Personal Finance 6th Edition Madura - Test Bank

Personal Finance, 6e (Madura) Chapter 1 Overview of a Financial Plan 1.1 How You Benefit from Personal Finance 1) Most Americans will never be able to understand and develop a personal financial plan. Answer: FALSE Diff: 1 Question Status: Previous edition 2) The simple objective of financial planning is to make the best use of your resources to achieve your financial goals. Answer: TRUE Diff: 2 Question Status: Previous edition 3) An understanding of personal finance is not necessary to judge the quality of advice that a financial adviser may give. Answer: FALSE Diff: 1 Question Status: Previous edition 4) The first step in budgeting is to evaluate your current financial position by looking at just your income and expenses. Answer: FALSE Diff: 2 Question Status: Previous edition 5) The value of what you own minus the value of what you owe is called your net worth. Answer: TRUE Diff: 2 Question Status: Previous edition 6) An example of an opportunity cost is the wages that you could have earned but did not because you were in class. Answer: TRUE Diff: 1 Question Status: Previous edition 7) Various government agencies have conducted surveys that show most people have a good understanding of personal finance. Answer: FALSE Diff: 1 Question Status: Previous edition 8) A good understanding of the financial planning process will allow you to make informed decisions without relying on the advice of financial advisers. Answer: FALSE Diff: 2 Question Status: Previous edition 9) A thorough understanding of this personal finance book qualifies you to become a financial adviser. Answer: FALSE Diff: 2 Question Status: Previous edition 10) In the United States the level of savings is about A) 50% of income earned. B) 25% of income earned. C) 4.5% of income earned. D) less than 1% of income earned. Answer: C Diff: 1 Question Status: Revised 11) Personal finance does not include the process of planning your A) spending. B) financing. C) investing. D) spirituality. Answer: D Diff: 1 Question Status: Previous edition 12) Which item is not one of the components of a personal financial plan? A) Setting aside money for season tickets to your favorite football team B) Investing your money C) Planning your retirement D) Budgeting Answer: A Diff: 1 Question Status: New 13) A personal financial plan specifies financial goals and describes A) saving, investing, and asset valuation. B) spending, saving, and credit card financing. C) spending, financing, and investment plans. D) saving and spending only. Answer: C Diff: 3 Question Status: Previous edition 14) Opportunity cost refers to A) money needed for major consumer purchases. B) what you give up or forego as a result of making a decision. C) the amount paid for taxes when a purchase is made. D) evaluating different alternatives for financial decisions. Answer: B Diff: 1 Question Status: Previous edition 15) Which of the following is an example of an opportunity cost? A) Renting an apartment near school B) Taking a class instead of working at your part-time job C) Setting aside money for paying income tax D) Purchasing automobile insurance Answer: B Diff: 2 Question Status: Previous edition 16) All of the following are true with regard to the demand for financial advisers except A) many people lack an understanding of personal finance. B) many people prefer to rely on advisers rather than making their own decision. C) many people are just not interested in making their own financial decisions. D) the law requires that you use advisers before making investments. Answer: D Diff: 2 Question Status: Revised 17) "Big spenders" focus their budgeting decisions on A) reducing expenses. B) increasing income. C) spending most of their income. D) saving most of their income. Answer: C Diff: 1 Question Status: Previous edition 18) "Big savers" focus their budget decisions on A) reducing expenses. B) increasing income. C) spending most of their income. D) saving most of their income. Answer: D Diff: 1 Question Status: Previous edition 19) Which of the following is not an asset? A) Your house that you rent B) Your car that you financed C) Your coin collection given to you by your grandfather D) Your textbooks Answer: A Diff: 2 Question Status: Revised 20) Which of the following items is not a liability? A) The balance due on your credit card B) Your college loans C) The wages you give up to take a class D) An IOU to your roommate Answer: C Diff: 2 Question Status: Previous edition 21) A measure of your wealth is A) the highest level of education you've attained. B) the amount of your annual income. C) the value of what you own minus the value of what you owe. D) your tax bracket. Answer: C Diff: 1 Question Status: Revised 22) Which of the following is not a financing decision? A) Should you buy Apple stock with savings B) Should you lease a car C) Should you take a loan and buy a car D) Should you take a 15 or 30 year mortgage to buy a house Answer: A Diff: 2 Question Status: New 23) Which of these statements is true with regards to the financial crisis? A) More than half of the people in the United States lost their jobs. B) The values of many homes were cut in half or more. C) The values of most investments declined by no more than 10%. D) Having a financial plan is of no help when economic conditions are as weak as they were during the crisis. Answer: B Diff: 2 Question Status: Revised 24) Which of the following is an example of an opportunity cost? A) Depositing money into a savings account so you will be able to pay cash for holiday gifts B) Buying a car which depletes your savings C) Giving up going to a movie in order to study for your finance exam D) Purchasing a new computer Answer: C Diff: 1 Question Status: Revised 25) Josh has decided to take a course at the local community college that could help him get a promotion at work. The course begins at 5 p.m. and goes until 9 p.m. on Monday nights. Josh normally works until 5 p.m. each day, but because of the drive time to the community college, he will need to leave work at 3 p.m. on class days. Josh currently earns $18.50 per hour. His employer contributes 10% of Josh's gross earnings to a 401(k) retirement plan. If the class meets 16 times, what is Josh's total opportunity cost for the class? A) $592.00 B) $800.00 C) $651.20 D) None Answer: C Explanation: C) 2 hours × $18.50 = $37.00 × 10%+ $3.70; $37.00 + $3.70 = $40.70/class × 16 classes = $651.20 Diff: 2 Question Status: Revised 26) A worker making $20 per hour decides to take a day of unpaid leave from work to attend a graduation ceremony. The worker ordinarily works and 8-hour day and is subjected to a total tax rate of 20%. What is the worker's total opportunity cost from the day of unpaid leave? A) $8.00 B) $128.00 C) $112.00 D) $160.00 Answer: B Explanation: B) $160 × 5% = $8; $160 × 70% = $112; $112 + $8 = $120 Diff: 2 Question Status: Revised 27) The wages that you forego when you leave work early to attend class are an example of a(n) ________. Answer: opportunity cost Diff: 1 Question Status: Previous edition 28) Amanda has cash of $100, a car worth $5,000, and books worth $200. Her liabilities include a car loan of $2,000 and a credit card balance of $100. What is the total of her assets, liabilities, and net worth? Answer: Assets of $5,300, liabilities of $2,100, and a net worth of $3,200. Diff: 2 Question Status: Previous edition 1.2 Components of a Financial Plan 1) A complete financial plan consists of budgeting, taxes, financing, and investing. Answer: FALSE Diff: 2 Question Status: Previous edition 2) If you do not have access to money to cover cash needs, you may have insufficient liquidity. Answer: TRUE Diff: 1 Question Status: Previous edition 3) Liquidity cannot be enhanced using sound money and credit management. Answer: FALSE Diff: 1 Question Status: Previous edition 4) Money management decisions include deciding how much credit to obtain to support your spending and what sources of credit to use. Answer: FALSE Diff: 2 Question Status: Previous edition 5) Credit should be used only when necessary, since it usually involves borrowed funds that you will need to pay back with interest. Answer: TRUE Diff: 2 Question Status: Previous edition 6) Your financial plan should include a plan for protecting your assets and income through insurance coverage. Answer: TRUE Diff: 1 Question Status: Revised 7) One of the considerations that determines your investment choices is the level of risk you are willing to tolerate. Answer: TRUE Diff: 1 Question Status: Revised 8) People do not need to determine how much money to set aside for retirement and how those funds should be invested until they near their retirement age. Answer: FALSE Diff: 2 Question Status: Revised 9) Effective estate planning will ensure that your wealth is distributed according to your wishes, but will do nothing to reduce the potential taxes your estate is subject to. Answer: FALSE Diff: 2 Question Status: Previous edition 10) Retirement planning should begin A) as early as possible in order that you accumulate sufficient funds for retirement. B) as soon as you start working full time. C) a few years before you plan on retiring. D) you do not need to plan since social security and your firm's pension will be sufficient. Answer: A Diff: 2 Question Status: New 11) A complete financial plan includes all of the following except A) managing liquidity. B) budgeting and tax planning. C) investing money. D) spiritual training. Answer: D Diff: 1 Question Status: Revised 12) ________ is the process of forecasting future expenses and savings. A) Budgeting B) Planning C) Predicting D) Fortune-telling Answer: A Diff: 1 Question Status: Previous edition 13) ________ involves having access to funds to cover any short-term cash deficiencies. A) Investment B) Money C) Liquidity D) Risk Answer: C Diff: 1 Question Status: Revised 14) ________ management involves decisions regarding how much money to retain in a liquid form and how to allocate funds among short-term investment instruments. A) Investment B) Money C) Credit D) Liquidity Answer: B Diff: 1 Question Status: Previous edition 15) ________ management involves decisions regarding how much credit you need to support spending and which sources of credit to use. A) Investment B) Money C) Credit D) Liquidity Answer: C Diff: 1 Question Status: Previous edition 16) Which of the following is a credit management decision? A) Purchasing a used car with cash B) Investing your savings in the stock market C) Obtaining a student loan to attend college D) Putting money into your retirement account Answer: C Diff: 1 Question Status: Previous edition 17) Which of the following is an example of money management? A) Putting your money in a savings account at your bank B) Shopping around for the credit card with the best interest rate C) Deciding to delay buying a new car until you can pay cash D) Paying off a loan early to reduce the interest charges Answer: A Diff: 2 Question Status: Revised 18) A plan for ________ is needed to determine how much you could afford to borrow, the length of the loan, and how to select a loan that charges competitive interest rates. A) buying B) financing C) spending D) saving Answer: B Diff: 1 Question Status: Revised 19) Which of the following is not a way that insurance is designed to protect your wealth? A) Protecting the assets that you own B) Limiting your exposure to potential liabilities C) Protecting your income D) Protecting your investments from downturns in the stock market Answer: D Diff: 2 Question Status: Revised 20) What is the core purpose of buying insurance? A) Protect your wealth and assets B) Make sure you make money on any claim C) Insurance is an expense a careful investor needs to minimize D) Make sure you leave an estate when you are gone Answer: A Diff: 2 Question Status: New 21) Which of the following does not protect your assets and/or income? A) Money insurance B) Disability insurance C) Automobile insurance D) Life and health insurance Answer: A Diff: 1 Question Status: Revised 22) Potential investments include all of the following instruments except A) stocks and bonds. B) mutual funds. C) real estate. D) lottery tickets. Answer: D Diff: 1 Question Status: Previous edition 23) Which of the following would not be considered an investment? A) A new television set B) An art collection C) A savings account D) A mutual fund of stocks and bonds Answer: A Diff: 1 Question Status: Revised 24) Retirement planning should take place A) when you retire. B) shortly after you retire. C) well before you retire. D) at any time. Answer: C Diff: 2 Question Status: Previous edition 25) From a financial standpoint when should a person start retirement planning and saving? A) When he or she first starts receiving a salary B) At 45-50 years of age C) At 50-55 years of age D) At 55-60 years of age Answer: A Diff: 2 Question Status: Previous edition 26) Estate planning A) protects your wealth against unnecessary taxes. B) shelters your wealth against all taxes. C) ensures that your wealth is distributed in the manner that the court determines. D) involves saving to purchase a large country estate. Answer: A Diff: 2 Question Status: Revised 27) The act of determining how wealth will be distributed before or upon death is A) estate planning. B) retirement planning. C) not needed for most people. D) liquidity planning. Answer: A Diff: 1 Question Status: Previous edition 28) ________ is the uncertainty surrounding the potential return on an investment. Answer: Risk Diff: 1 Question Status: Revised 29) Your ability to access funds to cover any short-term cash deficiencies is your ________. Answer: liquidity Diff: 1 Question Status: Previous edition 30) During his ________ your Uncle Harvey decides to cut you out of his will. Answer: estate planning Diff: 1 Question Status: Previous edition 31) Most investments are subject to ________, which is the uncertainty surrounding their potential return. Answer: risk Diff: 1 Question Status: Previous edition 32) List the six components of a financial plan. Answer: (a) Budgeting and tax planning (b) Managing liquidity (c) Financing your large purchases (d) Protecting your assets and income (e) Investing your money (f) Planning your retirement and estate Diff: 1 Question Status: Previous edition 1.3 How Financial Plan Decisions Affect Your Cash Flows 1) The major source of cash outflow for most people is the income they receive from employers. Answer: FALSE Diff: 1 Question Status: Previous edition 2) Which of the following is not a decision that you would probably encounter in managing your budget? A) What expenses you should anticipate B) How much money you should attempt to save each month C) How you will allocate your estate among your heirs D) How long you will take to pay off a specific loan Answer: C Diff: 2 Question Status: Revised 3) The first step in developing your financial plan is A) establish your financial goals. B) pay off all your credit cards. C) buy a cool car then begin saving money. D) get a good job. Answer: A Diff: 2 Question Status: New 4) Budgeting helps set goals by estimating ________ on a monthly basis to determine how much to save and spend. A) assets and income B) liabilities and expenses C) income and expenses D) net worth and income Answer: C Diff: 2 Question Status: Previous edition 5) A budget does not A) require thinking and planning. B) require an evaluation of your current financial position. C) help you account for all your income and expenses. D) require the preparation of a will. Answer: D Diff: 2 Question Status: Previous edition 6) When estimating expenses for a budget, A) last month's and last year's expenses are not a good starting point. B) many of the same expenses do not occur each month. C) large unusual expenses such as car or hospital bills should be included. D) estimating your future assets is a good starting point. Answer: C Diff: 1 Question Status: Previous edition 7) If your income exceeds the amount you spend, you should ________ your investments or ________ loans. A) reduce; repay existing B) reduce; obtain more C) increase; repay existing D) increase; obtain more Answer: C Diff: 2 Question Status: Previous edition 8) To increase your savings, A) income must be increased. B) expenses must be increased. C) income must be decreased. D) net worth must be decreased. Answer: A Diff: 1 Question Status: Previous edition 9) Which of the following would not be a factor in evaluating your current financial position? A) Income B) Expenses C) Possible lottery winnings D) Assets Answer: C Diff: 1 Question Status: Previous edition 10) Your net worth will not be increased by which of the following actions? A) Increasing your savings from 10% to 15% of your earnings B) Receiving a $100 birthday present from your grandmother C) Buying a new home entertainment system and putting the entire amount on your credit card D) Receiving an inheritance Answer: C Diff: 2 Question Status: Revised 11) The income in your budget is not affected by A) your education. B) your career decisions. C) the tax laws. D) the standard of living you experienced as a child. Answer: D Diff: 1 Question Status: Previous edition 12) Which of the following is not a decision involved in managing your liquidity? A) Deciding how much money to keep in savings B) Choosing between credit cards C) Determining how much money to save versus how much to spend D) Building and maintaining a monthly/yearly budget with allocations to expenses and investments Answer: B Diff: 2 Question Status: Revised 13) Which of the following is not a decision involved in managing your financing? A) Whether to obtain a 3 year versus 4 year loan on a new car B) Whether to obtain a 15 year versus 30 year loan on a new home C) Whether to pay off an existing loan D) Whether to invest income in a savings account or in a stock Answer: D Diff: 2 Question Status: New 14) Cash flows are affected by financial planning decisions. Which of the following is not correct? A) Insurance payments are a cash outflow B) Investing in stock is a cash outflow C) Buying on time results in a cash inflow D) Income is a cash inflow Answer: C Diff: 1 Question Status: Previous edition 15) Cash flows are affected by financial planning decisions. Which of the following is correct? A) Car payments you make are cash outflows B) Investments you make in stock are cash inflows C) Your routine monthly expenses are cash inflows D) Your income is a cash outflow Answer: A Diff: 2 Question Status: Previous edition 16) Your financial position is highly influenced by all of the following except A) the amount of education you pursue. B) the current pay level you receive. C) the current economy. D) the bonus check your best friend just received. Answer: D Diff: 1 Question Status: Previous edition 17) Your decision about one component of your financial plan can affect all other components. Which statement is true? A) The amount of insurance you choose to carry has no effect on your investing decisions. B) There will never be any trade-offs to consider when making decisions about your financial plan. C) If you make poor investment decisions, you may have to work longer than planned. D) You should contribute all of your extra money to your retirement account even if it means you don't have money available for products and services today. Answer: C Diff: 1 Question Status: Previous edition 18) Jessie has $4,000 in a bank account, $2,800 in a 401(k) plan at work, a car with a current value of $28,000, and a house that she purchased for $92,000 that has a current value of $118,000. The current balance of her home mortgage is $81,000, she has one credit card with a $3,000 balance, and a school loan with a balance of $6,000. What is Jessie's current net worth? A) $62,800 B) $46,800 C) ($242,800) D) ($62,800) Answer: A Explanation: A) $4,000 + $2,800 + $28,000 + $118,000 = $152,800 $3,000 + $81,000 + $6,000 = $90,000 Net worth $62,800 Diff: 2 Question Status: Previous edition 19) Jakob received a $1,000 a year raise in January, sold stocks in March for $6,000 that were originally purchased for $4,000, and in July had a $100 monthly increase in mortgage payments on his adjustable rate mortgage. The increased mortgage payment started in July and was in effect for the remainder of the year. What was the total impact on Jakob's cash flow for the year? A) $1,000 B) $5,400 C) $6,400 D) $7,600 Answer: C Explanation: C) Raise $1,000 Sale of stock $6,000 Increased mortgage payments (600) Net cash inflows $6,400 Diff: 2 Question Status: Revised 1.4 Developing the Financial Plan 1) Goals should be set as high as possible regardless of reality because they may eventually be obtainable. Answer: FALSE Diff: 2 Question Status: Revised 2) Goals with a time frame of five or more years into the future are called intermediate-term goals. Answer: FALSE Diff: 2 Question Status: Previous edition 3) If you set realistic goals rather than unrealistic ones, your plan becomes a more useful one. Answer: TRUE Diff: 1 Question Status: Previous edition 4) Your budget is influenced by your income, which in turn is influenced by your education and career decisions. Answer: TRUE Diff: 1 Question Status: Previous edition 5) In addition to the text, Web sites and financial magazines are good sources for help in financial planning. Answer: TRUE Diff: 1 Question Status: Previous edition 6) If prepared properly, financial plans are set for life and should not need to be adjusted. Answer: FALSE Diff: 2 Question Status: Previous edition 7) Which of the following is not a reason to set realistic financial goals? A) So you have something to refer to every time you get paid B) So you have a high likelihood of achieving them C) If the goal is too onerous you will be unwilling to follow the plan D) If you fail you will be discouraged and lose interest in planning Answer: A Diff: 2 Question Status: New 8) Which of the following is not a relevant consideration when identifying alternatives for achieving your financial goals? A) Choosing a large versus small university B) Pursuing additional education C) Choosing a state versus private university D) Choosing a major for study that enhances earning power Answer: A Diff: 2 Question Status: New 9) Which of the following goals would be easiest to measure? A) Reduce debt payments B) Save funds for an annual vacation C) Save $100 a month to create a $4,000 emergency fund D) Invest for a comfortable retirement Answer: C Diff: 2 Question Status: Previous edition 10) By establishing high and unrealistic financial goals, you will probably A) improve the likelihood of achieving at least some success. B) become discouraged and lose interest in planning. C) increase the viability of your plan. D) impress your spouse or significant other. Answer: B Diff: 2 Question Status: Previous edition 11) Goals with a time frame of between one and five years are classified as A) short-term. B) long-term. C) intermediate. D) unrealistic. Answer: C Diff: 1 Question Status: Previous edition 12) Which of the following would be classified as a short-term goal? A) Purchasing a house in three years B) Buying new clothes this month C) Retiring in ten years D) Paying for your two-year-old child's college education Answer: B Diff: 2 Question Status: Previous edition 13) Which of the following would be a long-term goal? A) Paying off a school loan in three years B) Purchasing a car within six months C) Saving enough money to retire in 20 years D) Paying for two years of college Answer: C Diff: 1 Question Status: Previous edition 14) If you are interested in achieving a long-term savings goal, then A) you are not concerned with paying off your current debt. B) you will try to save a small amount because that is better than saving nothing at all. C) you will buy a new car because your best friend just bought one. D) you believe that 'retail therapy' is the answer to your occasional depression. Answer: B Diff: 1 Question Status: Revised 15) Which of the following could save a smaller proportion of their earnings to achieve the same level of wealth as the others? A) Social workers B) School teachers C) Medical doctors D) All would save the same percentage of earnings to reach the same level of wealth Answer: C Diff: 2 Question Status: Revised 16) On which of the following Web sites should you question the accuracy of the information provided? A) The Internal Revenue Service's web site lists current tax rates and rules used for tax planning B) The Securities and Exchange Commission's web site explains new regulations for stockbrokers C) A major bank's web site lists new retirement plans rules used for retirement plans D) A free chat room lists recommended stocks for you to buy Answer: D Diff: 1 Question Status: Revised 17) Which of the following would not help protect you from unethical or incompetent advice from a financial adviser? A) Educating yourself on various financial products B) Asking questions of other clients C) Relying on the adviser as to when to buy and sell D) Knowing your risk tolerance Answer: C Diff: 1 Question Status: Revised 18) Which of the following statements is not true regarding education and financial position? A) Your financial position is highly influenced by the amount of education you pursue. B) Higher education always guarantees a higher income. C) The more education you have, the higher your earnings will likely be. D) Before you choose a major, you should consider your skills, interests, and the career paths that will be available to you. Answer: B Diff: 1 Question Status: Previous edition 19) Your financial plan is usually strongly influenced by A) your parents. B) your tolerance for risk and your self-discipline. C) your peers. D) your age. Answer: B Diff: 2 Question Status: Previous edition 20) Since career choices affect your income, you should choose the career that A) that pays the highest salary even if you dislike the work. B) that will be enjoyable and will suit your skills. C) that will be the easiest to find employment in. D) that requires the least amount of training or education so you can begin working as quickly as possible. Answer: B Diff: 2 Question Status: Previous edition 21) The financial crisis of 2008-09 affected the financial position of individuals in all of the following ways except which of these? A) There was a reduction in new job opportunities. B) Employers could not afford to give their employees a raise. C) The value of many investments declined. D) The demand for homes increased because more homeowners were trying to sell their homes. Answer: D Diff: 2 Question Status: Revised 22) Which of the following is not a step in developing a financial plan? A) Establish your financial goals B) Consider your current financial position C) Identify and evaluate alternative plans that could achieve your goals D) Put your plan away for six months to a year and then review it for accuracy Answer: D Diff: 1 Question Status: Previous edition 23) After your financial plan is developed it should be A) locked in a safe for keeping so it isn't stolen. B) reviewed every five years. C) monitored and updated annually. D) sold to others. Answer: C Diff: 1 Question Status: Previous edition 24) Put the following six steps in order for a financial plan: (a) identify and evaluate plans that could achieve your goals (b) consider current financial position (c) revise the plan (d) establish financial goals (e) evaluate the plan (f) select and implement the best plan Answer: (d), (b), (a), (f), (e), (c) Diff: 2 Question Status: Previous edition 25) Match the goals in the first column with the items in the second column: 1. short-term goal (a) To retire in 25 years 2. intermediate goal (b) To purchase a home in three years 3. long-term goal (c) To save enough money for books and tuition for next term Answer: 1. c 2. b 3. a Diff: 1 Question Status: Revised 26) Why is it important to monitor and revise your financial plan from time to time? A) Your financial position changes over time as does your personal, job and family situation B) As you get older you will want to lower your goals C) So that you remember the goals you were striving for D) You may decide enjoying consumption now is more important than saving for retirement years Answer: A Diff: 2 Question Status: New 27) Why is it important to understand how taxes impact your personal financial planning? A) Taxes paid reduce your net income and cash flow available to save as well as the returns on your investments. B) Not paying taxes can result in penalties and jail time. C) It is not that important since savings are not taxable. D) It is only important if you are in a 25%+ tax bracket. Answer: A Diff: 2 Question Status: New Use the following two columns of items to answer the matching questions below: A) determining how your wealth will be distributed before or upon your death B) what you owe C) forecasting future expenses and savings D) source of current information about a variety of topics E) value of what you on minus what you owe F) determining how much money you should set aside for retirement G) access to funds to cover any short-term cash deficiencies H) uncertainty on a potential return on an investment I) decisions regarding how much money to hold in liquid form and how to allocate funds among short term investments J) what you own 28) assets Diff: 1 Question Status: Revised 29) net worth Diff: 1 Question Status: Revised 30) liabilities Diff: 1 Question Status: Revised 31) estate planning Diff: 1 Question Status: Revised 32) liquidity Diff: 1 Question Status: Revised 33) money management Diff: 1 Question Status: Revised 34) risk Diff: 1 Question Status: Revised 35) retirement planning Diff: 1 Question Status: Revised 36) budgeting Diff: 1 Question Status: Revised 37) web site Diff: 1 Question Status: Revised Answers: 28) J 29) E 30) B 31) A 32) G 33) I 34) H 35) F 36) C 37) D Personal Finance, 6e (Madura) Chapter 3 Applying Time Value Concepts 3.1 The Importance of the Time Value of Money 1) The time period over which you save money has very little impact on its growth. Answer: FALSE Diff: 1 Question Status: Previous edition 2) The time value of money concept can help you determine how much money you need to save over a period of time to achieve a specific savings goal. Answer: TRUE Diff: 1 Question Status: Previous edition 3) Time value of money calculations, such as present and future value amounts, can be applied to many day-to-day decisions. Answer: TRUE Diff: 1 Question Status: Revised 4) Time value of money is only applied to single dollar amounts. Answer: FALSE Diff: 1 Question Status: Previous edition 5) Your utility bill, which varies each month, is an example of an annuity. Answer: FALSE Diff: 1 Question Status: Previous edition 6) In general, a dollar can typically buy more today than it can in one year. Answer: TRUE Diff: 1 Question Status: Revised 7) An annuity is a stream of equal payments that are received or paid at equal intervals in time. Answer: TRUE Diff: 1 Question Status: Previous edition 8) An annuity is a stream of equal payments that are received or paid at random periods of time. Answer: FALSE Diff: 2 Question Status: Previous edition 9) Time value of money computations relate to the future value of lump-sum cash flows only. Answer: FALSE Diff: 2 Question Status: Revised 10) There are two sets of present and future value tables: one set for lump sums and one set for annuities. Answer: TRUE Diff: 1 Question Status: Previous edition 11) Money received today is worth more than the same amount of money received in the future. This is true because A) money received today can grow at a compounded rate. B) future inflation will devalue your current investments. C) all goods and services will cost more in the future. D) unique investment opportunities exist today, which may not be available in the future. Answer: A Diff: 2 Question Status: Revised 12) The time value of money refers to A) personal opportunity costs such as time lost on an activity. B) financial decisions that require borrowing funds from a bank. C) changes in interest rates due to changes in the supply and demand for money in the national economy. D) the difference in the value of money depending on when it is received. Answer: D Diff: 2 Question Status: Revised 13) The time value of money implies that a dollar received today is worth ________ a dollar received tomorrow. A) more than B) less than C) the same as D) Insufficient data to determine the answer. Answer: A Diff: 1 Question Status: Revised 14) The concept of the time value of money is based on A) the level of unemployment. B) taxes. C) interest earned over time D) the Dow Jones Industrial Average. Answer: C Diff: 1 Question Status: Revised 15) An ordinary annuity can be defined as A) a series of unequal payments received or paid at equal intervals at the beginning of each period. B) a series of equal payments received or paid at equal intervals of time at the end of each period. C) a lump sum. D) intermittent payments for ordinary expenses. Answer: B Diff: 2 Question Status: Revised 16) Which of the following it not an annuity? A) Equal monthly payments to your investment account B) Lottery winnings of $100 per month for life C) Mortgage payments for a fixed-rate loan D) Monthly utility bills Answer: D Diff: 2 Question Status: Revised 17) The concept of time value of money is important to financial decision making because A) it emphasizes earning a return of interest on the money you invested. B) it recognizes that $1 today has more value than $1 received a year from now. C) it can be applied to future cash flows in order to compare different streams of income. D) all of these. Answer: D Diff: 2 Question Status: Previous edition 18) The concept that a dollar received today has more value than a dollar received in the future because of the interest it can earn is called the ________. Answer: time value of money Diff: 1 Question Status: Previous edition 19) A stream of equal payments either received or paid at equal time intervals is a(n) ________. Answer: annuity Diff: 1 Question Status: Previous edition 20) Which stream of cash flows is not an example of an annuity? A) Fixed rate mortgage payment B) Mortgage payment where the interest rate is reset annually C) 48 month car payment D) Interest payment on a 10 year Treasury bond Answer: B Diff: 1 Question Status: New 21) Time value of money is important because A) you do not want to wait a long time to get paid. B) deflation eats away at the value of a dollar. C) the present value of future cash flows is affected by inflation. D) time value of money is not as important to a person's finances as budgeting. Answer: C Diff: 2 Question Status: New 3.2 Future Value of a Dollar Amount 1) When money earns interest on interest, it is said to be compounding. Answer: TRUE Diff: 1 Question Status: Previous edition 2) When money accumulates interest, it is said to be discounting. Answer: FALSE Diff: 2 Question Status: Previous edition 3) In the tables for the future value of a single sum, the future value factors are all less than one. Answer: FALSE Diff: 3 Question Status: Previous edition 4) In order to maximize the use of your money, you may want to delay payment of your bills slightly beyond their due dates. Answer: FALSE Diff: 2 Question Status: Previous edition 5) By paying bills electronically, instead of mailing a check you can pay later and still ensure on-time payment. Answer: TRUE Diff: 1 Question Status: New 6) Compounding is the process of obtaining present values; discounting is the process of obtaining future values. Answer: FALSE Diff: 2 Question Status: Previous edition 7) The periodic interest rate, the number of periods in which your money will be invested, and the initial payment amount, must be known to estimate the future value using a financial calculator. Answer: TRUE Diff: 3 Question Status: Revised 8) The process of earning ________ on interest is referred to as compounding. A) dividends B) interest C) an annuity D) cash outflows Answer: B Diff: 1 Question Status: Revised 9) The earning of interest on interest over time is called A) an annuity. B) an ordinary annuity. C) compounding. D) present value. Answer: C Diff: 1 Question Status: Revised 10) Which of the following is not an example of a future value? A) The balance in your checking account today B) A savings account balance in 5 years C) A mortgage balance in 10 years D) The value of a retirement account in 20 years Answer: A Diff: 1 Question Status: Revised 11) To determine how much you must save each year to have enough for your daughter's college education, you would use the present value of $1 tables. Answer: FALSE Diff: 2 Question Status: Previous edition 12) Which of the following decisions would involve the use of the future value of $1? A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years. B) You win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years. C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years. D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday. Answer: A Diff: 3 Question Status: Revised 13) Everything else being equal, the ________ the interest rate, the ________ the final accumulation of money. A) higher; higher B) lower; lower C) higher; lower D) Both A and B are correct. Answer: D Diff: 2 Question Status: Previous edition 14) Byron is investigating a mutual fund that claims that $1,000 today will be worth $5,000 in five years. What is he solving for? A) Present value B) Future value C) Interest rate D) Payment Answer: C Diff: 3 Question Status: Previous edition 15) In order to take advantage of the time value of money you should do all of the following except A) pay bills electronically so you can delay payments and still ensure on-time payment. B) pay bills a little later than the due dates to take advantage of month-ending interest on your savings account. C) use settings on many bill-paying Web sites that allow you to set a future date for payment once you receive a bill. D) make use of your money while you have it, but always make payments by the due dates. Answer: B Diff: 2 Question Status: Revised 16) To determine how long it would take an investment to double at 10 percent, you could scan down the 10% column until you reach a factor of approximately 2.0 on the ________ table. A) Present value of $1 B) Future value of $1 C) Present value of an annuity D) Future value of an annuity Answer: B Diff: 2 Question Status: Revised 17) If you invest $12,000 today at an interest rate of 10%, how much will you have in 10 years? A) $31,128 B) $25,940 C) $13,860 D) $40,712 Answer: A Explanation: A) FVIF = 2.594 × $12,000 = $31,128 Diff: 3 Question Status: Previous edition 18) Mr. Berkey deposits $10,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much interest will he earn on his investment during this time period? A) $17,140 B) $7,140 C) $17,180 D) $7,180 Answer: B Explanation: B) FVIF = 1.714 × $10,000 = $17,140 - $10,000 = $7,140 Diff: 2 Question Status: Revised 19) If I deposit a sum of money today and want it to double in 10 years, I will need to receive an interest rate of slightly above ________. Answer: 7% Diff: 1 Question Status: Revised Use the following two columns of items to answer the matching questions below: A) the process of earning interest on interest B) a series of equal payments received or paid at equal intervals C) a factor multiplied by today's savings to determine how the savings will accumulate over time D) a business calculator that performs PV/FV calculations 20) future value interest factor Diff: 1 Question Status: Revised 21) financial calculator Diff: 1 Question Status: Revised 22) annuity Diff: 1 Question Status: Revised 23) compounding Diff: 1 Question Status: Revised Answers: 20) C 21) D 22) B 23) A 24) The process of earning interest on accumulated interest or paying interest on accumulated interest due is called A) simple interest. B) compounding. C) future value. D) present value. Answer: B Diff: 1 Question Status: New 25) Assume you owe a large balance on your credit card and only pay the monthly minimum payment equal to 1% of the balance. If the annual interest rate on the credit card is 18%, how many years will it take you to pay off the balance assuming you do not make any additional charges to the card? A) 7.8 years B) 5 years C) you will never pay off the balance D) not enough information is provided to determine the time Answer: C Diff: 3 Question Status: New 3.3 Present Value of a Dollar Amount 1) The process of obtaining present values is known as discounting. Answer: TRUE Diff: 1 Question Status: Previous edition 2) The process of obtaining present values is known as compounding. Answer: FALSE Diff: 2 Question Status: Previous edition 3) The present value interest factor (PVIF) becomes lower as the number of years increases. Answer: TRUE Diff: 3 Question Status: Revised 4) The same tables can be used to figure future values and present values of $1. Answer: TRUE Diff: 3 Question Status: Previous edition 5) The process of obtaining ________ values is referred to as discounting. A) present B) future C) current D) inflated Answer: A Diff: 1 Question Status: Previous edition 6) Susie wants to know how much she needs to save today to have $5,000 in five years. Which of the following tables should she use? A) Present value of $1 B) Present value of an ordinary annuity C) Future value of $1 D) Future value of an ordinary annuity Answer: A Diff: 2 Question Status: Revised 7) Sandy wants to know how much she needs to save today to have $5,000 in five years at a 7% interest rate. Which of the following tables should she use? A) Present value of $1 B) Present value of an ordinary annuity C) Future value of $1 D) Future value of an ordinary annuity Answer: A Diff: 2 Question Status: Revised 8) Which of the following decisions would involve the use of the present value of $1? A) Your brother buys your car and offers to pay you $500 per year for three years or $1,500 in two years. B) You win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years. C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years. D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday. Answer: C Diff: 3 Question Status: Revised 9) Future and present values are dependent upon all of the following except A) time. B) the interest rate. C) a present or future value interest factor, depending on the problem. D) annual income. Answer: D Diff: 1 Question Status: Revised 10) If you are presented with an offer to accept payment now or a greater amount in the future, you would use (assuming you can invest the money at a known rate) A) present value of $1. B) future value of $1. C) present value of an annuity. D) Both A and B can be used for this analysis. Answer: A Diff: 2 Question Status: Revised 11) As the time period until receipt of an amount of money increases, the present value of the amount at a fixed interest rate A) remains the same. B) increases. C) decreases. D) not enough information to make a decision. Answer: C Diff: 2 Question Status: Revised 12) How much must you invest today at 8% interest in order to see your investment grow to $15,000 in 10 years? A) $6,330 B) $6,945 C) $7,620 D) $7,500 Answer: B Explanation: B) PVIF = .463 × $15,000 = $6,945 Diff: 2 Question Status: Previous edition Using the Time Value of Money charts provided, answer the following question(s). (Note to Instructors: Provide the appropriate tables to students from Personal Finance, Sixth Edition, Appendix C: Financial Tables.) 13) If Joe has $5,600 today and invests it at a 10% interest rate, how much will he have in 12 years? (Note—Solve as a future value problem.) A) $17,393.60 B) $17,572.80 C) $15,770.49 D) $12,320.00 Answer: B Explanation: B) Note—This problem can be solved using either the Future or the Present Value tables. Solved as Future Value - $5,600 × 3.138 = $17,572.80 Solved as Present Value - $5,600/.319 = $17,554.86 (rounded) Diff: 2 Question Status: Revised 14) If Jim wants $25,000 in five years and can earn an 8% interest rate, how much does he need to invest today? (Note—Solve as a present value problem.) A) $16,108 B) $17,025 C) $15,158 D) $17,829 Answer: B Explanation: B) Note—This problem can be solved using either the Future or the Present Value tables. Solved as Future Value - $25,000/1.469 = $17,018.38 (rounded) Solved as Present Value - $25,000 × 0.681 = $17,025.00 Diff: 2 Question Status: Revised 15) At what annual rate would $500 grow to $1,948 in 12 years? (Note—Solve as a present value problem.) A) 12.0 % B) 13.0 % C) 12.5 % D) 11.0 % Answer: A Explanation: A) Note—This problem can be solved using either the Future or the Present Value tables. Solved as Future Value - $1,948/500 = 3.896 (Exhibit 3.1)—look up on 12 year line Solved as Present Value - $500/$1,948 = 0.257 (Exhibit 3.2)—look up on 12 year line (12.0 percent) Diff: 2 Question Status: Revised Use the following two columns of items to answer the matching questions below: A) the process of obtaining present values B) a factor multiplied by a future value to get the present value of that amount 16) present value interest factor Diff: 1 Question Status: Revised 17) discounting Diff: 1 Question Status: Revised Answers: 16) B 17) A 18) If Lucky Louie won a lottery and chose to take $1,000,000 in cash (disregarding taxes), how much money would he have in 30 years if he invested at 6% per annum? A) $5,743,491 B) $5,804,268 C) $6,050,972 D) Not enough information is provided to solve the problem Answer: A Diff: 3 Question Status: New 19) Which of the following decisions is not financially sound? A) Defer your student loan payments with no interest accruing B) Defer your student loan payments if the interest rate is 7% per annum C) Take a 60 month zero interest rate car loan D) Prioritize paying off the highest interest rate loans versus lower rate loans Answer: B Diff: 2 Question Status: New 3.4 Future Value of an Annuity 1) The cash flows of an annuity due occur at the beginning of each period. Answer: TRUE Diff: 3 Question Status: Previous edition 2) An annuity due differs from an ordinary annuity in that the payments occur at the beginning of the period instead of at the end of the period. Answer: TRUE Diff: 2 Question Status: Previous edition 3) If the payment in an ordinary annuity changes over time, you cannot determine the future value of the payment stream. Answer: FALSE Diff: 2 Question Status: Previous edition 4) Which of the following decisions would involve the use of the future value of a $1 ordinary annuity table? A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years. B) You win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years. C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years. D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday. Answer: D Diff: 2 Question Status: Revised 5) Aaron wants to put $200 per month into an individual retirement account at 15% for four years. What is he solving for using his financial calculator? A) Present value B) Future value C) Interest rate D) Payment Answer: B Diff: 2 Question Status: Revised 6) Lisa wants to know how much savings she would accumulate in 15 years if she saves $2,000 per year and her savings earns 4% per year. She needs to determine the A) present value of an annuity. B) annuity amount. C) future value of one specific dollar amount today. D) future value of an annuity. Answer: D Diff: 2 Question Status: New 7) Jerry wants to know how much he needs to save every year to accumulate $15,000 in five years at a 10% interest rate. Which of the following tables should he use? A) Present value of $1 B) Present value of an ordinary annuity C) Future value of $1 D) Future value of an ordinary annuity Answer: D Diff: 2 Question Status: Revised 8) Don wants to know how much he needs to save every year to amass $15,000 in five years at a 5% interest rate. What is he calculating using his financial calculator? A) Present value B) Future value C) Interest rate D) Payment Answer: D Diff: 2 Question Status: Previous edition 9) The higher the rate used in determining the future value of an annuity, A) the smaller the future value at the end of the period. B) the greater the future vale at the end of the period. C) the greater the present value at the beginning of the period. D) none of these—the interest rate has no effect on the future value of the annuity. Answer: B Diff: 2 Question Status: Revised 10) To save for her newborn son's college education, Kelli Peterson will invest $1,500 at the end of each year for the next 18 years. The interest rate she expects to earn on her investment is 9%. How much money will she have saved by the time her son turns 18? A) $55,461 B) $69,027 C) $61,952 D) $68,399 Answer: C Explanation: C) FVIFA = 41.301 × $1,500 = $61,952 Diff: 2 Question Status: Previous edition 11) The future value of an ordinary annuity assumes that the payments are received A) at the beginning of the year and the last payment does not compound. B) at the end of the year and the last payment does not compound. C) at the beginning of the year and the last payment is compounded. D) at the end of the year and the last payment is compounded. Answer: B Diff: 2 Question Status: Revised 12) Using the Time Value of Money charts provided, answer the following question. (Note to Instructors: Provide the appropriate tables to students from Personal Finance, Sixth Edition, Appendix C: Financial Tables.) Judy would like to have $200,000 saved in her retirement account in 20 years. Assuming an interest rate of 10%, how much should she contribute each year? A) $3,491.92 B) $2,000.00 C) $2,576.11 D) $4,376.77 Answer: A Explanation: A) (Exhibit 3.3) $200,000/57.275 = $3,491.92 (rounded) Diff: 2 Question Status: Revised 13) The difference between an ordinary annuity and an annuity due is that with an annuity due the payments occur at the ________ of each period. Answer: beginning Diff: 2 Question Status: Revised 14) You wish to retire in 30 years and determine that you will need $1,000,000 to fund your retirement. If you can invest with a return of 8% you will need to invest ________ each year to reach your goal. Answer: $8,827 (rounded) Diff: 2 Question Status: Previous edition 15) The ________ the interest rate, the ________ the present value of an annuity. A) higher; lower B) lower; lower C) higher; higher D) Interest rates do not affect the present value of an annuity. Answer: A Diff: 2 Question Status: New 16) You have set a $100,000 goal for a college funds for your newborn child. You plan on having a fixed amount taken from your salary each month to meet this goal. The calculation to determine the monthly amount is called A) planning and budgeting. B) present value of an annuity. C) future value of an annuity. D) future value of a series of single payments. Answer: C Diff: 1 Question Status: New 3.5 Present Value of an Annuity 1) To determine how much money you would need to save to withdraw $10,000 a year for five years, you would use the present value of an annuity tables. Answer: TRUE Diff: 3 Question Status: Previous edition 2) Time value concepts can be applied to lottery winnings. The winner can usually choose an annuity or a lump sum. Answer: TRUE Diff: 1 Question Status: Previous edition 3) It is always better to choose a lump sum rather than to choose periodic payments over time. This is why nearly all lottery winners choose the lump-sum payment. Answer: FALSE Diff: 2 Question Status: Revised 4) The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and then summing the resulting present values. Answer: TRUE Diff: 2 Question Status: Previous edition 5) You utilize present and future value concepts in investment, purchase, and retirement decisions. Answer: TRUE Diff: 1 Question Status: Previous edition 6) The time value of money can be used to estimate future savings with periodic deposits of funds. Answer: TRUE Diff: 1 Question Status: Previous edition 7) Which of the following decisions would involve the use of the present value of a $1 ordinary annuity table? A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years. B) You win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years. C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college 4 years hence. D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday. Answer: B Diff: 3 Question Status: Revised 8) To compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years, you would need to use A) the future value of an annuity. B) the present value of an annuity. C) both future and present value of an annuity. D) both present and future value of $1. Answer: C Diff: 3 Question Status: Revised 9) To determine how much you would need to save each year to reach a specific goal, you would use A) present value of $1. B) future value of $1. C) present value of an annuity. D) future value of an annuity. Answer: D Diff: 2 Question Status: Revised 10) Yogi Berra Jr. has agreed to play for the New York Mets for $4 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars? A) Present value of a single amount B) Future value of an annuity C) Future value of a single amount D) Present value of an annuity Answer: D Diff: 2 Question Status: Previous edition 11) The state lottery has just informed you that you have won $1 million to be paid out in the amount of $50,000 per year for the next 20 years. With a discount rate of 12%, what is the present value of your winnings? A) $221,950 B) $398,150 C) $373,450 D) $392,150 Answer: C Explanation: C) PVIFA 7.469 × $50,000 = $373,450 Diff: 2 Question Status: Previous edition 12) Using the Time Value of Money charts provided, answer the following question. (Note to Instructors: Provide the appropriate tables to students from Personal Finance, Sixth Edition, Appendix C: Financial Tables.) Jack is 35 years old and is planning to retire at age 65. Based on a variety of factors, he is planning a retirement of 20 years. Jack determines that he will need $20,000 per year during his 20 years of retirement. If he can invest at 9%, how much will he need to save each year beginning today to reach his goal? A) $11,428.57 B) $6,086.00 C) $1,339.47 D) $20,000.00 Answer: C Explanation: C) $20,000 × 9.129 (PV annuity 9 percent, 20 years) = $182,580.00 Annual needed savings × 136.308 (FV annuity 9 percent, 30 years) = $182,580.00 Annual needed savings = $1,339.47 Diff: 1 Question Status: Revised 13) Assuming that you had just won $5,000,000 in the lottery, describe the advantages and disadvantages of receiving a lump sum today versus a ten-year annuity. Discuss other factors that are relevant or needed to make this decision. No interest rate is given, but different interest rates can be assumed if necessary to answer this problem. Answer: A lump sum would incur a large tax liability. In contrast, an annuity may lower the overall tax liability and would provide yearly payments. This problem does not state an interest rate, so actual computations could be done at different interest rates. The rates could depend upon a your ability to invest and wisely use the money. In general, if you can invest the lump sum winnings at a higher interest rate than implied by the annuity, you should prefer the lump sum. Diff: 2 Question Status: Revised Use the following two columns of items to answer the matching questions below: A) a series of equal payments that occur at the beginning of each period B) diagrams that show payments over time C) a factor multiplied by a periodic savings level (annuity) to get the present value of the annuity 14) timelines Diff: 1 Question Status: Revised 15) annuity due Diff: 1 Question Status: Revised 16) present value interest factor for an annuity Diff: 1 Question Status: Revised Answers: 14) B 15) A 16) C 17) Lucky Louie just won the lottery!! He has a choice of taking $1,000,000 in cash or receiving $50,000 per year for 30 years beginning at the end of this year. The best way to make this choice is to A) consult a tax advisor. B) consult an oracle. C) calculate the future value of the annuity payments. D) calculate the present value of the annuity payments. Answer: D Diff: 2 Question Status: New 18) Assuming interest rates were 6% per annum, what would be the present value of the $50,000 per year for 30 years payment stream? Use the tables or a financial calculator. A) $688,242 B) $1,500,000 C) $700,002 D) $693,974 Answer: A Diff: 3 Question Status: New 3.6 Using Time Value to Estimate Savings 1) Present and future values concepts are applied in all of the following decisions except A) purchase of a home. B) calculation of withdrawals needed during retirement. C) calculation of savings for a large purchase. D) annual cash inflows. Answer: D Diff: 1 Question Status: Revised 2) Present and future values concepts are not applied to which of the following? A) Payments on a home B) Calculation of withdrawals needed during retirement C) Calculation of savings for a large purchase D) The balance of your checking account today Answer: D Diff: 1 Question Status: Previous edition 3) The time value of money can be applied to all of the following except A) bond valuation. B) stock valuation. C) determining the current market value of your home. D) determining the amount of taxes owed on income this year. Answer: D Diff: 2 Question Status: Revised Use the data in table 3.1 to answer the following question(s): Table 3.1 4) Refer to Table 3.1 above. How much will you need to deposit today to enable you to withdraw $1,000 each year for the next 5 years if the money is invested at 7%? A) $1,403 B) $713 C) $5,751 D) $4,100 Answer: D Explanation: D) $1,000 × 4.100 = $4,100 Diff: 2 Question Status: Previous edition 5) Refer to Table 3.1 above. How much will you have if you deposit $1,000 today in an account paying 7% and you leave it on deposit for 5 years? A) $1,403 B) $713 C) $5,751 D) $4,100 Answer: A Explanation: A) $1,000 × 1.403 = $1,403 Diff: 2 Question Status: Previous edition 6) Refer to Table 3.1 above. How much will you have if you deposit $1,000 each year for the next 5 years in an account paying 7%? A) $1,403 B) $713 C) $5,751 D) $4,100 Answer: C Explanation: C) $1,000 × 5.751 = $5,751 Diff: 2 Question Status: Previous edition 7) Refer to Table 3.1 above. How much will you need to deposit today in an account paying 7% if you wish to have $1,000 in 5 years? A) $1,403 B) $713 C) $5,751 D) $4,100 Answer: B Explanation: B) $1,000 × .713 = $713 Diff: 2 Question Status: Previous edition Using the Time Value of Money charts provided, answer the following question(s). (Note to Instructors: Provide the appropriate tables to students from Personal Finance, Sixth Edition, Appendix C: Financial Tables.) 8) If Sandy has $7,000 today and invests it for five years at a 5% interest rate, how much will she have in five years? A) $8,750 B) $7,850 C) $8,932 D) $8,857 Answer: C Explanation: C) FVIF 1.276 × $7,000 = $8,932 Diff: 1 Question Status: Previous edition 9) If Art wants $35,000 in 10 years and can earn a 12% interest rate, how much does he need to invest today? A) $10,538 B) $10,310 C) $11,270 D) $14,375 Answer: C Explanation: C) PVIF .322 × $35,000 = $11,270 Diff: 2 Question Status: Previous edition 10) At what annual rate would $200.00 grow to $497.60 in five years? A) 19% B) 18% C) 20% D) 22% Answer: C Explanation: C) $497.60/$200 = 2.488; FVIF 2.488, n = 5, i = 20% Diff: 3 Question Status: Revised 11) How many years will it take for $35 to grow to $53.87 if it is invested at 9% compounded annually? A) 6.0 B) 5.5 C) 5.0 D) 4.0 Answer: C Explanation: C) $53.87/$35 =1.539; FVIF 1.539, i = 9%, n = 5 Diff: 3 Question Status: Revised 12) How many years will it take for $500 to grow to $1,039.50 if it is invested at 5% compounded annually? A) 15 B) 14 C) 13 D) 12 Answer: A Explanation: A) $1,039.50/$500 = 2.079; FVIF 2.079, i = 5%, n = 15 Diff: 2 Question Status: Revised 13) Carol would like to have $500,000 saved in her retirement account in 30 years. Assuming an interest rate of 10%, how much should she contribute each year? A) $2,182.00 B) $2,000.00 C) $1,956.20 D) $3,039.70 Answer: D Explanation: D) $500,000 / FVIF 164.49 = $3,039.70 Diff: 2 Question Status: Revised 14) John would like to save $1,500,000 by the time he retires in 30 years and believes he can earn an annual return of 8%. How much does he need to invest each year to achieve his goal? A) $13,242 B) $18,900 C) $20,518 D) none of the above Answer: A Explanation: A) $1,500,000 / FVIF 113.28 = $13,242 Diff: 2 Question Status: Previous edition 15) Mr. Wolf is borrowing $500,000 to expand his business. The loan will be for ten years at 12% interest and will be repaid in equal quarterly installments. What will the quarterly installments be? A) $88,496 B) $21,631 C) $25,510 D) $60,650 Answer: B Explanation: B) $500,000 / 23.115 (PVIFA, n = 40, i = 3%) = $21,631 (rounded) Diff: 2 Question Status: Previous edition 16) Describe how present and future values concepts apply to your income and expenses and ultimately your personal budget, income statement, and balance sheet. Answer: This is basically a subjective answer. Present and future value concepts affect your investing, purchase, and ret