Chapter 9: The Value of Money
Multiple Choice
1. ______________________ is the math of finance whereby interest is earned over time by
saving or investing money.
a. Future value
b. Present value
c. Principal
d. Time value of money
Answer: d
Level: easy
Section: Basic concepts
2. What concept involves earning interest on interest in addition to interest on the principal or
initial investment?
a. discounting
b. the principal value
c. inflation
d. compounding
Answer: d
Level: medium
Section: Compounding to Determine Future Values
3. The arithmetic process whereby a future value decreases at a compound interest rate over time
to reach a present value is known as ____________________.
a. discounting
b. inflation
c. compounding
d. future value
Answer: a
Level: difficult
Section: Discounting to Determine Present Values
4. Recall the four variables from the future value equations: PV = present value, FV = future
value, r = interest rate, and n = number of periods. As long as we know the values for any three
of these variables, we can solve to find what information?
a. inflation rate
b. fourth or unknown variable
c. future interest rate
d. present interest rate
Answer: b
Level: medium
Section: Equating Present Values and Future Values
5. A shortcut method referred to as ___________________ can be used to approximate the time
required for an investment to double in value.
a. the future value equation
b. the time value of money equation
c. the Rule of 72
d. discounting
Answer: c
Level: medium
Section: Finding Interest Rates and Time Requirements
6. What type of annuity exists when the equal payments or receipts occur at the end of each time
period?
a. an ordinary annuity
b. a basic annuity
c. an annuity due
d. a compound annuity
Answer: a
Level: difficult
Section: Future Value of an Annuity
7. Which of the following would you need to use in order to determine the present value of an
annuity?
a. lump sum to be received in 5 years time
b. the amount of equal cash flow payment to be received each year for the next 5 years
c. cash flows that increase by $1,000 each year for 5 years
d. cash flows that are not known today
Answer: b
Level: difficult
Section: Present Value of an Annuity
8. Many present value problems also involve cash flow annuities. Usually these are what type of
annuity?
a. a compound annuity
b. an annuity due
c. a basic annuity
d. an ordinary annuity
Answer: d
Level: medium
Section: Present Value of an Annuity
9. All of these are variables in interest rate or time period equations except which term?
a. PV = present value
b. FV = future value
c. interest rate
d. CV = compound value
Answer: d
Level: medium
Section: Interest Rates and Time Requirements for Annuities
10. In many situations, compounding or discounting may ___________________.
a. occur more often than annually.
b. be compounded.
c. be deferred.
d. occur marginally.
Answer: a
Level: easy
Section: More Frequent Compounding or Discounting Intervals
11. _________________ is repaid in equal payments over a specified time period.
a. Adjustable loan mortgage loan
b. An amortized loan
c. An adjustable interest residential real mortgage loan
d. An ARS loan
Answer: b
Level: difficult
Section: Determining Periodic Annuity Payments
12. ________________ typically have interest rates tied to the bank prime rate or the Treasury
bill rate which normally are lower than long term interest rates on fixed rate mortgage loans. It
also makes it easier for borrowers with low credit scores and those that want to borrow larger
amounts of money to acquire a mortgage loan.
a. ARMs
b. EAR
c. PVR
d. FVR
Answer: a
Level: easy
Section: Determining Periodic Annuity Payments
13. ________________ is the act of lending money at an excessively high interest rate.
a. Usury
b. Amortization
c. Shamming
d. Larceny
Answer: a
Level: medium
Section: Cost of Consumer Credit
14. What measures the true interest rate when compounding occurs more frequently than once a
year?
a. APR
b. EAR
c. PVR
d. FVR
Answer: b
Level: easy
Section: Cost of consumer credit
15. Banks, finance companies, and other lenders are required by the Truth in Lending law to do
all of the following except _______________________.
a. disclose their lending interest rates on credit extended to consumers.
b. disclose their lending interest rates on credit extended to businesses.
c. disclose their lending interest rates on credit extended to investors.
d. disclose their lending interest rates to the individual credit of all bank customers to the
general public.
Answer: d
Level: medium
Section: APR versus EAR