Multiple Choice Questions on Present and Future Value Calculations

Multiple Choice Questions
2. The future value of $100 at a 5% per year interest rate at the end
of one year is:
A) $95.00
B) $105.00
C) $97.50
D) None of the above.
Answer: B LOD: 3 Page: 63

A-Head: Valuing Monetary Payments Now and in the Future.
4. Which of the following expresses 5.65%?

A) 0.565
B) 0.00565
C) 5.65
D) 0.0565
Answer: D LOD: 1 Page: 63

8.If a saver is willing to wait a year to receive a $100 payment rather
than accept a lesser amount today:
A) The $100 is less than the present value.
B) The present value must not be calculable.
C) The present value must be less than $100.
D) The saver must not know the present value.
Answer: C LOD: 2 Page: 63

9. Which of the following best expresses the proceeds a lender
receives from a simple loan?
A) PV + i
B) FV/i
C) PV(1 + i)
D) PV/i

11. Suppose Tom receives a one year simple loan from ABC Bank for
$5000.00. At the end of the year, Tom repays $5400.00 to ABC
Bank. The interest rate on Tom's loan was:
A) $400
B) 8.00%
C) 7.41%
D) None of the above

13. Compound interest is the idea:
A) That says you get an interest deduction for paying your loan off
early.
B) That says you get interest on interest.
C) That says you get an interest deduction if you take out a loan for
longer than one year.
D) That says interest rates will rise on larger loans.

15. Which of the following best expresses the payment a lender

receives for lending their money for three years?
A) 3PV
B) PV(1+i)3
C) PV/(1 + i)3

16. Suppose Paul borrows $4000 for one year from his grandfather who
charges Paul 7% interest. At the end of the year Paul will have to
repay his grandfather:
A) $4,280
B) $4,290
C) $4,350
Answer: A LOD: 3 Page: 65

17. A lender is promised a $100 payment (including interest) one year
from today. If the lender has a 6% opportunity cost of money, she
should be willing to accept what amount today?
A) $100.00
B) $106.20
C) $96.40
D) $94.34

18. A saver knows that she will receive $100 from the bank one year
from now, this includes the interest she will earn. What is the
interest rate she is earning if she put $95 in the bank today?
A) 5.10%
B) 6.00%
C) 5.52%
D) 5.26%
E) None of the above

19. Tom deposits funds in his savings account at the bank which is
paying 3.5% interest. If he keeps his funds in the bank for one year
he will have $155.25. What amount is Tom depositing?
A) $151.75
B) $150.00
C) $148.75
D) $147.50

21. Mary deposits funds into a CD at her bank. The CD has an annual
interest of 4.0%. If Mary leaves the funds in the CD for entire two
years she will have $540.80. What amount is Mary depositing?
A) $521.60
B) $490.00
C) $505.00

23. The value of $100 left in a savings account earning 5% a year, will
be worth what amount after ten years?
A) $150.00
B) $160.50
C) $159.84
D) $162.89

27. The future value of $100 left in a savings account earning 3.5% for
three and a half years is best expressed by:
A) $100(1.035)3.5
B) $100(0.35)3.5
C) $100 x 3.5 x (1.035)
D) $100(1.035)3/2

29. If 10% is the annual rate, considering compounding, the monthly
rate is:
A) 0.0833%
B) 0.833%
C) 0.00797%
D) 1.0833%

30. What is the future value of $1000 after six months earning 12%
annually?
A) $1050.00
B) $1060.00
C) $1120/2
D) $1058.30

35. The rule of 72 says that at 6% interest $100 should become $200 in
about:
A) 72 months
B) 100 months
C) 12 years
D) 7.2 years

38. What is the present value of $500 promised four years from now at
5% annual interest?
A) $411.35
B) $400.00
C) $607.75

39. The higher the future value of the payment:

A) The lower the present value.
B) The higher the present value.
C) The future value doesn't impact the present value, only the
interest rate really matters.
D) The lower the present value because the interest rate must fall.

40. The shorter the time (n) until the payment:
A) The higher the present value.
B) The lower the present value because time is valuable.
C) The lower must be the interest rate.

43. Doubling the future value will cause:

A) The present value to double.
B) The present value to decrease.
C) The present value to increase by less that 100%.
D) The interest rate, i, to decrease.

44. The relationship between present value and the interest rate could
best be described as:
A) A direct relationship, they both move together.
B) An inverse relationship, as i increases, PV decreases.
C) An unclear relationship, whether it is direct or inverse depends
on the interest rate.

46. A change in the interest rate has:

A) A smaller impact on the present value of a payment to be made
far into the future than one to be made sooner.
B) Will not have a difference on the present value of two equal
payments to be made at different times.
C) A larger impact on the present value of a payment to be made
far into the future than one to be made sooner.

47. A monthly growth rate of 0.5% is an annual growth rate of:

A) 6.00%
B) 5.00%
C) 6.17%
D) 6.50%

51. An investment has grown from $100.00 to $130.00 or 30% over
four years. What annual increase gives a 30% increase over four
years?
A) 7.50%
B) 6.30%
C) 6.78%
D) 7.24%

53. The difference between the terms interest rate and discount rate is:
A) The interest rate is used for future value calculations and the
discount rate isn't.
B) The interest rate is only used for present value calculations.
C) The discount rate is only used for future value calculations.
D) Nothing, they are synonymous.

55. People who have high discount rates are:

A) More likely to save their current income.
B) Less like to save their current income.
C) Not affected, discount rates do not impact saving decisions.
D) Equally likely to save their current income as people with low
discount rates.

56. People who have low discount rates are:
A) More likely to save their current income.
B) Less likely to save their current income.
C) Equally likely to save their current income as someone with a
high discount rate.
D) Not affected, discount rates do not impact saving decisions.

59. If the market interest rate is above an individual's personal discount

rate:
A) We would expect that individual to borrow.
B) We would expect that individual to not borrow or save.
C) We would expect that individual to save.

61. Higher savings usually requires higher interest rates because:
A) Everyone has high discount rates.
B) Saving requires sacrifice and people must be compensated for
this sacrifice.
C) Higher savings means we expect interest rates to decrease.
D) a and b

63. If the internal rate of return from an investment is more than the
opportunity cost of funds:
A) The firm should make the investment.
B) The firm should not make the investment.
C) The firm should only make the investment using retained
earnings.

A-Head: Applying Present Value.
65. An investment carrying a current cost of $120,000 is going to
generate $50,000 of revenue for each of the next three years. To
calculate the internal rate of return we need to:
A) Calculate the present value of each of the $50,000 payments
and multiply these and set this equal to $120,000.
B) Take the present value of $150,000 for three years from now
and set this equal to $120,000.
C) Set the sum of the present value of $50,000 for each of the next
three years equal to $120,000.
D) Subtract $120,000 from $150,000 and set this difference equal
to the interest rate.

69. If a bond has a face value of $1000 and a coupon rate of 4.25%, the
bond owner will receive annual coupon payments of:
A) $425.00
B) $4.25
C) $42.50
D) Cannot be determined from the information provided.

72. The price of a bond is determined by:
A) Taking the present value of the bond's final payment and
subtracting the coupon payments.
B) Taking the present value of the coupon payments and adding
this to the face value.
C) Taking the present value of all of the bond's payments.

73. A 30 year coupon bond, compared to a 20 year coupon bond:

A) Will have a lower present value since present value decreases
with time.
B) Will have a lower face value since it provides more coupon
payments.
C) Will have a higher price, everything else equal.
D) Will have a higher face value since it provides more coupon
payments.

76. The interest rate used to discount the promised payment from a
bond:
A) Will vary directly with the value of the bond.
B) Should be the one that makes the value equal to the par value
of the bond.
C) Will vary inversely with the value of the bond.
D) Should always be greater than the coupon rate.

78. Which formula below best expresses the real interest rate, (r)?
A) i = r – πe
B) r = i + πe
C) r = i – πe
D) πe = i + r

A-Head: Real and Nominal Interest Rates.
79. A borrower who makes a $1000 loan for one year and earns interest
in the amount of $75, earns what nominal interest rate and what
real interest rate if inflation is two percent?
A) A nominal rate of 5.5% and a real rate of 2.0%
B) A nominal rate of 7.5% and a real rate of 5.0%
C) A nominal rate of 7.5% and a real rate of 9.5%
D) A nominal rate of 7.5% and a real rate of 5.5%

80. As inflation increases, for any fixed nominal interest rate, the real
interest rate:
A) Also increases.
B) Remains the same, that's why it is real.
C) Decreases.
D) Decreases by less than the increase in inflation.

84. If a lender wants to earn a real interest rate of 3% and expects
inflation to be 3%, she should charge a nominal interest rate of:
A) At least 6%.
B) Could charge anything above 0% and earn a 3% real rate.
C) Needs to charge a nominal rate that equals the real rate desired
plus expected inflation.
D) a and c

85. A borrower is offered a choice between a fixed rate mortgage and a

variable rate mortgage. The fixed rate mortgage may be more
attractive if:
A) The borrower expects inflation to decrease.
B) The borrower expects inflation to increase.
C) The borrower expects the home price to increase.
D) The borrower expects the home price to decrease.

86. A borrower is offered a choice between a fixed rate mortgage and a

variable rate mortgage. The variable rate mortgage may be more
attractive to the lender if:
A) The lender expects inflation to decrease.
B) The lender expects the home price to decrease.
C) The lender expects the home price to increase.
D) The lender expects inflation to increase.

87. We should expect a country that experiences volatile inflation to

also have:
A) Volatile nominal interest rates.
B) Volatile real interest rates but stable nominal rates.
C) Stable nominal interest rates.
D) b and c

88. The present value of winning a lottery that promises to pay $50,000
a year forever, is best expressed by:
A) ($50,000)n
B) ($50,000)n x i
C) $50,000/i
D) It is impossible to compute the present value of this flow.

89. If the interest rate is 4%, the present value of an investment that
pays $100,000 a year forever is:
A) $4,000,000
B) $25,000,000
C) $400,000
D) $2,500,000

Short Answer Questions
90. A lender expects to earn a real interest rate of 4.5% over the next
12 months. She charges a 9.25% (annual) nominal rate for a 12
month loan. What inflation rate is she expecting? If the lender is in
a 30% marginal tax bracket and the borrower is in a 25% marginal
tax bracket, what was the real after tax rates each expects?
Answer: For the first part she expected an inflation rate of 4.75%.
We obtain this answer using the Fisher equation where i = r + πe.
For the second part we need to use a variation of the Fisher
equation. The lender receives an after-tax nominal rate of 6.475%
from which we subtract the inflation rate of 4.75% and the lender
expects a real after-tax rate of 1.725%. The borrower expects to
pay an after-tax real rate of 2.188%.
LOD: 3 Page: 84
91. Compute the yield for a $1000 face value zero coupon bond that
sells for $280 and matures in 20 years.
Answer: Using a financial calculator and inserting $280 for the

present value, $1000 for the future values, 20 for n, and solving for
i, we can compute this to be 6.57%. LOD: 3 Page: 78
92. Compute the future value of $1000 at a 6 percent interest rate 6,

10 and 20 years into the future.
Answer: We can use a calculator and the formula FV = PV(1+i)n to

solve this problem. To calculate the future value for six years the
formula will be: FV = $1000(1.06)6 which equals $1418.52. Using a
similar approach for 10 years: FV = $1000(1.06)10 which equals
$1790.85. And finally for 20 years: FV = $1000(1.06)20 which equals
$3207.14.
LOD: 3 Page: 67
94. Determine through calculation, which has a higher present value:

An annual payment of $100 received over 3 years or an annual
payment of $50 received 7 years. In both cases the discount rate is
7% (0.07).
Answer: We can use the present value formula to answer this

question. In the case of the $100 payment, the present value =
$262.43. In the case of the 7 $50 payments the present value is
$269.46. So the 7 payments of $50 each have a higher present
value. LOD: 3 Page: 74
95. To four decimal places what is the monthly interest rate if you are
asked to convert a 12 percent annual rate to a monthly rate?
Answer: It is not as imply as dividing 12 percent by 12 and

obtaining an answer of 1.000 percent. The monthly rate, im can be
determined by using the following formula: (1 +im)12 = (1.12) which
we can manipulate to (1 + im) = (1.12)1/12 which equals 1.0095, or
the monthly interest rate is 0.95%.
LOD: 3 Page: 71
97. Using the rule of 72, determine the approximate time it will take
$1000 to double given the following interest rates.
a) 5.5%
b) 10.0%
c) 30.0%
d) 2.0%
e) 4.5%
Answer: Since the rule of 72 says if we take 72/I we get the

approximate number of years it takes for an amount to double, we
can determine the answer for each interest rate.
a) 72/5.5 = 13.1 years
b) 72/10 = 7.2 years
c) 72/30 = 2.4 years
d) 72/2 = 36 years
e) 72/4.5 = 16 years
LOD: 2 Page: 66
98. What will be the amount owed at the end of one year if a borrower
charges $100 on her credit card and doesn't make any payments
during the year if the interest rate is 1.5% per month?
Answer: $119.56. While it is tempting to multiply 1.5 times 12,

obtaining 18% and multiply this by $100 to determine the interest
chare, it would be incorrect since we would be ignoring
compounding. The correct answer can be determined by using the
following; FV = PV(1 + im)12. This will be FV = $100(1.015)12 or
$119.56.
LOD: 3 Page: 71
99. Which investment plan will provide the highest future value: $500
invested at 5 percent annually for four years and then that balance
invested at 7 percent annually for an additional three years. Or
$500 invested at 6 percent annually for seven years?
Answer: $500 invested for four years at 5 percent interest and then
that balance invested at 7% for three additional years will produce
a balance of $744.52 at the end of seven years. $500 invested for
seven years at 6 percent interest produces $752.82. LOD: 3
Page: 75
101. An investment grows from $2000 to $2750 over the period of 10
years. What average annual growth rate will produce this result?
Answer: First we determine the overall percentage change in the

investment is 37.5%, [(2750-20000/2000] x 100 = 37.5. Next, we
ask what annual growth rate over 10 years produces this result? We
can determine this by using the following: (1+i)10 = (1.375); which
with a little manipulation turns into: i = (1.375)1/10 -1; which says i =
.03236, or an annual growth rate of 3.24% produces this result.
Notice this is different than the answer you would obtain by simply
dividing 37.5% by 10.
LOD: 3 Page: 71
103. Calculate the internal rate of return for a machine that costs
$500,000 and provides annual revenue of $115,000 per year for 5
years, you can assume all revenue is received once a year at the
end of the year.
Answer: To solve this we equate the cost of the machine to the sum
of the present value for each annual payment and solve for the
interest rate. Using a financial calculator or a spreadsheet we
obtain an internal rate of return of 4.85%.
LOD: 3 Page: 73
104. You win your state lottery. The lottery officials offer you the
following option, you can accept annual payments of $50,000 for 20
years or receive an upfront payment of $700,000. Ignoring issues
like mortality tables, taxes, etc. What market interest rate has you
taking the upfront payment?
Answer: Using a financial calculator or a spreadsheet we can

equate the $700,000 to the sum of the present value flow of
receiving $50,000 a year for the next 20 years, the internal rate of
return is 3.67%. If you are confident that you can earn an average
annual return greater than 3.67% a year over the next 20 years,
the upfront payment may be the option to select.
LOD: 3 Page: 76
105. You are considering purchasing a home. You find one that you like
but you realize that you will need to obtain a mortgage for
$100,000. The mortgage company presents you with two options, a
15 year mortgage at a 6.0% annual rate and a 30 year mortgage at
a 6.5% annual rate. What will be the fixed annual payment for each
mortgage?
Answer: Using a financial calculator or a spreadsheet we can

determine the 15 year mortgage will require annual payments of
$10,296.28; the 30 year mortgage will require annual payments in
the amount of $7,657.74.
LOD: 3 Page: 74
107. A bond offers a $50 coupon, has a face value of $1000, and 10
years to maturity. If the interest rate is 4.0% what is the value of
this bond?
Answer: Realizing that the price of the bond is the sum of the
present value of all payments we simply calculate the present value
of each payment and sum these. With the help of a financial
calculator or a spreadsheet if necessary, we see the value of the
bond is $1081.10.
LOD: 3 Page: 79
108. A bond offers a $40 coupon, has a face value of $1000, and 10
years to maturity. If the interest rate is 5.0%, what is the value of
this bond?
Answer: Realizing that the price of the bond is the sum of the
present value of all payments we simply calculate the present value
of each payment and sum these. With the help of a financial
calculator or spreadsheet if necessary, we see the value of the
bond is $922.78.
LOD: 3 Page: 79
111. Explain why, if real interest rates are so important, we see most
interest rates quoted in nominal terms.
Answer: It is almost impossible to quote real interest rates ex ante.

For any given nominal interest rate, the real interest rate is the
nominal interest rate less the rate of inflation. The problem is no
one knows what the rate of inflation will be exactly. As a result it is
easier to quote nominal interest rates.
LOD: 2 Page: 84
112. If a borrower and a lender agree on a long term loan at a nominal

interest rate that is fixed over the duration of the loan, how will a
higher than expected rate of inflation impact the parties if at all?
Answer: A higher than expected rate of inflation will benefit the

borrower who will end up paying a lower real interest rate than
planned, so the borrower is better off. The lender on the other hand
will end up receiving a real interest rate that is less than what was
planned so will be harmed.
LOD: 2 Page: 84
115. An individual is currently 30 years old, wants to work until they are
65 and plans on dying at the age of 85. How much will the
individual need to have saved by the time they are 65 if they plan
on spending $40,000 per year while retired? You can assume the
individual can earn an interest rate of 5.0% and the $40,000 is in
addition to any Social security they mat receive.
Answer: We can use a financial calculator to determine that in order

to determine that the individual will need to amass a fund of
$498,488 at the time they plan on retiring to obtain $40,000 a year
for 20 years. Now they have 35 years to amass this fund, this will
require the individual to set aside $5,519 each year for 35 years.
LOD: 3 Page: 75

Multiple Choice Questions on Present and Future Value Calculations

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Multiple Choice Questions on Present and Future Value Calculations

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Multiple Choice Questions

Answer: B LOD: 3 Page: 63

4. Which of the following expresses 5.65%?

Answer: D LOD: 1 Page: 63

Answer: C LOD: 2 Page: 63

Answer: C LOD: 2 Page: 63

Answer: B LOD: 3 Page: 63

Answer: B LOD: 1 Page: 64

15. Which of the following best expresses the payment a lender

Answer: B LOD: 2 Page: 65

Answer: A LOD: 3 Page: 65

Answer: D LOD: 3 Page: 67

Answer: D LOD: 3 Page: 67

Answer: B LOD: 3 Page: 67

Answer: D LOD: 3 Page: 67

Answer: D LOD: 2 Page: 67

Answer: A LOD: 2 Page: 67

Answer: C LOD: 2 Page: 71

Answer: D LOD: 3 Page: 71

Answer: C LOD: 2 Page: 66

Answer: A LOD: 3 Page: 67

39. The higher the future value of the payment:

Answer: B LOD: 2 Page: 70

Answer: A LOD: 2 Page: 70

43. Doubling the future value will cause:

Answer: A LOD: 2 Page: 69

Answer: B LOD: 2 Page: 70

46. A change in the interest rate has:

Answer: C LOD: 2 Page: 70

47. A monthly growth rate of 0.5% is an annual growth rate of:

Answer: C LOD: 2 Page: 71

Answer: C LOD: 3 Page: 73

Answer: D LOD: 2 Page: 71

55. People who have high discount rates are:

Answer: B LOD: 2 Page: 72

Answer: A LOD: 2 Page: 72

59. If the market interest rate is above an individual's personal discount

Answer: C LOD: 2 Page: 72

Answer: B LOD: 2 Page: 72

Answer: A LOD: 2 Page: 73

Answer: C LOD: 2 Page: 73

Answer: C LOD: 2 Page: 77

Answer: C LOD: 2 Page: 78

73. A 30 year coupon bond, compared to a 20 year coupon bond:

Answer: C LOD: 2 Page: 79

Answer: C LOD: 2 Page: 80

Answer: C LOD: 2 Page: 84

Answer: D LOD: 2 Page: 82

Answer: C LOD: 2 Page: 82

Answer: D LOD: 2 Page: 82

85. A borrower is offered a choice between a fixed rate mortgage and a

Answer: B LOD: 2 Page: 84

86. A borrower is offered a choice between a fixed rate mortgage and a

Answer: D LOD: 2 Page: 84

87. We should expect a country that experiences volatile inflation to

Answer: A LOD: 2 Page: 83

Answer: C LOD: 2 Page: 78

Answer: D LOD: 3 Page: 78

Short Answer Questions

Answer: Using a financial calculator and inserting $280 for the

92. Compute the future value of $1000 at a 6 percent interest rate 6,

Answer: We can use a calculator and the formula FV = PV(1+i)n to