Tome Value Of Money Review (Appendix B)

Question 1

Summarize what the old saying “Time is Money” means by choosing all of the statements below that reflect its meaning. (Check all that apply.)

Answer 1

As we carry the balance of debt, we accumulate interest costs on it.

The value of our assets change because of interest earned on the assets.

It reflects the notion that as time passes, the values of our assets and liabilities change.

Question 2

Review the statements below and choose the one which is correct regarding interest as it relates to money.

Answer 2

Interest is payment by the borrower to the owner of an asset for its use.

Question 3

Identify the required components needed to determine the present value of a sum.

Answer 3

The number of periods the sum will be earning interest

The future amount of money needed

The interest rate charged

Question 4

Determine which of the statements below is correct regarding the present value concept.

Answer 4

We want to know how much we must invest now in order to have a certain sum of money some time in the future.

Question 5

The formula to compute the present value of a single sum is:

Answer 5

future value divided by (1 + interest rate)^n

Question 6

Explain what future and present value computations enable us to do by selecting all of the correct statements below. (Check all that apply.)

Answer 6

The present value computation is important when we want to know the value of future-day assets today.

They enable us to measure or estimate the interest component of holding assets or debt over time.

The future value computation is important when we want to know the value of present-day assets at a future date.

Question 7

Show your understanding of interest by completing the following sentence: Interest is the amount of money …
(earned, owed) by the owner of an asset and ..
(paid, earned) by the borrower of the asset for its use.

Answer 7

earned ; paid

Question 8

Describe what a period represents in time-value of money computations by completing the following sentence:

The present value or future value of a sum of money can be calculated as long as we know the number of ….
(days, times, years) that interest will be compounded within one ….
(year, month, day).

Answer 8

Times; Year

Question 9

Recall the required components of figuring present value by matching the formula symbol on the left with its definition on the right.

1. n:
2. f:
3. i:
4. p:

Answer 9

1. n: number of periods
2. f: future value
3. i: interest rate per period
4. p: present value

Question 10

Review the statements below and determine which are correct regarding compounding in regards to interest.

Answer 10

Interest can be compounded daily, monthly, quarterly or annually.

In the present value formula, annual interest can be transformed into interest earned per (n) periods.

Question 11

Explain the present value concept by completing the following sentence:

A person can use the present value concept to calculate how much money he has to invest …
(today, tomorrow) in order to have a specific sum of money in the …
(present, future).

Answer 11

Today; future

Question 12

Helen is offered the possibility of investing $2,722.40 today and in return to receive $4,000 after 5 years. Calculate the annual interest rate that she must receive over the next 5 years for her investment to grow to $4,000 by using the Present Value of 1 table below.

Periods

8%

9%

10%

1

.9259

.9174

.9091

2

.8573

.8417

.8264

3

.7938

.7722

.7513

4

.7350

.7084

.6830

5

.6806

.6499

.6209

6

.6302

.5963

.5645

Answer 12

2 years
1652.80/2000 = .8264 (which is 2 years at 10% on p Val table.
Or
Reason: $2,000 x.8264 = $1,652.80.

Question 13

Assume that we want to have $500 three periods from today. Use the present value of a single sum formula to calculate how much we must invest now, at an interest rate of 8% in order to have the $500 in the future: p=f/(1+i)n

Answer 13

396.92
Reason: p= $500/(1+.08)3

Question 14

Calculate the future value of $250 invested for 4 periods at 9% by using the future value of a single amount formula: f= p x (1+i)^ n

Answer 14

352.90
Reason: f = $250 x (1+.09)4

Question 15

The future value concept can be explained as the following:

A person can use the future value concept to calculate how much money she will have ….
(today, tomorrow) if she invests a specific sum of money in the ….
(present, future).

Answer 15

tomorrow; present

Question 16

Show your understanding of how “periods” can be expressed in time value of money computations by selecting the correct statements below.

Answer 16

Periods must equal one year or less.

Periods represent the number of times that interest is compounded within one year.

Periods can be expressed in one-month periods.

Question 17

Illustrate your understanding of compounding interest by determining which of the statements below are true.

Answer 17

Interest is added to a sum of money at the end of a period and then, this new sum is used to figure the interest amount for the next period, etc.

If the rate of interest is 10% compounded monthly, then interest is figured 12 times during the year.

Question 18

The three factors used in a future value table include all of the following except:

Answer 18

present value

Question 19

Helen is offered the possibility of investing $2,722.40 today and in return to receive $4,000 after 5 years. Calculate the annual interest rate that she must receive over the next 5 years for her investment to grow to $4,000 by using the Present Value of 1 table below.

Periods

8%

9%

10%

1

.9259

.9174

.9091

2

.8573

.8417

.8264

3

.7938

.7722

.7513

4

.7350

.7084

.6830

5

.6806

.6499

.6209

6

.6302

.5963

.5645

Answer 19

8%
Reason: $2,722.40/$4,000 =.6806 which is the factor in the 8% column and 5 periods

Question 20

Match the term on the left with its definition on the right related to present and future value concepts.

1. Annuity:
2. Interest:
3. Future value:
4. Present value:

Answer 20

1. Annuity: series of equal payments occurring at equal intervals.
2. Interest: borrowers payment to owner of an asset for its use.
3. Future value: value of present day asset at future date.
4. Present value: value of future day asset today.

Question 21

Calculate the future value of $400 invested for 3 periods at 8% by using the future value of a single amount formula:f=px (1+i)n

Answer 21

503.88
Reason: f= $400 x (1+.08)3

Question 22

Determine which of the statements below is correct regarding the present value of an ordinary annuity.

Answer 22

The present value of an annuity is the amount that can be invested now at the specified rate to yield a future series of equal periodic payments.

Question 23

Determine which of the statements below is correct regarding the future value concept.

Answer 23

We want to know how much an amount invested today would equal at some specified date in the future.

Question 24

Janice purchased a diamond bracelet by agreeing to make 5 annual installments of $400 at the end of each of the next 5 years. The finance rate she is being charged is 6%. Use the Present Value of an Annuity of 1 table below to determine the sticker price listed on the bracelet.

Periods

6%

7%

8%

1

.9434

.9346

.9259

2

1.8334

1.8080

1.7833

3

2.6730

2.6243

2.5771

4

3.4651

3.3872

3.3121

5

4.2124

4.1002

3.9927

6

4.9173

4.7665

4.6229

Answer 24

$1,684.96
Reason: $400 x4.2124 = $1,684.96 (Use 5 periods in the table.)

Question 25

Explain the future value concept applied to an annuity by completing the following sentence:

A person can use the future value concept and apply it to an annuity to calculate how much money he will have …..
(today, tomorrow) if he makes …..
(multiple, one) periodic payment(s) at the end of …
(one, each) period.

Answer 25

tomorrow; multiple; each

Question 26

Review the statements below and select the ones that are true regarding the use of a future value table.

Answer 26

A future value table involves three factors: f, i, and n.

Knowing two of the factors in a future value table allows us to compute the third.

Question 27

Review the following statements and select the one which is true regarding an ordinary annuity.

Answer 27

An ordinary annuity is a series of equal payments occurring at the end of the period at equal intervals.

Question 28

Ann plans to invest $4,000 at the end of each year into a retirement account that earns 10% compounded annually. If she continues with her plan for 6 years, use the Future Value of an Annuity of 1 table below to determine how much will be accumulated in the account on the date of her last deposit.

Periods

8%

9%

10%

1

1.0000

1.0000

1.0000

2

2.0800

2.0900

2.1000

3

3.2464

3.2781

3.3100

4

4.5061

4.5731

4.6410

5

5.8666

5.9847

6.1051

6

7.3359

7.5233

7.7156

Answer 28

$30,862.40
Reason: $4,000 x7.7156 = 30,862.40

Question 29

Explain the present value concept, applied to an annuity, by completing the following sentence:

A person can use the present value concept and apply it to an annuity to calculate how much money he has to invest …
(today, tomorrow) in order to receive …
(multiple, one) periodic payment(s) in the …
(present, future).

Answer 29

Today; mutiple; future

Question 30

Jack is considering a project that will return $2,000 at the end of each year for 6 years. He wants a return of 8%. Use the Present Value of an Annuity of 1 table below to determine how much he is willing to pay for the project right now.

Periods

6%

7%

8%

1

.9434

.9346

.9259

2

1.8334

1.8080

1.7833

3

2.6730

2.6243

2.5771

4

3.4651

3.3872

3.3121

5

4.2124

4.1002

3.9927

6

4.9173

4.7665

4.6229

Answer 30

$9,245.80
Reason: $2,000 x4.6229= $9,245.80

Question 31

Determine which of the statements below is correct regarding the future value of an ordinary annuity.

Answer 31

A future value of an annuity is the amount that would accumulate by the end date of a series of equal payments.

Question 32

Ken is planning to begin saving for a future vacation. He plans to invest $600 at the end of each year into a savings account that earns 9% compounded annually. If he continues with his plan for 4 years, use the Future Value of an Annuity of 1 table below to determine how much will be accumulated in the account on the date of his last deposit.

Periods

8%

9%

10%

1

1.0000

1.0000

1.0000

2

2.0800

2.0900

2.1000

3

3.2464

3.2781

3.3100

4

4.5061

4.5731

4.6410

5

5.8666

5.9847

6.1051

6

7.3359

7.5233

7.7156

Answer 32

$2,743.86
Reason: $600 x4.5731 = $2,743.86 (4 periods at 9% interest.)

Question 33

Determine which of the statements below is correct regarding the present value of an ordinary annuity.

Answer 33

The present value of an annuity is the amount that can be invested now at the specified rate to yield a future series of equal periodic payments.