Chapter 04 - Introduction to Valuation: The Time Value of Money
Chapter 04
Introduction to Valuation: The Time Value of Money
Multiple Choice Questions
1. Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the: A. true value. B. future value. C. present value. D. discounted value. E. complex value.
2. Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called: A. discounting. B. compounding. C. duplicating. D. multiplying. E. indexing.
3. Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as: A. simple interest. B. complex interest. C. accrued interest. D. interest on interest. E. discounted interest.
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Chapter 04 - Introduction to Valuation: The Time Value of Money
4. Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as: A. simple interest. B. interest on interest. C. discounted interest. D. complex interest. E. compound interest.
5. By definition, a bank that pays simple interest on a savings account will pay interest: A. only at the beginning of the investment period. B. on interest.
C. only on the principal amount originally invested.
D. on both the principal amount and the reinvested interest. E. only if all previous interest payments are reinvested.
6. Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626? A. Present value B. Compound value C. Future value D. Complex value E. Factor value
7. Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called: A. aggregating. B. discounting. C. simplifying. D. compounding. E. extrapolating.
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Chapter 04 - Introduction to Valuation: The Time Value of Money
8. The interest rate used to compute the present value of a future cash flow is called the: A. prime rate. B. current rate. C. discount rate. D. compound rate. E. simple rate.
9. Computing the present value of a future cash flow to determine what that cash flow is worth today is called: A. compounding. B. factoring.
C. time valuation.
D. simple cash flow valuation. E. discounted cash flow valuation.
10. Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?
A. Shortening the investment time period
B. Paying interest only on the principal amount
C. Paying simple interest rather than compound interest
D. Paying interest only at the end of the investment period rather than throughout the investment period
E. Increasing the interest rate
11. Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value? A. 5 percent simple interest
B. 5 percent interest, compounded annually C. 6 percent interest, compounded annually D. 7 percent simple interest
E. 7 percent interest, compounded annually
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