Test bank - TVM1

# Test bank - TVM1 - CHAPTER 2 TIME VALUE OF MONEY(Difficulty...

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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. Multiple Choice: Conceptual Easy: PV and discount rate Answer: a Diff: E 1 . You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows? a. The discount rate decreases. b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same. c. The discount rate increases. d. Answers b and c above. e. Answers a and b above. PV versus FV Answer: e Diff: E 2 . Which of the following statements is most correct? a. If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series. b. To increase present consumption beyond present income normally requires either the payment of interest or else an opportunity cost of interest foregone. c. 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. d. Disregarding risk, if the present value of a sum is equal to its future value, either k = 0 or t = 0. e. Each of the statements above is true. Time value concepts Answer: e Diff: E 3 . Which of the following statements is most correct? a. A 5-year \$100 annuity due will have a higher present value than a 5- year \$100 ordinary annuity. b. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and same interest rate. c. If an investment pays 10 percent interest compounded annually, its effective rate will also be 10 percent. Chapter 2 - Page 1

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d. Statements a and c are correct. e. All of the statements above are correct. Time value concepts Answer: d Diff: E 4 . The future value of a lump sum at the end of five years is \$1,000. The nominal interest rate is 10 percent and interest is compounded semiannually. Which of the following statements is most correct? a. The present value of the \$1,000 is greater if interest is compounded monthly rather than semiannually. b. The effective annual rate is greater than 10 percent. c. The periodic interest rate is 5 percent. d. Both statements b and c are correct. e. All of the statements above are correct. Time value concepts Answer: d Diff: E 5 . Which of the following statements is most correct? a. The present value of an annuity due will exceed the present value of
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Test bank - TVM1 - CHAPTER 2 TIME VALUE OF MONEY(Difficulty...

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