TCU Finance Exit Exam | 350+ Practice
Questions & Verified Answers | Time
Value of Money, Bonds, Stocks, Capital
Budgeting, WACC & Financial Markets |
Texas Christian University Finance
SECTION 1: TIME VALUE OF MONEY
Core Concepts
1. Rate of return you could earn on an alternative investment of similar risk is
called:
A. Discount rate
B. Opportunity Cost
C. Required return
D. Cost of capital
Correct Answer: B
Rationale: Opportunity cost is the rate of return that could be earned on an alternative
investment of similar risk. It represents the return foregone by choosing one investment
over another .
2. Finding Present Value is called __________, the reverse of compounding.
A. Amortization
B. Annuitization
C. Discounting
D. Capitalization
,Correct Answer: C
Rationale: Discounting is the process of finding the present value of a future cash flow.
It is the reverse of compounding, which finds the future value of a present amount .
3. If payments are equal and are made at fixed intervals, then the series is a(n):
A. Consol
B. Annuity
C. Perpetuity
D. Growing perpetuity
Correct Answer: B
Rationale: An annuity is a series of equal payments made at fixed intervals. If payments
occur at the end of each period, it is an ordinary annuity; if at the beginning, it is an
annuity due .
4. Mortgages, car loans, and student loans are examples of what type of annuity?
A. Annuity Due
B. Perpetuity
C. Ordinary Annuity
D. Growing Annuity
Correct Answer: C
Rationale: These are ordinary annuities because payments occur at the end of each
period. Rental payments and life insurance premiums are examples of annuity due
(beginning of period payments) .
5. True/False: The FV of an annuity due will be greater than that of a similar
ordinary annuity.
A. True
B. False
, Correct Answer: A
Rationale: Annuity due payments occur at the beginning of each period, giving them
one extra period to compound. Therefore, the future value of an annuity due is greater
than that of a similar ordinary annuity by a factor of (1+r) .
6. Calculate the present value or future value of a lump (single) sum.
Correct Answer:
PV = FV / (1 + i)^n
FV = PV(1 + i)^n
Rationale: These are the fundamental time value of money formulas. Use a financial
calculator or spreadsheet to solve for any variable when given the others .
7. How do you find the Future Value of an Ordinary Annuity?
Correct Answer:
FV = PMT × [((1 + r)^n - 1) / r]
PV = 0 (for calculator)
Rationale: This formula calculates the future value of a series of equal payments at the
end of each period. The term in brackets is the annuity future value factor .
8. How do you find the Present Value of an Ordinary Annuity?
Correct Answer:
PV = PMT × [(1 - (1 / (1 + r)^n)) / r]
Rationale: This formula calculates the present value of a series of equal payments at the
end of each period. The term in brackets is the annuity present value factor .
, 9. Promise to pay interest perpetually is called a(n):
A. Annuity
B. Consol
C. Perpetuity
D. Zero-coupon bond
Correct Answer: C
Rationale: A perpetuity is a financial instrument that promises to pay a fixed amount of
cash flow forever. The PV of a perpetuity = PMT / interest rate .
10. In 1749, the British government issued bonds whose proceeds were used to
pay off other British bonds. These were called:
A. Annuities
B. Consols
C. Gilts
D. T-bills
Correct Answer: B
Rationale: Consols were British government bonds that consolidated the government's
debt. They are a classic example of perpetuities .
11. What is the relationship between time and present value?
Correct Answer: The further out in time, the less the present value becomes.
Rationale: Money received in the future is worth less today because of the time value of
money. The longer the time horizon, the greater the discounting effect .
12. What is the relationship between interest rates and present value?
Questions & Verified Answers | Time
Value of Money, Bonds, Stocks, Capital
Budgeting, WACC & Financial Markets |
Texas Christian University Finance
SECTION 1: TIME VALUE OF MONEY
Core Concepts
1. Rate of return you could earn on an alternative investment of similar risk is
called:
A. Discount rate
B. Opportunity Cost
C. Required return
D. Cost of capital
Correct Answer: B
Rationale: Opportunity cost is the rate of return that could be earned on an alternative
investment of similar risk. It represents the return foregone by choosing one investment
over another .
2. Finding Present Value is called __________, the reverse of compounding.
A. Amortization
B. Annuitization
C. Discounting
D. Capitalization
,Correct Answer: C
Rationale: Discounting is the process of finding the present value of a future cash flow.
It is the reverse of compounding, which finds the future value of a present amount .
3. If payments are equal and are made at fixed intervals, then the series is a(n):
A. Consol
B. Annuity
C. Perpetuity
D. Growing perpetuity
Correct Answer: B
Rationale: An annuity is a series of equal payments made at fixed intervals. If payments
occur at the end of each period, it is an ordinary annuity; if at the beginning, it is an
annuity due .
4. Mortgages, car loans, and student loans are examples of what type of annuity?
A. Annuity Due
B. Perpetuity
C. Ordinary Annuity
D. Growing Annuity
Correct Answer: C
Rationale: These are ordinary annuities because payments occur at the end of each
period. Rental payments and life insurance premiums are examples of annuity due
(beginning of period payments) .
5. True/False: The FV of an annuity due will be greater than that of a similar
ordinary annuity.
A. True
B. False
, Correct Answer: A
Rationale: Annuity due payments occur at the beginning of each period, giving them
one extra period to compound. Therefore, the future value of an annuity due is greater
than that of a similar ordinary annuity by a factor of (1+r) .
6. Calculate the present value or future value of a lump (single) sum.
Correct Answer:
PV = FV / (1 + i)^n
FV = PV(1 + i)^n
Rationale: These are the fundamental time value of money formulas. Use a financial
calculator or spreadsheet to solve for any variable when given the others .
7. How do you find the Future Value of an Ordinary Annuity?
Correct Answer:
FV = PMT × [((1 + r)^n - 1) / r]
PV = 0 (for calculator)
Rationale: This formula calculates the future value of a series of equal payments at the
end of each period. The term in brackets is the annuity future value factor .
8. How do you find the Present Value of an Ordinary Annuity?
Correct Answer:
PV = PMT × [(1 - (1 / (1 + r)^n)) / r]
Rationale: This formula calculates the present value of a series of equal payments at the
end of each period. The term in brackets is the annuity present value factor .
, 9. Promise to pay interest perpetually is called a(n):
A. Annuity
B. Consol
C. Perpetuity
D. Zero-coupon bond
Correct Answer: C
Rationale: A perpetuity is a financial instrument that promises to pay a fixed amount of
cash flow forever. The PV of a perpetuity = PMT / interest rate .
10. In 1749, the British government issued bonds whose proceeds were used to
pay off other British bonds. These were called:
A. Annuities
B. Consols
C. Gilts
D. T-bills
Correct Answer: B
Rationale: Consols were British government bonds that consolidated the government's
debt. They are a classic example of perpetuities .
11. What is the relationship between time and present value?
Correct Answer: The further out in time, the less the present value becomes.
Rationale: Money received in the future is worth less today because of the time value of
money. The longer the time horizon, the greater the discounting effect .
12. What is the relationship between interest rates and present value?
