yrs
    b. 10.9
    c. 11.7
    d. 13.2

    10.A famous quarterback just signed a $10 million contract providing $1 million a year for 10 years. The first payment is after one year. The interest rate is 10%. The quarterback's contract present value is approximately?
    a. 5.2 million
    b. 6.1
    c. 6.8
    d. 8.9

    11.A less famous receiver just signed an $8 million contract providing $3 million now and $1 million for the next 5 years. The interest rate is 10%. The receiver's contract present value is approximately?
    a. 5.2
    b. 6.1
    c. 6.8
    d. 8.9

    12.What is the present value (approx.) of a 5-year annuity of $100 if the discount rate is 6%?
    a. 326.25
    b. 421.24
    c. 532.83
    d. 601.23

    13.Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual year-end payments. If the interest rate is 7%, what is the annual payment approximately?
    a. 189.65
    b. 220.21
    c. 295.23
    d. 401.89
    14.The $40 million lottery payment that you just won actually pays $2 million per year for 20 years. If the discount rate is 5%, and the first payment comes in 1 year, what is the present value of the winnings approximately?
    a. 40.00 million
    b. 38.26
    c. 24.92
    d. 19.64

    15.You believe you will need to have saved $500,000 by the time you retire in 35 years. If the interest rate is 9% per year, how much must you save each year (approx.) until retirement to meet your retirement goal?
    a. 3230.77
    b. 2317.92
    c. 1875.01
    d. 1306.00

    Chapter 10 (Block and Hirt)

    16. Market-determined required rate of return is the same thing as discount rate, according to the text.
    a. True
    b. False

    17.When the market interest rate exceeds the coupon rate, bonds sell for less than face value.
    a. True
    b. False

    18.The yield to maturity is defined as the discount rate that makes the present value of the bond's payments equal its price.
    a. True
    b. False

    19.Common stock usually represents a perpetuity.
    a. True
    b. False

    20.Required rate of return = real rate of return + inflation premium + risk premium
    a. True
    b. False

    21.Price-earnings ratio represents a multiplier applied to current earnings to determine the value of a share of stock.
    a. True
    b. False

    22.Supernormal growth pattern is often experienced by firms in mature industries.
    a. True
    b. False

    23.If the annual dividend of a preferred stock is $10 and the required rate of return is 10%, then the price of the preferred stock would be:
    a. $10
    b. $90
    c. $100
    d. $110

    24.According to the constant growth dividend valuation model, if dividends were $2.00, required rate of return is 12%, and the dividends grow at a constant rate of 7% per year, the price of the stock would be:
    a. $24
    b. $40
    c. $48
    d. $60

    25.What is the approximate price of a bond if par value is $1000, interest rate of (coupon) 9%, matures in 20 years and the present yield to maturity is 6%?
    a. $910
    b. $1245
    c. $1344
    d. $1485

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    https://brainmass.com/business/annuity/190840

    Solution Preview

    Please see attached file

    Note: the abbreviations have the following meanings

    PVIF= Present Value Interest Factor
    FVIF= Future Value Interest Factor
    Ordinary Annuity
    PVIFA= Present Value Interest Factor for an Annuity
    FVIFA= Future Value Interest Factor for an Annuity

    They can be read from tables or calculated using the following equations
    PVIF( n, r%)= =1/(1+r%)^n
    FVIF( n, r%)= =(1+r%)^n

    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
    FVIFA( n, r%)= =[(1+r%)^n -1]/r%

    1.     What is the future value (approx.), where present value=1000, r=6% and n=1?
    a.     1060.00
    b.     1600.00
    c.     943.40
    d.     900.00

    Answer: a.     1060.00
    1060 =1000*(1+6%)

    2.     What is the future value (approx.), where present value=1000, r=6% and n=10?
    a.     1600.00
    b.     400.00
    c.     1790.85
    d.     1645.32

    Answer: c.     1790.85
    1790.85 =1000*(1+6%)^10

    3.     What is the present value (approx.), where future value = 1000, r=6% and n=1?
    a.     1060.00
    b.     1600.00
    c.     943.40
    d.     900.00

    Answer: c.     943.40
    943.40 =1000/(1+6%)

    4.     What is the present value (approx.), where future value = 1000, r=6% and n=5?
    a.     1300.00
    b.     747.26
    c.     545.38
    d.     700.00

    Answer: b.     747.26
    747.26 =1000/(1+6%)^5

    5.     What is the present value (approx.), where future value = 1000, r=6% and n=10?
    a.     558.39
    b.     1600.00
    c.     400.00
    d.     428.32

    Answer: a.     558.39
    558.39 =1000/(1+6%)^10

    6.     Calculate the interest rate implied (approx.), where PV=1000, n=5, FV=1436.
    a.     5.6%
    b.     6.2%
    c.     7.5%
    d.     9.2%

    Answer: c.     7.5%
    7.5% =(1436/1000)^(1/5)-1

    7.     Calculate the interest rate implied (approx.), where PV=1000, n=11, FV=1750.
    a.     5.2%
    b.     3.7%
    c.     7.5%
    d.     ...

    Solution Summary

    Answers to multiple choice questions on Time Value of Money (Calculations for present value, future value, annuities, implied interest rate, number of years, present value of the winnings), Market-determined required rate of return, yield to maturity, Common stock, perpetuity, Price-earnings ratio, price of the preferred stock, constant growth dividend valuation model, price of a bond ,amortizing loan

    $2.19