FIN 370 Week 2 Apply: Week 2 Exercise

Review the Week 2 “Knowledge Check” in Connect® in preparation for this assignment.

Complete the Week 2 “Exercise” in Connect®.

Note: You have only one attempt available to complete this assignment. Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date.

You are offered a choice between $770 today and $815 one year from today. Assume that interest rates are 4 percent. Which do you prefer?

Multiple Choice

$770 today at 3 percent interest rates

$815 one year from today

They are equivalent to each other.

$770 today

If an average home in your town currently costs $250,000, and house prices are expected to grow at an average rate of 3 percent per year, what will a house cost in eight years?

Multiple Choice

$255,033.41

$316,692.52

$314,928.01

$255,043.97

Which of the following statements is incorrect with respect to time lines?

Multiple Choice

Cash flows we pay out are called outflows and designated with a negative number.

Cash flows we receive are called inflows and denoted with a positive number.

A helpful tool for organizing our analysis is the time line.

Interest rates are not included on our time lines.

People borrow money because they expect

Multiple Choice

interest rates to rise.

the time value of money to apply only if they are saving money.

their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on the loan.

that consumers don’t need to calculate the impact of interest on their purchases.

When your investment compounds, your money will grow in a(n) __________ fashion.

Multiple Choice

exponential

static

linear

implied

What is the future value of $1,000 deposited for one year earning 5 percent interest rate annually?

Multiple Choice

$1,050

$2,050

$1,000

$1,005

If an average home in your town currently costs $350,000, and house prices are expected to grow at an average rate of 3 percent per year, what will an average house cost in “5” years?

Multiple Choice

$507,500.00

$405,745.93

$405,168.75

$402,500.00

A deposit of $500 earns 5 percent the first year, 6 percent the second year, and 7 percent the third year. What would be the third year future value?

Multiple Choice

$615.62

$595.46

$671.02

$634.91

If an average home in your town currently costs $300,000, and house prices are expected to grow at an average rate of 5 percent per year, what will an average house cost in 10 years?

Multiple Choice

$483,153.01

$507,593.74

$488,688.39

$450,000.00

We call the process of earning interest on both the original deposit and on the earlier interest payments

Multiple Choice

multiplying.

discounting.

compounding.

computing.

How much would be in your savings account in 7 years after depositing $100 today if the bank pays 5 percent interest per year?

Multiple Choice

$140.71

$814.20

$735.00

$135.00

What is the future value of $2,500 deposited for one year earning a 14 percent interest rate annually?

Multiple Choice

$2,550

$3,150

$2,950

$2,850

What is the future value of $600 deposited for four years earning an 11 percent interest rate annually?

Multiple Choice

$803.61

$910.84

$792.90

$899.23

What is the present value of a $250 payment in one year when the discount rate is 6 percent?

Multiple Choice

$250.00

$245.00

$235.85

$265.00

What is the present value of a $750 payment made in three years when the discount rate is 5 percent?

Multiple Choice

$868.22

$647.88

$712.50

$646.96

Approximately how many years does it take to double a $600 investment when interest rates are 6 percent per year?

Multiple Choice

12 years

8 years

0.08 year

8.33 years

Approximately what rate is needed to double an investment over five years?

Multiple Choice

8 percent

14.4 percent

15.8 percent

12.2 percent

Which of the following statements is correct?

Multiple Choice

Discounting is finding the future value of an original investment.

$100 to be received in the future is worth more than that today since it could be invested and earn interest.

The Rule of 72 calculates the compounded return on investments.

$100 to be received in the future is worth less than that today since it could be invested and earn interest.

Approximately what interest rate is needed to double an investment over four years?

Multiple Choice

4 percent

100 percent

25 percent

18 percent

What is the present value of a $600 payment in one year when the discount rate is 8 percent?

Multiple Choice

$555.56

$575.09

$525.87

$498.61

A dollar paid (or received) in the future is

Multiple Choice

not comparable to a dollar paid (or received) today.

worth as much as a dollar paid (or received) today.

worth more than a dollar paid (or received) today.

not worth as much as a dollar paid (or received) today.

What is the present value of a $500 payment in one year when the discount rate is 5 percent?

Multiple Choice

$475.00

$476.19

$525.00

$500.00

Approximately what interest rate is needed to double an investment over eight years?

Multiple Choice

8 percent

100 percent

9 percent

12 percent

What is the present value of a $200 payment made in three years when the discount rate is 8 percent?

Multiple Choice

$158.77

$515.42

$251.94

$150.00

When calculating the number of years needed to grow an investment to a specific amount of money

Multiple Choice

the interest rate has nothing to do with the length of the time period needed to achieve the growth.

the higher the interest rate, the shorter the time period needed to achieve the growth.

the lower the interest rate, the shorter the time period needed to achieve the growth.

the Rule of 72 is the only way to calculate the time period needed to achieve the growth.

Determine the interest rate earned on a $1,500 deposit when $1,680 is paid back in one year.

Multiple Choice

89.00 percent

12.00 percent

0.89 percent

1.12 percent

Determine the interest rate earned on a $200 deposit when $208 is paid back in one year.

Multiple Choice

2 percent

4 percent

104 percent

8 percent

Determine the interest rate earned on a $500 deposit when $650 is paid back in one year.

Multiple Choice

0.77 percent

30.0 percent

77.0 percent

1.30 percent

Which of the following will increase the future value of an annuity?

Multiple Choice

The number of periods increases.

The amount of the annuity increases.

The interest rate increases.

All of these choices are correct.

Level sets of frequent, consistent cash flows are called

Multiple Choice

loans.

budgets.

bills.

annuities.

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

Multiple Choice

the future value

interest rate for compounding

the time line

the present value

When moving from the left to the right of a time line, we are using

Multiple Choice

compound interest to calculate future values.

discounted cash flows to calculate present values.

simple interest to calculate future values.

only payments to calculate future values.

In order to discount multiple cash flows to the present, one would use

Multiple Choice

the appropriate simple rate.

the appropriate discount rate.

the appropriate compound rate.

the appropriate tax rate.

What is the future value of a $500 annuity payment over eight years if interest rates are 14 percent?

Multiple Choice

$6,750.14

$6,241.09

$6,809.72

$6,616.38

What is the future value of an $800 annuity payment over 15 years if the interest rates are 6 percent?

Multiple Choice

$1,917.25

$7,002.99

$18,620.78

$12,720.00

When saving for future expenditures, we can add the ________ of contributions over time to see what the total will be worth at some point in time.

Multiple Choice

future value

present value

payment

time value to money

If the future value of an ordinary, 7-year annuity is $10,000 and interest rates are 4 percent, what is the future value of the same annuity due?

Multiple Choice

$9,615.38

$10,700.00

$10,000.00

$10,400.00

If the present value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what is the present value of the same annuity due?

Multiple Choice

$943.40

$1,040.00

$1,000.00

$1,060.00

Your credit rating and current economic conditions will determine

Multiple Choice

whether you get simple or compound interest.

the interest rate that a lender will offer.

how long discounting will affect you.

how long compounding will affect you.

What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?

Multiple Choice

$1,938.96

$440.80

$1,197.81

$204.17

If the future value of an ordinary, 11-year annuity is $5,575 and interest rates are 5.5 percent, what is the future value of the same annuity due?

Multiple Choice

$5,769.06

$5,881.63

$5,619.52

$5,947.88

What is the present value of a $1,100 payment made every year forever when interest rates are 4.5 percent?

Multiple Choice

$11,100

$21,089.37

$22,963.14

$24,444.44

What is the present value of a $600 annuity payment over 4 years if interest rates are 6 percent?

Multiple Choice

$757.49

$3,145.28

$475.26

$2,079.06

What is the present value, when interest rates are 10 percent, of a $75 payment made every year forever?

Multiple Choice

$750.00

$1,000.00

$6.75

$675.00

If the future value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what is the future value of the same annuity due?

Multiple Choice

$943.40

$1,060.00

$1,040.00

$1,000.00

A loan is offered with monthly payments and a 14.5 percent APR. What is the loan’s effective annual rate (EAR)?

Multiple Choice

15.50 percent

15.63 percent

15.13 percent

14.97 percent

When you get your credit card bill, if you make a payment larger than the minimum payment

Multiple Choice

you will not affect the payoff time.

you are wasting your current consumption and making TVM not work for you.

you will increase the payoff time.

you will reduce the payoff time.

The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a

Multiple Choice

less accurate measure of the interest rate paid for monthly compounding.

measure that only applies to mortgages.

more accurate measure of the interest rate paid for monthly compounding.

concept that is only used because the law requires it, and is of no use to a borrower.

Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value

Multiple Choice

grows.

is independent of the monthly compounding.

decreases.

is affected only if the calculation involves an annuity due.

A loan is offered with monthly payments and a 10 percent APR. What is the loan’s effective annual rate (EAR)?

Multiple Choice

12.67 percent

10.00 percent

11.20 percent

10.47 percent

Review the Week 2 “Knowledge Check” in Connect® in preparation for this assignment.

Complete the Week 2 “Exercise” in Connect®.

Note: You have only one attempt available to complete this assignment. Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date.

You are offered a choice between $770 today and $815 one year from today. Assume that interest rates are 4 percent. Which do you prefer?

Multiple Choice

$770 today at 3 percent interest rates

$815 one year from today

They are equivalent to each other.

$770 today

If an average home in your town currently costs $250,000, and house prices are expected to grow at an average rate of 3 percent per year, what will a house cost in eight years?

Multiple Choice

$255,033.41

$316,692.52

$314,928.01

$255,043.97

Which of the following statements is incorrect with respect to time lines?

Multiple Choice

Cash flows we pay out are called outflows and designated with a negative number.

Cash flows we receive are called inflows and denoted with a positive number.

A helpful tool for organizing our analysis is the time line.

Interest rates are not included on our time lines.

People borrow money because they expect

Multiple Choice

interest rates to rise.

the time value of money to apply only if they are saving money.

their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on the loan.

that consumers don’t need to calculate the impact of interest on their purchases.

When your investment compounds, your money will grow in a(n) __________ fashion.

Multiple Choice

exponential

static

linear

implied

What is the future value of $1,000 deposited for one year earning 5 percent interest rate annually?

Multiple Choice

$1,050

$2,050

$1,000

$1,005

If an average home in your town currently costs $350,000, and house prices are expected to grow at an average rate of 3 percent per year, what will an average house cost in “5” years?

Multiple Choice

$507,500.00

$405,745.93

$405,168.75

$402,500.00

A deposit of $500 earns 5 percent the first year, 6 percent the second year, and 7 percent the third year. What would be the third year future value?

Multiple Choice

$615.62

$595.46

$671.02

$634.91

If an average home in your town currently costs $300,000, and house prices are expected to grow at an average rate of 5 percent per year, what will an average house cost in 10 years?

Multiple Choice

$483,153.01

$507,593.74

$488,688.39

$450,000.00

We call the process of earning interest on both the original deposit and on the earlier interest payments

Multiple Choice

multiplying.

discounting.

compounding.

computing.

How much would be in your savings account in 7 years after depositing $100 today if the bank pays 5 percent interest per year?

Multiple Choice

$140.71

$814.20

$735.00

$135.00

What is the future value of $2,500 deposited for one year earning a 14 percent interest rate annually?

Multiple Choice

$2,550

$3,150

$2,950

$2,850

What is the future value of $600 deposited for four years earning an 11 percent interest rate annually?

Multiple Choice

$803.61

$910.84

$792.90

$899.23

What is the present value of a $250 payment in one year when the discount rate is 6 percent?

Multiple Choice

$250.00

$245.00

$235.85

$265.00

What is the present value of a $750 payment made in three years when the discount rate is 5 percent?

Multiple Choice

$868.22

$647.88

$712.50

$646.96

Approximately how many years does it take to double a $600 investment when interest rates are 6 percent per year?

Multiple Choice

12 years

8 years

0.08 year

8.33 years

Approximately what rate is needed to double an investment over five years?

Multiple Choice

8 percent

14.4 percent

15.8 percent

12.2 percent

Which of the following statements is correct?

Multiple Choice

Discounting is finding the future value of an original investment.

$100 to be received in the future is worth more than that today since it could be invested and earn interest.

The Rule of 72 calculates the compounded return on investments.

$100 to be received in the future is worth less than that today since it could be invested and earn interest.

Approximately what interest rate is needed to double an investment over four years?

Multiple Choice

4 percent

100 percent

25 percent

18 percent

What is the present value of a $600 payment in one year when the discount rate is 8 percent?

Multiple Choice

$555.56

$575.09

$525.87

$498.61

A dollar paid (or received) in the future is

Multiple Choice

not comparable to a dollar paid (or received) today.

worth as much as a dollar paid (or received) today.

worth more than a dollar paid (or received) today.

not worth as much as a dollar paid (or received) today.

What is the present value of a $500 payment in one year when the discount rate is 5 percent?

Multiple Choice

$475.00

$476.19

$525.00

$500.00

Approximately what interest rate is needed to double an investment over eight years?

Multiple Choice

8 percent

100 percent

9 percent

12 percent

What is the present value of a $200 payment made in three years when the discount rate is 8 percent?

Multiple Choice

$158.77

$515.42

$251.94

$150.00

When calculating the number of years needed to grow an investment to a specific amount of money

Multiple Choice

the interest rate has nothing to do with the length of the time period needed to achieve the growth.

the higher the interest rate, the shorter the time period needed to achieve the growth.

the lower the interest rate, the shorter the time period needed to achieve the growth.

the Rule of 72 is the only way to calculate the time period needed to achieve the growth.

Determine the interest rate earned on a $1,500 deposit when $1,680 is paid back in one year.

Multiple Choice

89.00 percent

12.00 percent

0.89 percent

1.12 percent

Determine the interest rate earned on a $200 deposit when $208 is paid back in one year.

Multiple Choice

2 percent

4 percent

104 percent

8 percent

Determine the interest rate earned on a $500 deposit when $650 is paid back in one year.

Multiple Choice

0.77 percent

30.0 percent

77.0 percent

1.30 percent

Which of the following will increase the future value of an annuity?

Multiple Choice

The number of periods increases.

The amount of the annuity increases.

The interest rate increases.

All of these choices are correct.

Level sets of frequent, consistent cash flows are called

Multiple Choice

loans.

budgets.

bills.

annuities.

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

Multiple Choice

the future value

interest rate for compounding

the time line

the present value

When moving from the left to the right of a time line, we are using

Multiple Choice

compound interest to calculate future values.

discounted cash flows to calculate present values.

simple interest to calculate future values.

only payments to calculate future values.

In order to discount multiple cash flows to the present, one would use

Multiple Choice

the appropriate simple rate.

the appropriate discount rate.

the appropriate compound rate.

the appropriate tax rate.

What is the future value of a $500 annuity payment over eight years if interest rates are 14 percent?

Multiple Choice

$6,750.14

$6,241.09

$6,809.72

$6,616.38

What is the future value of an $800 annuity payment over 15 years if the interest rates are 6 percent?

Multiple Choice

$1,917.25

$7,002.99

$18,620.78

$12,720.00

When saving for future expenditures, we can add the ________ of contributions over time to see what the total will be worth at some point in time.

Multiple Choice

future value

present value

payment

time value to money

If the future value of an ordinary, 7-year annuity is $10,000 and interest rates are 4 percent, what is the future value of the same annuity due?

Multiple Choice

$9,615.38

$10,700.00

$10,000.00

$10,400.00

If the present value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what is the present value of the same annuity due?

Multiple Choice

$943.40

$1,040.00

$1,000.00

$1,060.00

Your credit rating and current economic conditions will determine

Multiple Choice

whether you get simple or compound interest.

the interest rate that a lender will offer.

how long discounting will affect you.

how long compounding will affect you.

What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?

Multiple Choice

$1,938.96

$440.80

$1,197.81

$204.17

If the future value of an ordinary, 11-year annuity is $5,575 and interest rates are 5.5 percent, what is the future value of the same annuity due?

Multiple Choice

$5,769.06

$5,881.63

$5,619.52

$5,947.88

What is the present value of a $1,100 payment made every year forever when interest rates are 4.5 percent?

Multiple Choice

$11,100

$21,089.37

$22,963.14

$24,444.44

What is the present value of a $600 annuity payment over 4 years if interest rates are 6 percent?

Multiple Choice

$757.49

$3,145.28

$475.26

$2,079.06

What is the present value, when interest rates are 10 percent, of a $75 payment made every year forever?

Multiple Choice

$750.00

$1,000.00

$6.75

$675.00

If the future value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what is the future value of the same annuity due?

Multiple Choice

$943.40

$1,060.00

$1,040.00

$1,000.00

A loan is offered with monthly payments and a 14.5 percent APR. What is the loan’s effective annual rate (EAR)?

Multiple Choice

15.50 percent

15.63 percent

15.13 percent

14.97 percent

When you get your credit card bill, if you make a payment larger than the minimum payment

Multiple Choice

you will not affect the payoff time.

you are wasting your current consumption and making TVM not work for you.

you will increase the payoff time.

you will reduce the payoff time.

The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a

Multiple Choice

less accurate measure of the interest rate paid for monthly compounding.

measure that only applies to mortgages.

more accurate measure of the interest rate paid for monthly compounding.

concept that is only used because the law requires it, and is of no use to a borrower.

Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value

Multiple Choice

grows.

is independent of the monthly compounding.

decreases.

is affected only if the calculation involves an annuity due.

A loan is offered with monthly payments and a 10 percent APR. What is the loan’s effective annual rate (EAR)?

Multiple Choice

12.67 percent

10.00 percent

11.20 percent

10.47 percent