Time Value of Money – Practice Questions Irfanullah.

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1. You are trying to estimate the required rate of return for a particular investment. Which of the
following premiums are you least likely to consider?
A. Inflation premium
B. Maturity premium
C. Nominal premium

2. Which of the following is least likely to be an accurate interpretation of interest rates?

A. The rate needed to calculate present value
B. Opportunity cost
C. The maximum rate of return an investor must receive to accept an investment

3. Your client invests her savings worth $2 million in a security. The security matures in 4 years
and pays 7.5% per year compounded annually. Assuming no interim cash flows, which of the
following is most likely to be the future value of the investment?
A. $2.150 million
B. $2.600 million
C. $2.671 million

4. Your client deposits $5 million in his savings account which pays 5% annual interest,
compounded quarterly. How much will the savings account be worth after 2.5 years?
A. $5.625 million
B. $5.649 million
C. $5.661 million

5. Grim Smith plans to invest ¥12 million 3 years from now. The estimated rate of return is 8% per
year. Which of the following is most likely to be the value of the investment eleven years from
today?
A. ¥22.21 million
B. ¥27.98 million
C. ¥35.25 million

6. A three-year CD offers a stated annual interest rate of 10% compounded quarterly. Given an
initial investment of $80,000, which of the following is most likely to be the value of the CD at
the end of 3 years?
A. $86,151
B. $86,628
C. $107,591

7. Donald Trump invests $3 million in a bank that promises to pay 4% compounded daily. Which
of the following is closest to the amount Donald receives at the end of the first year? Assume
365 days in a year.
A. $3.003 million
B. $3.122 million
C. $3.562 million

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 Time Value of Money – Practice Questions Irfanullah.co

8. You invest $50,000 for three years at a stated annual rate of 3.6% with continuous
compounding. What is your investment worth after three years?
A. $51,832
B. $55,702
C. $55,596

9. Which of the following is most likely to increase as the frequency of compounding increases?
A. Interest rate
B. Present value
C. Future value

10. An investment earns an annual interest rate of 12% compounded quarterly. Which of the
following is most likely to be the effective annual rate?
A. 3.00%
B. 12.00%
C. 12.55%

11. Which of the following is most likely to be the continuously compounded rate corresponding to
an effective annual rate of 7.45%?
A. 7.19%
B. 7.47%
C. 7.73%

12. Haley Hopkins deposits $24,000 into her retirement account at the end of every year for 15
years. The interest rate is 12% per year. If she continues this practice and does not make any
withdrawals, how much money will she have at the end of 15 years after her final deposit?
A. $894,713
B. $1,094,713
C. $1,294,713

13. You wish to compute the future value of an annuity. The periodic annuity payment is $120,000.
The future value annuity factor is 21.664 and the interest rate is 4.5%. Which of the following is
least likely to be useful for the future value computation?
A. Annuity amount
B. Future value annuity factor
C. Interest rate

14. You have been making the following deposits on the last day of every month.

Month Amount

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 Time Value of Money – Practice Questions Irfanullah.co

January $1,500
February $2,000
March $2,000
April $2,500
May $3,000
June $1,000

The interest rate is 6% compounded monthly. How much will you have on 1 July?
A. $12,000
B. $12,148
C. $13,903

15. Which of the following investment options has the highest value at the end of five years?
 Option 1. An instrument that would pay nothing for two years, and then $30,000 per year
for three years. The interest rate for this investment is 7%.
 Option 2. An instrument that would pay $15,000 per year for three years, and then $10,000
per year for two years. The interest rate for this investment is 8%.
 Option 3. An instrument that would pay $25,000 for two years, and then nothing for three
years. The interest rate for this investment is 9%.
A. Option 1
B. Option 2
C. Option 3

16. Liam Punter purchases a contract from an insurance company. The contract promises to pay
$600,000 after 8 years with a 5% annual return. What amount of money should Punter most
likely invest?
A. $406,104
B. $408,350
C. $886,473

17. Mathew Jones wishes to save for his son’s, college education. He expects to pay $40,000 per
year for four years with the first payment due eight years from today. He wishes to invest an
equal amount every year for the next seven years with the first deposit one year from today.
Assuming an investment rate of 10%, how much should he invest every year?
A. $13,365
B. $11,087
C. $22,857

18. Your client needs to select one of the following retirement packages:
 Option 1. Take a lump sum amount of $2.5 million today.

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 Time Value of Money – Practice Questions Irfanullah.co

 Option 2. An annuity with 25 annual payments of $180,000 with first payment today.

If the interest rate is 6%, which package will you recommend?

A. Option 1 as it has a greater present value.
B. Option 2 as it has a greater present value.
C. Either of the two options as they have an equal present value.

19. Sally Smith is a pension fund manager. According to her estimates, retirees will be paid benefits
worth $0.75 million per year. These payments will begin 12 years from now. There will be a
total of 20 payments. Given a discount rate of 8%, which of the following is most likely to be
the present value of the payments today?
A. $2,924,191
B. $3,158,126
C. $7,363,610

20. A security pays $150 per year in perpetuity. Given that they required rate of return is 4.75%,
what is the value of this security?
A. $316
B. $3158
C. $3185

21. Bill Graham is planning to buy a security which pays a dividend of $100 per year indefinitely,
with the first payment to be received at t = 4. Given that the required rate of return is 10% per
annum, compounded annually, how much should Mr. Graham pay today?
A. $683
B. $751
C. $1,000

22. A security will make the following payments:

Time Period Dividend Amount ($)

1 50
2 100
3 150
4 200
5 250

Assuming a discount rate of 9%, what is the present value?

A. $487
B. $550
C. $616

23. Canadian Foods recorded an operating profit of $2.568 million for the year 2008. It recorded an
operating profit of $5.229 million for the year 2012. Which of the following is most likely to be
the annualized growth rate of operating profits?
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 Time Value of Money – Practice Questions Irfanullah.co

A. 16.30%
B. 18.50%
C. 15.30%

24. Bata had 81 shoe shops all over the country in the year 2009. By 2012 Bata had to shut down 14
shops. Which of the following is most likely to be the growth rate of the number of shops?
A. -6.10%
B. -4.63%
C. 6.53%

25. How many years will it take to triple an investment of $2,500 given that the interest rate is 6%
per annum compounded annually?
A. 11.9 years
B. 18.9 years
C. 21.3 years

26. Evan Hubbard wants to collect $100,000 so he can travel around the world. He plans to deposit
$800 every month starting one month from today. The interest rate is 7% compounded
monthly. Approximately how many months will it take for Hubbard to achieve his goal?
A. 225 months
B. 34 months
C. 250 months

27. Wak O’Neal plans to buy a car worth $42,000 today. He is required to pay 15% as a down
payment. The remainder is to be paid as a monthly payment over the next 12 months with the
first payment due at t=1.Given that the interest rate is 8% per annum compounded monthly,
which of the following is most likely to be the approximate monthly payment?
A. $3,105
B. $3,654
C. $3,921

28. Gerard Jones has to pay for his 5 year doctorate degree 6 years from now. The current annual
expenditure is $7,200. This is expected to grow by 7% annually. The first payment will need to
be made 6 years from today. Jones identifies a savings plan that allows him to earn an 8% per
annum interest rate. How much should Gerard deposit each year stating one year from today?
Assume that Jones plans to make 5 payments.
A. $8,370
B. $8,539
C. $8,730

29. Hank plans to purchase a $100,000 house. He makes a down payment of $15,000 and borrows
the rest with a 20-year fixed rate mortgage. The mortgage payments are quarterly with the first
payment due at t=1. The mortgage interest rate is 10% per annum compounded quarterly. Which
of the following is most likely to be the quarterly payment?
A. $2,337
B. $2,467
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 Time Value of Money – Practice Questions Irfanullah.co

C. $2,726

30. An investor is buying a $200,000 property. He agrees to pay 20% today. The payment of the
balance will be in the form of monthly payments over the next 15 years at 9% per year,
compounded monthly. Which of the following is most likely to be the monthly payment?
A. $1,137
B. $1,440
C. $1,623

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 Time Value of Money – Practice Questions Irfanullah.co

Solutions

1: C
Required rate of return includes inflation premium, maturity premium, default risk premium, and
liquidity premium.

2: C
Required rate of return is the minimum rate of return an investor must receive to accept an
investment. Therefore, option C is least likely to be an accurate interpretation of interest rates.

3: C
I/Y= 7.5, N = 4, PV = - 2,000,000, PMT = 0, Compute FV.
FV = 2.671 million

4: C
N = 10, I/Y = 1.25, PV = - 5,000,000, PMT = 0, Compute FV.
FV = 5.661

5: A
N = 11-3 = 8 years, I/Y = 8%, PV = - 12,000,000, PMT= 0, Compute FV
FV = 22.21 million

6: C
N= 12 (3 x4), I/Y= 2.5 (10/4), PV= - 80,000, PMT= 0, Compute FV.
FV = 107,591

7: B
N= 365, I/Y= 0.1095 (4/365), PV= - 3million, PMT= 0, Compute FV
FV = 3.122 million

8: B
FV = PVerN
FV = 50,000 e0.036 × 3 = 55,702

9: C
More frequent compounding results in a larger future value.

10: C
EAR = (1 + Periodic Rate)m − 1
0.12 4
EAR = (1 + ) − 1 = 0.1255 = 12.55%
4

11: A
EAR = eContinuously compounded rate − 1
0.0745 = eContinuously compounded rate − 1

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 Time Value of Money – Practice Questions Irfanullah.co

1.0745 = eContinuously compounded rate

Continuously compounded rate = ln 1.0745 = 7.19%

12: A
N = 15, I/Y = 12, PV = 0, PMT = - 24,000, Compute FV.
FV =894,713

13: C
FV = PV × FV annuity factor. Therefore, interest rate is least likely to be used for computation
purposes.

14: A
The stated annual rate is 6% with monthly compounding. The monthly rate is 0.5% = 0.005. The
January payment takes place at the end of the month. Between 31 January and 1 July we have 5
months. Hence the first payment will compound for 5 periods.

Month Amount Periods Future Value

Jan $1,500 5 1,537.88
Feb $2,000 4 2,040.30
Mar $2,000 3 2,030.15
Apr $2,500 2 2,525.06
May $3,000 1 3,015.00
Jun $1,000 0 1,000.00
Sum 12,148.39

15: A
Option 1 has the highest future value.

Option 1 Option 2 Option 3

Time Cash Future Value Cash Future Value Cash Future Value
flow flow flow
t=1 $0 $15,000 $15,000 (1.08)4 $25,000 $25,000 (1.09)4
$0 = $20,407 = $32,290
t=2 $0 $15,000 $15,000 (1.08)3 $25,000 $25,000 (1.09)3
$0 = $18,896 = $32,376
t=3 $30,000 (1.07)2 $15,000 $15,000 (1.08)2 $0 $0
$30,000
= $34,347 = $17496
t=4 $30,000 (1.07)1 $10,000 $10,000 (1.08)1 $0 $0
$30,000 = $32,100 = $10,800
t=5 $30,000 (1.07)0 $10,000 $10,000 (1.08)0 $0 $0
$30,000
= $30,000 = $10,000

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 Time Value of Money – Practice Questions Irfanullah.co

SUM = SUM = SUM =

$96,447 $77,599 $67,666

16: A
N= 8, I/Y= 5, PMT = 0, FV = 600,000, Compute PV.
PV = 406,104

17: B
First draw a timeline:

The four college payments represent an annuity. Calculate the present value this annuity at year 7.
N = 4, I/Y = 10, PMT = 40000, FV = 0, Compute PV.
PV at the end of year 7 = 126,794.62.
Now determine payments which must be made every year in order to have 126,794.62 at the end of
year 7. N = 7, I/Y = 10, PV = 0, FV = 126,794.62, Compute PMT.
PMT = 13,364.85.

18: A
The present value of Option 1 is $2.5 million.
Option 2: FV= 0, N = 24 (As 1 payment has been received), PMT = 180,000, I/Y = 6
Compute PV. PV = 2,259,064 + 180,000 (Received today) = 2,439,064.
The present value of Option 1 is greater.

19: B
Given that the first annuity payment will be at the end of Year 12, we should compute the present
value at the end of Year 11. N = 20, I/Y = 8, PMT = 750,000, FV = 0. Compute PV.
PV at the end of Year 11 = 7,363,610.56.
Next, discount back to T = 0:

7,363,610
PVtoday = = $3,158,126
(1 + 0.08)11

20: B
A
PV =
r
150
PV = = $3158
0.0475

21: A
100
PVt=3 = = $1,000
0.1

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 Time Value of Money – Practice Questions Irfanullah.co

1,000
PVtoday = = $751
(1 + 0.10)3

22: B
Plug the cash flows into the calculator, use an interest rate of 9% and compute the NPV.

Keystrokes Explanation Display

[2nd] [QUIT] Return to standard mode 0
[CF] [2nd] [CLR WRK] Clear CF Register CF = 0
0 [ENTER] No cash flow at T = 0 CF0 = 0
[↓] 50 [ENTER] Enter CF at T = 1 C01 = 50
[↓] [↓] 100 [ENTER] Enter CF at T = 2 C02 = 100
[↓] [↓] 150 [ENTER] Enter CF at T = 3 C03 = 150
[↓] [↓] 200 [ENTER] Enter CF at T = 4 C04 = 200
[↓] [↓] 250 [ENTER] Enter CF at T = 5 C03 = 250
[↓] [NPV] [9] [ENTER] Enter discount rate I = 9
[↓] [CPT] Compute NPV 550.03

23: C
1
5.229 4
g=( ) − 1 = 19.5%
2.568

N = 4 because we assume that operating profits are at the end of the year. From the end of 2008 to
the end of 2012 we have 4 years. Some students incorrectly use N = 5.

24: A
1
81 − 14 3
g=( ) − 1 = −6.1%
81

25: B
FV = 7500 (2500 x 3), PMT = 0, I/Y = 6, PV = 2500, Compute N.
N = 18.9

26: A
I/Y = 0.583 (7/ 12), PV = 0, PMT = 800, FV = 100,000. Compute N.
N = 224.44

27: A
Amount after down payment 42,000 x 0.85 = 35,700
N = 12, I/Y = 0.666 (8% / 12), PV = - 35,700, FV = 0, Compute PMT.
PMT =3,105
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 Time Value of Money – Practice Questions Irfanullah.co

28: A
Step 1: Find the annual expenditures
Annual Expendituret=6 = 7,200 (1 + 0.07)6 = $10,805
Annual Expendituret=7 = 7,200 (1 + 0.07)7 = $11,562
Annual Expendituret=8 = 7,200 (1 + 0.07)8 = $12,371
Annual Expendituret=9 = 7,200 (1 + 0.07)9 = $13,237
Annual Expendituret=10 = 7,200 (1 + 0.07)10 = $14,163
Step 2: Find the present value of annual expenditures at t=5
Time Period Annual Present Value
Expenditure ($)
6 10,805 10,805 (1.08)−1
= 10,004
−2
7 11,562 11,562 (1.08)
= 9,912.5
8 12,371 12,371 (1.08)−3
= 9,820.5
9 13,237 13,237 (1.08)−4
= 9,729.6
−5
10 14,163 14,163 (1.08) = 9,639
SUM = $49,106

Step 3: Find the annuity payment

N = 5, I/Y = 8, PV = 0, FV = 49,106, Compute PMT.
PMT = 8,370

29: B
Mortgage amount = $100,000 − $15,000 = $85,000
N = 80 (20 x 4), I/Y = 2.5 (10/4), PV = - 85,000, FV = 0, Compute PMT.
PMT = 2,467

30: C
Downpayment = $200,000 × 0.20 = $40,000
Remainder = $200,000 − $40,000 = $160,000
N= 180 (15 x 12), I/Y= 0.75 (9% / 12), PV = -160,000, FV= 0, Compute PMT.
PMT = 1,623

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