Chapter 04 - Introduction to Valuation: The Time Value of MoneyChapter 04Introduction to Valuation: The Time Value of Money Multiple Choice Questions1.Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the:A.true value.B.future value.C.present value.D.discounted value.E.complex value.2.Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:A.discounting.B.compounding.C.duplicating.D.multiplying.E.indexing.3.Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as:A.simple interest.B.complex interest.C.accrued interest.D.interest on interest.E.discounted interest.4.Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:A.simple interest.B.interest on interest.C.discounted interest.D.complex interest.E.compound interest.5.By definition, a bank that pays simple interest on a savings account will pay interest:A.only at the beginning of the investment period.B.on interest.C.only on the principal amount originally invested.D.on both the principal amount and the reinvested interest.E.only if all previous interest payments are reinvested.6.Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626?A.Present valueB.Compound valueC.Future valueD.Complex valueE.Factor value7.Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:A.aggregating.B.discounting.C.simplifying.D.compounding.E.extrapolating.8.The interest rate used to compute the present value of a future cash flow is called the:A.prime rate.B.current rate.C.discount rate.D.compound rate.E.simple rate.9.Computing the present value of a future cash flow to determine what that cash flow is worth today is called:A.compounding.B.factoring.C.time valuation.D.simple cash flow valuation.E.discounted cash flow valuation.10.Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?A.Shortening the investment time periodB.Paying interest only on the principal amountC.Paying simple interest rather than compound interestD.Paying interest only at the end of the investment period rather than throughout the investment periodE.Increasing the interest rate11.Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value?A.5 percent simple interestB.5 percent interest, compounded annuallyC.6 percent interest, compounded annuallyD.7 percent simple interestE.7 percent interest, compounded annually12.Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?A.8 percent simple interestB.8 percent interest, compounded annuallyC.8.5 percent simple interestD.8.5 percent interest, compounded annuallyE.9 percent interest, compounded annually13.Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rateII. Increasing the interest rateIII. Increasing the time periodIV. Decreasing the amount of the lump sum investmentA.I and III onlyB.I and IV onlyC.II and III onlyD.II and IV onlyE.II, III, and IV only14.Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years?A.FV = $500/(1 + 0.08) 7B.FV = $500/(1 + 0.07) 8C.FV = $500/(0.07 8)D.FV = $500 (1 + 0.07)8E.FV = $500 (1 + 0.08)715.Given an interest rate of zero percent, the future value of a lump sum invested today will always:A.remain constant, regardless of the investment time period.B.decrease if the investment time period is shortened.C.decrease if the investment time period is lengthened.D.be equal to $0.E.be infinite in value.16.Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all i