FIN 305 WEEK 2 EXAM: 300 UNIQUE PRACTICE
QUESTIONS AND CORRECT ANSWERS WITH
RATIONALE LATEST UPDATE ALREADY GRADED A+
ASSURED PASS
Section 1: Time Value of Money (Questions 1–60)
Question 1
Time value of money is based on the belief that a dollar received today is worth
more than a dollar received in the future primarily because of:
A. Inflation only
B. The ability to earn interest on the money received today
C. Government regulations
D. Tax considerations
Correct Answer: B
Rationale: The core principle of TVM is that money available today can be
invested to earn a return, making it worth more than the same amount received
later. While inflation is a factor, the primary reason is the earning potential of
money over time.
Question 2
If you invest $1,000 at an annual interest rate of 8% compounded annually, what
will be the value of your investment after 3 years?
A. $1,240.00
B. $1,259.71
C. $1,280.00
D. $1,300.00
Correct Answer: B
Rationale: FV = PV(1 + r)^n = $1,000(1.08)^3 = $1,000(1.259712) = $1,259.71.
Question 3
,What is the present value of $5,000 to be received 4 years from now if the discount
rate is 6%?
A. $3,960.47
B. $4,212.36
C. $4,000.00
D. $3,500.00
Correct Answer: A
Rationale: PV = FV / (1 + r)^n = $5,000 / (1.06)^4 = $5,.262477 =
$3,960.47.
Question 4
An annuity that pays $500 at the end of each year for 5 years with a discount rate
of 7% has a present value closest to:
A. $2,050.10
B. $2,150.20
C. $2,250.00
D. $2,500.00
Correct Answer: A
Rationale: PVA = PMT × [1 - (1 + r)^-n] / r = $500 × [1 - (1.07)^-5] / 0.07 = $500
× 4.1002 = $2,050.10.
Question 5
If you deposit $200 at the end of each month into an account earning 6% annual
interest compounded monthly, what will be the balance after 5 years?
A. $13,954.00
B. $14,000.00
C. $12,000.00
D. $15,000.00
Correct Answer: A
Rationale: Monthly rate = 0.06/12 = 0.005; n = 60. FVA = $200 × [(1.005)^60 - 1]
/ 0.005 = $200 × 69.770 = $13,954.00.
Question 6
What is the effective annual rate (EAR) for a nominal rate of 12% compounded
quarterly?
A. 12.00%
B. 12.55%
C. 12.68%
D. 13.00%
Correct Answer: B
,Rationale: EAR = (1 + 0.12/4)^4 - 1 = (1.03)^4 - 1 = 1.1255 - 1 = 0.1255 =
12.55%.
Question 7
If a perpetuity pays $1,000 per year forever and the discount rate is 5%, what is its
present value?
A. $5,000
B. $10,000
C. $20,000
D. $50,000
Correct Answer: C
Rationale: PV of perpetuity = PMT / r = $1,.05 = $20,000.
Question 8
What is the future value of $2,000 invested at 10% simple interest for 5 years?
A. $2,200
B. $3,000
C. $2,500
D. $2,100
Correct Answer: B
Rationale: Simple interest: FV = PV(1 + rt) = $2,000(1 + 0.10 × 5) = $2,000(1.5) =
$3,000.
Question 9
If you need $10,000 in 3 years and can earn 7% annually, how much must you
invest today?
A. $8,162.98
B. $7,500.00
C. $8,000.00
D. $8,500.00
Correct Answer: A
Rationale: PV = $10,000 / (1.07)^3 = $10,.225043 = $8,162.98.
Question 10
An investment promises to pay $1,000 at the end of year 1, $2,000 at the end of
year 2, and $3,000 at the end of year 3. If the discount rate is 8%, what is the
present value?
A. $5,022.29
B. $5,500.00
C. $4,800.00
, D. $5,200.00
Correct Answer: A
Rationale: PV = $1,000/1.08 + $2,000/1.1664 + $3,000/1.259712 = $925.93 +
$1,714.68 + $2,381.68 = $5,022.29.
Question 11
What is the relationship between present value and the discount rate?
A. Directly proportional
B. Inversely related
C. No relationship
D. Exponential
Correct Answer: B
Rationale: As the discount rate increases, the present value decreases. They are
inversely related.
Question 12
If the nominal rate is 8% and inflation is 3%, what is the approximate real rate of
return?
A. 5.00%
B. 11.00%
C. 4.85%
D. 2.67%
Correct Answer: C
Rationale: Real rate ≈ (1..03) - 1 = 0.0485 = 4.85%.
Question 13
An annuity due differs from an ordinary annuity because:
A. Payments are made at the beginning of each period
B. Payments are made at the end of each period
C. Payments are made only once
D. Payments are tax-free
Correct Answer: A
Rationale: An annuity due has payments at the beginning of each period, while an
ordinary annuity has payments at the end.
Question 14
What is the future value of an annuity due with payments of $1,000 per year for 4
years at 6%?
A. $4,374.62
B. $4,637.09
QUESTIONS AND CORRECT ANSWERS WITH
RATIONALE LATEST UPDATE ALREADY GRADED A+
ASSURED PASS
Section 1: Time Value of Money (Questions 1–60)
Question 1
Time value of money is based on the belief that a dollar received today is worth
more than a dollar received in the future primarily because of:
A. Inflation only
B. The ability to earn interest on the money received today
C. Government regulations
D. Tax considerations
Correct Answer: B
Rationale: The core principle of TVM is that money available today can be
invested to earn a return, making it worth more than the same amount received
later. While inflation is a factor, the primary reason is the earning potential of
money over time.
Question 2
If you invest $1,000 at an annual interest rate of 8% compounded annually, what
will be the value of your investment after 3 years?
A. $1,240.00
B. $1,259.71
C. $1,280.00
D. $1,300.00
Correct Answer: B
Rationale: FV = PV(1 + r)^n = $1,000(1.08)^3 = $1,000(1.259712) = $1,259.71.
Question 3
,What is the present value of $5,000 to be received 4 years from now if the discount
rate is 6%?
A. $3,960.47
B. $4,212.36
C. $4,000.00
D. $3,500.00
Correct Answer: A
Rationale: PV = FV / (1 + r)^n = $5,000 / (1.06)^4 = $5,.262477 =
$3,960.47.
Question 4
An annuity that pays $500 at the end of each year for 5 years with a discount rate
of 7% has a present value closest to:
A. $2,050.10
B. $2,150.20
C. $2,250.00
D. $2,500.00
Correct Answer: A
Rationale: PVA = PMT × [1 - (1 + r)^-n] / r = $500 × [1 - (1.07)^-5] / 0.07 = $500
× 4.1002 = $2,050.10.
Question 5
If you deposit $200 at the end of each month into an account earning 6% annual
interest compounded monthly, what will be the balance after 5 years?
A. $13,954.00
B. $14,000.00
C. $12,000.00
D. $15,000.00
Correct Answer: A
Rationale: Monthly rate = 0.06/12 = 0.005; n = 60. FVA = $200 × [(1.005)^60 - 1]
/ 0.005 = $200 × 69.770 = $13,954.00.
Question 6
What is the effective annual rate (EAR) for a nominal rate of 12% compounded
quarterly?
A. 12.00%
B. 12.55%
C. 12.68%
D. 13.00%
Correct Answer: B
,Rationale: EAR = (1 + 0.12/4)^4 - 1 = (1.03)^4 - 1 = 1.1255 - 1 = 0.1255 =
12.55%.
Question 7
If a perpetuity pays $1,000 per year forever and the discount rate is 5%, what is its
present value?
A. $5,000
B. $10,000
C. $20,000
D. $50,000
Correct Answer: C
Rationale: PV of perpetuity = PMT / r = $1,.05 = $20,000.
Question 8
What is the future value of $2,000 invested at 10% simple interest for 5 years?
A. $2,200
B. $3,000
C. $2,500
D. $2,100
Correct Answer: B
Rationale: Simple interest: FV = PV(1 + rt) = $2,000(1 + 0.10 × 5) = $2,000(1.5) =
$3,000.
Question 9
If you need $10,000 in 3 years and can earn 7% annually, how much must you
invest today?
A. $8,162.98
B. $7,500.00
C. $8,000.00
D. $8,500.00
Correct Answer: A
Rationale: PV = $10,000 / (1.07)^3 = $10,.225043 = $8,162.98.
Question 10
An investment promises to pay $1,000 at the end of year 1, $2,000 at the end of
year 2, and $3,000 at the end of year 3. If the discount rate is 8%, what is the
present value?
A. $5,022.29
B. $5,500.00
C. $4,800.00
, D. $5,200.00
Correct Answer: A
Rationale: PV = $1,000/1.08 + $2,000/1.1664 + $3,000/1.259712 = $925.93 +
$1,714.68 + $2,381.68 = $5,022.29.
Question 11
What is the relationship between present value and the discount rate?
A. Directly proportional
B. Inversely related
C. No relationship
D. Exponential
Correct Answer: B
Rationale: As the discount rate increases, the present value decreases. They are
inversely related.
Question 12
If the nominal rate is 8% and inflation is 3%, what is the approximate real rate of
return?
A. 5.00%
B. 11.00%
C. 4.85%
D. 2.67%
Correct Answer: C
Rationale: Real rate ≈ (1..03) - 1 = 0.0485 = 4.85%.
Question 13
An annuity due differs from an ordinary annuity because:
A. Payments are made at the beginning of each period
B. Payments are made at the end of each period
C. Payments are made only once
D. Payments are tax-free
Correct Answer: A
Rationale: An annuity due has payments at the beginning of each period, while an
ordinary annuity has payments at the end.
Question 14
What is the future value of an annuity due with payments of $1,000 per year for 4
years at 6%?
A. $4,374.62
B. $4,637.09
