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TEST BANK:
TIME VALUE OF MONEY

(Difficulty: E = Easy, M = Medium, and T = Tough)

Multiple Choice: Problems

Easy:

FV of a single payment Answer: d Diff: E . You deposit \$2,000 in a savings account that pays 10 percent interest, compounded annually. How much will your account be worth in 15 years?

a. \$2,030.21
b. \$5,000.00
c. \$8,091.12
d. \$8,354.50
e. \$9,020.10

FV of a single payment Answer: c Diff: E . You deposit \$1,000 in a savings account that pays 9 percent interest, compounded annually. How much will your account be worth in 6 years?

a. \$1,054.00
b. \$1,199.00
c. \$1,677.10
d. \$1,689.48
e. \$7,523.33

PV of a single payment Answer: b Diff: E . You can earn 8 percent interest, compounded
\$117.48
Effective annual rate Answer: c Diff: E . Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks?

a. 0.25%
b. 0.50%
c. 0.70%
d. 1.00%
e. 1.25%

Effective annual rate Answer: b Diff: E . You recently received a letter from Cut-to-the-Chase National Bank that offers you a new credit card that has no annual fee. It states that the annual percentage rate (APR) is 18 percent on outstanding balances. What is the effective annual interest rate? (Hint: Remember these companies bill you monthly.)

a. 18.81%
b. 19.56%
c. 19.25%
d. 20.00%
e. 18.00%

Effective annual return Answer: b Diff: E . Which of the following investments has the highest effective return (EAR)? (Assume that all CDs are of equal risk.)

a. A bank CD which pays 10 percent interest quarterly.
b. A bank CD which pays 10 percent monthly.
c. A bank CD which pays 10.2 percent annually.
d. A bank CD which pays 10 percent semiannually.
e. A bank CD which pays 9.6 percent daily (on a 365-day basis).

Effective annual return Answer: a Diff: E

. Which one of the following investments provides the highest effective return?

a. An investment which has a 9.9 percent nominal