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**Unformatted text preview: **CHAPTER 2 TIME VALUE OF MONEY (Difficulty: E = Easy, M = Medium, and T = Tough) Note: Most problems assume students have a calculator with a y x feature (i.e., an exponential feature). Annuity problems for finding the interest rate or the number of periods are in the financial calculator section at the end of this chapter. True-False Easy: PV versus FV Answer: b Diff: E 1 . If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series. a. True b. False PV versus FV Answer: a Diff: E 2 . Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value. a. True b. False Amortization Answer: a Diff: E 3 . The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The later we are in the loan's life, the larger the principal portion of the payment. a. True b. False Effective annual rate Answer: b Diff: E 4 . If a bank uses quarterly compounding for savings accounts, the nominal rate will be greater than the effective annual rate. a. True b. False Chapter 2 - Page 1 Retirement and compounding Answer: a Diff: E 5 . One of the potential benefits of investing early for retirement is that an investor can receive greater benefits from the compounding of interest. a. True b. False Medium: PV of an annuity Answer: a Diff: M 6 . All other factors held constant, the present value of a given annual annuity decreases as the number of discounting periods per year increases. a. True b. False PV of a sum Answer: a Diff: M 7 . The present value of a future sum decreases as either the discount rate or the number of discount periods per year increases. a. True b. False Compounding Answer: b Diff: M 8 . The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity. a. True b. False Comparative compounding Answer: a Diff: M 9 . Suppose an investor can earn a steady 5 percent annually with investment A, while investment B will yield a constant 12 percent annually. Within 11 years' time, the compounded value of investment B will be more than twice the compounded value of investment A (ignore risk). a. True b. False Chapter 2 - Page 2 Amortization Answer: b Diff: M 10 . When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan. a. True b. False Effective and nominal rates Answer: b Diff: M 11 . The effective annual rate is always greater than the nominal rate as a result of compounding effects....

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