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Question;Multiple Choice Questions;1. You are investing $100 today in a;savings account at your local bank. Which one of the following terms refers to;the value of this investment one year from now?;A. future value;B. present value;C. principal amounts;D. discounted value;E. invested principal;2. Tracy invested $1,000 five years ago and;earns 4 percent interest on her investment. By leaving her interest earnings in;her account, she increases the amount of interest she earns each year. The way;she is handling her interest income is referred to as which one of the;following?;A. simplifying;B. compounding;C. aggregation;D. accumulation;E. discounting;3. Steve invested $100 two years ago at 10;percent interest. The first year, he earned $10 interest on his $100;investment. He reinvested the $10. The second year, he earned $11 interest on;his $110 investment. The extra $1 he earned in interest the second year is;referred to as;A. free interest.;B. bonus income.;C. simple interest.;D. interest on interest.;E. present value interest.;4. Interest earned on both the initial;principal and the interest reinvested from prior periods is called;A. free interest.;B. dual interest.;C. simple interest.;D. interest on interest.;E. compound interest.;5. Sara invested $500 six years ago at 5;percent interest. She spends her earnings as soon as she earns any interest so;she only receives interest on her initial $500 investment. Which type of;interest is Sara earning?;A. free interest;B. complex interest;C. simple interest;D. interest on interest;E. compound interest;6. Shelley won a lottery and will receive;$1,000 a year for the next ten years. The value of her winnings today;discounted at her discount rate is called which one of the following?;A. single amount;B. future value;C. present value;D. simple amount;E. compounded value;7. Terry is calculating the present value;of a bonus he will receive next year. The process he is using is called;A. growth analysis.;B. discounting.;C. accumulating.;D. compounding.;E. reducing.;8. Steve just computed the present value of;a $10,000 bonus he will receive in the future. The interest rate he used in;this process is referred to as which one of the following?;A. current yield;B. effective rate;C. compound rate;D. simple rate;E. discount rate;9. The process of determining the present;value of future cash flows in order to know their worth today is called which;one of the following?;A. compound interest valuation;B. interest on interest computation;C. discounted cash flow valuation;D. present value interest factoring;E. complex factoring;10. Andy deposited $3,000 this morning into;an account that pays 5 percent interest, compounded annually. Barb also;deposited $3,000 this morning into an account that pays 5 percent interest;compounded annually. Andy will withdraw his interest earnings and spend it as;soon as possible. Barb will reinvest her interest earnings into her account.;Given this, which one of the following statements is true?;A. Barb will earn more interest the first;year than Andy will.;B. Andy will earn more interest in year three;than Barb will.;C. Barb will earn interest on interest.;D. After five years, Andy and Barb will;both have earned the same amount of interest.;E. Andy will earn compound interest.;11. Sue and Neal are twins. Sue invests;$5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent;when he is 30 years old. Both investments compound interest annually. Both Sue;and Neal retire at age 60. Which one of the following statements is correct;assuming that neither Sue nor Neal has withdrawn any money from their accounts?;A. Sue will have less money when she;retires than Neal.;B. Neal will earn more interest on interest;than Sue.;C. Neal will earn more compound interest;than Sue.;D. If both Sue and Neal wait to age 70 to;retire, then they will have equal amounts of savings.;E. Sue will have more money than Neal as;long as they retire at the same time.;12. Samantha opened a savings account this;morning. Her money will earn 5 percent interest, compounded annually. After;five years, her savings account will be worth $5,600. Assume she will not make;any withdrawals. Given this, which one of the following statements is true?;A. Samantha deposited more than $5,600 this;morning.;B. The present value of Samantha's account;is $5,600.;C. Samantha could have deposited less money;and still had $5,600 in five years if she could have earned 5.5 percent;interest.;D. Samantha would have had to deposit more;money to have $5,600 in five years if she could have earned 6 percent interest.;E. Samantha will earn an equal amount of;interest every year for the next five years.;13. This afternoon, you deposited $1,000;into a retirement savings account. The account will compound interest at 6;percent annually. You will not withdraw any principal or interest until you;retire in forty years. Which one of the following statements is correct?;A. The interest you earn six years from now;will equal the interest you earn ten years from now.;B. The interest amount you earn will double;in value every year.;C. The total amount of interest you will;earn will equal $1,000?.06? 40.;D. The present value of this investment is;equal to $1,000.;E. The future value of this amount is equal;to $1,000? (1 + 40).06.;14. Your grandmother has promised to give;you $5,000 when you graduate from college. She is expecting you to graduate two;years from now. What happens to the present value of this gift if you delay;your graduation by one year and graduate three years from now?;A. remains constant;B. increases;C. decreases;D. becomes negative;E. cannot be determined from the;information provided;15. Luis is going to receive $20,000 six;years from now. Soo Lee is going to receive $20,000 nine years from now. Which;one of the following statements is correct if both Luis and Soo Lee apply a 7;percent discount rate to these amounts?;A. The present values of Luis and Soo Lee's;monies are equal.;B. In future dollars, Soo Lee's money is;worth more than Luis' money.;C. In today's dollars, Luis' money is worth;more than Soo Lee's.;D. Twenty years from now, the value of;Luis' money will be equal to the value of Soo Lee's money.;E. Soo Lee's money is worth more than Luis;money given the 7 percent discount rate.;16. Which one of the following variables is;the exponent in the present value formula?;A. present value;B. future value;C. interest rate;D. time;E. There is no exponent in the present;value formula.;17. You want to have $1 million in your;savings account when you retire. You plan on investing a single lump sum today;to fund this goal. You are planning on investing in an account which will pay;7.5 percent annual interest. Which of the following will reduce the amount that;you must deposit today if you are to have your desired $1 million on the day;you retire?;I. Invest in a different account paying a;higher rate of interest.;II. Invest in a different account paying a;lower rate of interest.;III. Retire later.;IV. Retire sooner.;A. I only;B. II only;C. I and III only;D. I and IV only;E. II and III only;18. Which one of the following will produce;the highest present value interest factor?;A. 6 percent interest for five years;B. 6 percent interest for eight years;C. 6 percent interest for ten years;D. 8 percent interest for five years;E. 8 percent interest for ten years;19. What is the relationship between;present value and future value interest factors?;A. The present value and future value;factors are equal to each other.;B. The present value factor is the exponent;of the future value factor.;C. The future value factor is the exponent;of the present value factor.;D. The factors are reciprocals of each;other.;E. There is no relationship between these;two factors.;20. Martin invested $1,000 six years ago;and expected to have $1,500 today. He has not added or withdrawn any money from;this account since his initial investment. All interest was reinvested in the;account. As it turns out, Martin only has $1,420 in his account today. Which;one of the following must be true?;A. Martin earned simple interest rather;than compound interest.;B. Martin earned a lower interest rate than;he expected.;C. Martin did not earn any interest on;interest as he expected.;D. Martin ignored the Rule of 72 which;caused his account to decrease in value.;E. The future value interest factor turned;out to be higher than Martin expected.


Paper#51257 | Written in 18-Jul-2015

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