Section 9. Retirement - TVM Practice
for CPWA
Assume that an individual has invested $1,000,000 in a stock market index and that the
market index returns 8% annually over the next 30 years. Over that same period of time
the consumer price index averages 3% a year. What is the future value of the portfolio
before inflation after 30 years (the first figure below) and the portfolio value in today's
dollars after 30 years (the second figure below)?
a. $3,400,000; $4,321,942
b. $3,400,000; $4,140,502
c. $10,062,657; $4,321,942
d. $10,062,657; $4,140,502 - answerCorrect answer: D
Feedback: Step 1: calculate future value in 30 years
PV = $1,000,000
i = 8%
n = 30 years
......FV = $10,062,657.
Step 2: calculate value in today's dollars (net of inflation)
PV = $1,000,000
i = 4.85% ((1.08/1.03)-1)
n = 30 years
.....FV = $4,140,502.
2. Over the past 30 years, stocks have returned 8%. If the market returns 8% over the
next 30 years, and
CPI is 3%, what is the purchasing power of $1 in 30 years? Round to the nearest dollar.
a. $4.00
b. $5.00
c. $10.00
d. $11.00 - answerCorrect answer: A
Feedback: The answer is $4.00.
Using the Real Rate of Return formula, isolate the variables needed:
Investment Return
Inflation
Input Variables:
Real Rate of Return = [(1 + .08)/ (1+.03) - 1] x 100
, = (1.0485 -1) x 100
= 4.85%
Using Time Value of Money, calculate the future value.
PV= -1, I= 4.85, N=30, Calculate FV
FV = $4.14
What is the annualized return of a stock that is purchased for $100 and sold for $150
after two years? Assume no dividends.
a. 22.47%
b. 25%
c. 44.88%
d. 50% - answerCorrect answer: A
Feedback: The answer is 22.47%.
Using Time Value of Money, calculate the annualized return.
PV= -100 FV= 150, N=2, Calculate I
I = 22.47%
An investor purchased 100 shares of an oil company stock in 1930 for $10 per share.
What is the real value of the investment in 2010 if the annual return of the stock has
averaged 8%?
a. $2,186
b. $4,719
c. $218,600
d. $471,900 - answerCorrect answer: D
Feedback: The answer is $471,900.
Using Time Value of Money, calculate the future value.
PV= -1,000, I= 8, N=80, Calculate FV
FV = $471,900
An investor purchased 100 shares of an oil company stock in 1930 for $10 per share.
What is the real value of the investment in 2010 if the annual return of the stock has
averaged 8% and inflation is 3%?
a. $2,186
b. $4,719
c. $44,352
d. $49,561 - answerCorrect answer: C
Feedback: The answer is $44,352.
Using the Real Rate of Return formula, isolate the variables needed
Investment Return
for CPWA
Assume that an individual has invested $1,000,000 in a stock market index and that the
market index returns 8% annually over the next 30 years. Over that same period of time
the consumer price index averages 3% a year. What is the future value of the portfolio
before inflation after 30 years (the first figure below) and the portfolio value in today's
dollars after 30 years (the second figure below)?
a. $3,400,000; $4,321,942
b. $3,400,000; $4,140,502
c. $10,062,657; $4,321,942
d. $10,062,657; $4,140,502 - answerCorrect answer: D
Feedback: Step 1: calculate future value in 30 years
PV = $1,000,000
i = 8%
n = 30 years
......FV = $10,062,657.
Step 2: calculate value in today's dollars (net of inflation)
PV = $1,000,000
i = 4.85% ((1.08/1.03)-1)
n = 30 years
.....FV = $4,140,502.
2. Over the past 30 years, stocks have returned 8%. If the market returns 8% over the
next 30 years, and
CPI is 3%, what is the purchasing power of $1 in 30 years? Round to the nearest dollar.
a. $4.00
b. $5.00
c. $10.00
d. $11.00 - answerCorrect answer: A
Feedback: The answer is $4.00.
Using the Real Rate of Return formula, isolate the variables needed:
Investment Return
Inflation
Input Variables:
Real Rate of Return = [(1 + .08)/ (1+.03) - 1] x 100
, = (1.0485 -1) x 100
= 4.85%
Using Time Value of Money, calculate the future value.
PV= -1, I= 4.85, N=30, Calculate FV
FV = $4.14
What is the annualized return of a stock that is purchased for $100 and sold for $150
after two years? Assume no dividends.
a. 22.47%
b. 25%
c. 44.88%
d. 50% - answerCorrect answer: A
Feedback: The answer is 22.47%.
Using Time Value of Money, calculate the annualized return.
PV= -100 FV= 150, N=2, Calculate I
I = 22.47%
An investor purchased 100 shares of an oil company stock in 1930 for $10 per share.
What is the real value of the investment in 2010 if the annual return of the stock has
averaged 8%?
a. $2,186
b. $4,719
c. $218,600
d. $471,900 - answerCorrect answer: D
Feedback: The answer is $471,900.
Using Time Value of Money, calculate the future value.
PV= -1,000, I= 8, N=80, Calculate FV
FV = $471,900
An investor purchased 100 shares of an oil company stock in 1930 for $10 per share.
What is the real value of the investment in 2010 if the annual return of the stock has
averaged 8% and inflation is 3%?
a. $2,186
b. $4,719
c. $44,352
d. $49,561 - answerCorrect answer: C
Feedback: The answer is $44,352.
Using the Real Rate of Return formula, isolate the variables needed
Investment Return
