Pretest Session 4

Nan and Neal are twins. Nan invests Rp5,000,000 at 7 percent at age 25. Neal invests Rp5,000,000 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?

• Nan will have less money when she retires than Neal.

• Neal will earn more interest on interest than Nan.

• Neal will earn more compound interest than Nan.

• If both Nan and Neal wait to age 70 to retire they will have equal amounts of savings.

• Nan will have more money than Neal at any age.

You are investing Rp1,000,000 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

• Future value

• Present value

• Principal amount

• Discounted value

• Invested principal

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

• growth analysis.

• discounting.

• accumulating.

• compounding.

• reducing.

Today, you earn a salary of Rp5,000,000. What will be your annual salary three years from now if you receive annual raises of 2 percent?

• 5,520,404

• 5,412,160

• 5,306,040

• 6,094,972

• 5,858,296

On your tenth birthday, you received Rp3,000,000 which you invested at 5 percent interest, compounded annually. Your investment is now worth Rp4,886,680. How old are you today?

• Age 20

• Age 31

• Age 30

• Age 23

• Age 21

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed) 

• Both projects have the same future value at the end of Year 4. 

• Both projects have the same value at Time 0. 

• Both projects are ordinary annuities. 

• Project Y has a higher present value than Project X. 

• Project X has both a higher present and a higher future value than Project Y

An ordinary annuity is best defined as:

• increasing payments paid for a definitive period of time.

• increasing payments paid forever.

• equal payments paid at the end of regular intervals over a stated time period. 

• equal payments paid at the beginning of regular intervals for a limited time period.

• equal payments that occur at set intervals for an unlimited period of time. 

A perpetuity is defined as: 

• a limited number of equal payments paid in even time increments

• payments of equal amounts that are paid irregularly but indefinitely. 

• varying amounts that are paid at even intervals forever. 

• unending equal payments paid at equal time intervals. 

• unending equal payments paid at either equal or unequal time intervals

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ________ rate.

• stated 

• discounted annual

• effective annual 

• periodic monthly 

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) ________ loan. 

• amortized 

• continuous

• balloon 

• pure discount 

• interest-only