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CHAPTER 5 QUIZZ
1) Your goal is to have $1 million in your retirement savings on the
day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire ________ rather than ________ and earn a ________ rate of interest, then you can deposit a smaller lump sum today. Incorrect A) later; sooner; low B) sooner; later; low C) later; sooner; high D) today; later; high E) sooner; later; high 2) Phillippe invested $1,000 ten years ago and expected to have $1,800 today He has neither added nor withdrawn any money since his initial investment. All interest was reinvested and compounded annually. As it turns out, he only has $1,680 in his account today. Which one of the following must be true? A)He ignored the Rule of 72 which caused his account to decrease in value. B) He earned a lower interest rate than he expected. C) The future value interest factor turned out to be higher than he expected. D) He did not earn any interest on interest as he expected. 3. Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will: A) equal $10,000. B) remain constant. C) increase D) be less than $10,000. 4. Which one of these will increase the present value of a set amount to be received sometime in the future? A) Decrease in the future value B) Decrease in the interest rate C) Decrease in both the future value and the number of time periods D) Increase in the time until the amount is received 5. Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning at 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 in Year 2 than Andy. B) Andy will earn more interest in Year 3 than Barb will. C) After five years, Andy and Barb will both have earned the same amount of interest. D) Barb will earn more interest in Year 1 than Andy will. 6. Which one of the following will produce the lowest present value interest factor? Incorrect A) 6 percent interest for 10 years B) 8 percent interest for 5 years C) 8 percent interest for 10 years D) 6 percent interest for 8 years 7. 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 40 years. Which one of the following statements is correct? A) The future value of this amount is equal to $1,000 × (1 + 40).06. B) The total amount of interest you will earn will equal $1,000 × .06 × 40. C) The interest you earn in Year 6 will equal the interest you earn in Year 10. D) The interest amount you earn will double in value every year. E) The present value of this investment is equal to $1,000 8. Chang Lee 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 individuals apply a discount rate of 7 percent? A) Twenty years from now, the value of Chang Lee's money will equal the value of Soo Lee's money. B) The present values of Chang Lee's and Soo Lee's money are equal. C) In today's dollars, Chang Lee's money is worth more than Soo Lee's. D) In future dollars, Soo Lee's money is worth more than Chang Lee's money. 9. Nan and Neal are twins. Nan invests $5,000 at 7 percent at age 25. Neal invests $5,000 at 7 percent at age 30. Both investments compound interest annually. Both twins retire at age 60 and neither adds nor withdraws funds prior to retirement. Which statement is correct? A) Neal will earn more compound interest than Nan. B) If both Nan and Neal wait to age 70 to retire they will have equal amounts of savings. C) Nan will have more money than Neal at any age. D) Nan will have less money when she retires than Neal. 10. Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam: A) could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. B) has an account currently valued at $5,000. C) will earn the same amount of interest each year for four years. D) could earn more interest on this account if the interest earnings were withdrawn annually.
