Chapter 6 TF

Question 1

An individual who elects to receive a given sum of money later than it is due incurs an opportunity cost.

Answer 1

True

Question 2

A sum of money invested at 9 percent simple interest per year will grow to a larger amount by the end of 5 years than if it had been invested at 9 percent compound interest.

Answer 2

False. A sum of money invested at 9 percent compound interest will grow to a larger amount by the end of 5 years than if it had been invested at 9 percent simple interest.

Question 3

Discounting is another word for compounding.

Answer 3

False. Compounding refers to the calculation of the increase in a single sum from the present into the future. Discounting is the reverse of compounding and refers to the calculation of the present value of a future sum.

Question 4

All other things being equal, the higher the interest rate, the greater the difference between the present value and the future value of a given sum of money.

Answer 4

True

Question 5

All other things being equal, the fewer the number of periods, the greater the difference between the present value and the future value of a given sum of money.

Answer 5

False. All other things being equal, the fewer the number of periods, the smaller the difference between the present value and the future value of a given sum of money.

Question 6

In basic time-value-of-money problems there are four values, two of which must be known in order to solve for the third and fourth

Answer 6

False. In time-value problems, three of the four values must be known in order to solve for the fourth.

Question 7

All other things being equal, the greater the frequency with which compounding occurs within a year, the greater the difference between the present value and the future value of a given sum of money.

Answer 7

True

Question 8

The basic formula for calculating the future value of a single sum is FVSS = PVSS × (1 + i)n.

Answer 8

True

Question 9

In the expression 1.096, the interest rate being used is 6 percent.

Answer 9

False. In the expression 1.096, the interest rate being used is 9 percent.

Question 10

Two hundred dollars deposited in an account that earns 14 percent compound annual interest will accumulate to $963.58 by the end of 12 years.

Answer 10

True

Question 11

The FVSS factor for 8 percent for 10 years is smaller than the FVSS factor for 9 percent for 10 years.

Answer 11

True

Question 12

The future value of a single sum is greater for 8 percent for 10 years than for 8 percent for 9 years.

Answer 12

True

Question 13

According to the Rule of 72, a sum of money invested at 5 percent compound annual interest will double in value approximately every 3.6 years

Answer 13

False. According to the Rule of 72, a sum invested at 5 percent compound annual interest will double in value approximately every 14.4 years (72 ÷ 5 = 14.4).

Question 14

The basic formula for calculating the present value of a single sum is [6-3]

PVSS=(1+i)^n/FVSS

Answer 14

False. The basic formula for finding the PVSS is:

PVSS=FVSS*(1/(1+i)^N)

Question 15

All other things being equal, the higher the interest rate, the larger the present value of a single sum.

Answer 15

False. All other things being equal, the higher the interest rate, the smaller the present value of a single sum.

Question 16

The present value of $100 due one year from now is over $90 if a 10 percent interest assumption is used

Answer 16

True

Question 17

An annuity due is a series of payments of equal amounts made at the end of each of a number of periods

Answer 17

False. An annuity due is a series of payments of equal amounts made at the beginning of each of a number of periods.

Question 18

If $100 is to be deposited in a 6 percent compound interest savings account at the end of each of the next 3 years and no withdrawals are made, the account balance at the end of the third year will be $318.36.

Answer 18

True

Question 19

If the number of periods (years) during which compounding occurs exceeds the number of periods (years) during which annuity payments are made, the future value of the annuity as of the end of the final compounding year cannot be computed.

Answer 19

False. The future value of the annuity as of the end of the period (year) during which payments are made is calculated first. Then this value is accumulated as a single sum from that point to the end of the period (year) during which compounding occurs.

Question 20

A sinking fund problem is one in which the amount of the periodic deposits is known and you want to find their future value.

Answer 20

False. A sinking fund problem is one in which we know the future value and wish to solve for the amount of the periodic deposits to reach that future value.

Question 21

The use of an HP-10BII is a less efficient way to solve a sinking fund problem than the use of a formula.

Answer 21

False. The use of an HP-10BII is a much more efficient way to solve a sinking fund problem than the use of a formula

Question 22

The present value of a $1,000-per-year 6-year annuity using a 7 percent discount rate is $5,582.38.

Answer 22

False. The present value of the annuity is $4,766.54. The present value would have been $5,582.38 if n and i had been reversed.

Question 23

The present value of the first payment under a $1,000-per-year annuity due using an 8 percent interest assumption is $925.93.

Answer 23

False. Since the problem involves an annuity due, the present value of the first $1,000 payment is $1,000.

Question 24

In a loan amortization schedule, the portion of each payment used to cover interest increases over time, and the portion applied against principal declines

Answer 24

False. In a loan amortization schedule, the portion of each payment used to cover interest decreases over time and the portion applied against principal increases