Practice Quiz Questions: PV and FV of a Single sum.

Review Problems
1. How much must you deposit today in a bank account paying interest compounded
quarterly:

a. if you wish to have $10,000 at the end of 3 months, if the bank pays 5.0% APR?
Answer: $9,877
b. if you wish to have $50,000 at the end of 24months, if the bank pays 8.0%APR?
Answer: $42,675
c. if you wish to have $6,000 at the end of 12 months, if the bank pays 9.0% APR?
Answer: $5,489

2. a. What rate of interest [APR] is the bank charging you if you borrow $77,650 and must
repay
$80,000 at the end of 2 quarters, if interest is compounded quarterly?
Answer: 6.0% APR
b. What rate of interest [APR] is the bank charging you if you borrow $49,000 and
must repay
$50,000 at the end of 3 months, if interest is compounded monthly?
Answer: 8.0% APR

3. How much must you deposit today in a bank account paying interest compounded
monthly:

a. if you wish to have: $10,000 at the end of 1 months, if the bank pays 5.0% APR ?
Answer: $9,959
b. if you wish to have: £6,000 at the end of 6 months, if the bank pays 9.0%
APR ?
Answer: £5,737
c. if you wish to have: $12,000 at the end of 12 months, if the bank pays 6.0%
APR ?
Answer: $11,303
4. If interest is compounded quarterly, how much will you have in a bank account:

a. if you deposit today £8,000 at the end of 3 months, if the bank pays 5.0%
APR ?
Answer: £8,100
b. if you deposit today $10,000 at the end of 6 months, if the bank pays 9.0%
APR ?
Answer: $10,455
c. if you deposit today ¥80,000 at the end of 12 months, if the bank pays 8.0%
APR ?
Answer: ¥86,595
d. if you deposit today $5,000 at the end of 24 months, if the bank pays 5.0%
APR ?
Answer: $5,522

5. If interest is compounded monthly, how much will you have in a bank account,

a. if you deposit today £8,000 at the end of 3 months, if the bank pays 5.0%
APR ?
Answer: £8,100
b. if you deposit today $10,000 at the end of 6 months, if the bank pays 9.0%
APR ?
Answer: $10,459
 c. if you deposit today ¥80,000 at the end of 12 months, if the bank pays 8.0%
APR ?
Answer: ¥86,640
d. if you deposit today £5,000 at the end of 24 months, if the bank pays 5.0%
APR ?
Answer: £5,525
6. You borrowed $1,584 and must repay $2,000 in exactly 4 years from today. Interest is
compounded annually.
a. What is the interest rate [APR] of the loan? Answer 6.0%
b. What effective annual rate [EAR] are you paying? Answer 6.0%

7. You now have $8,000 in a bank account in which you made one single deposit $8,000
monthly of $148.97 exactly 40 years ago. Interest is compounded monthly.
a. What rate of interest [APR] is the bank paying? Answer 10.0%
b. What effective annual rate [EAR] is the bank paying? Answer 10.47%

Possibly New Problems.

8. Suppose you make an investment of $1,000. This first year the investment returns 12%,
the second year it returns 6%, and the third year in returns 8%. How much would this
investment be worth, assuming no withdrawals are made?
Answer:
1000*(1.12) x (1.06) x (1.08)
= $1,282
9. Why is (1+i) called an interest factor?
Factoring the expression $10,000 + 10,000 x i = 10,000 x (1+i)
Thus (1+i) is an interest factor.

10. Suppose you make an investment of $1,000. This first year the investment returns 5%,
the second year it returns i. Write an expression, using i, that represents the future value
of the investment at the end of two years.
Answer:
FV=1,000 x (1.05) x (1+i)

11. An investment is worth $50,000 today. This first year the investment returns 9%, the
second year it returns i. Write an expression using i that represents the original value of
the investment.
Answer:
PV=50,000÷[(1.09) x (1+i)]

12. Suppose you make an investment of $A. This first year the investment returns 10%,
the second year it returns 16%, and the third year in returns 2%. How much would this
investment be worth, assuming no withdrawals are made?
Answer:
A*(1.10) x (1.16) x (1.02)

11. Suppose you make an investment of $10,000. This first year the investment returns 15%,
the second year it returns 2%, and the third year in returns 10%. How much would this
investment be worth at the end of three years, assuming no withdrawals are made?

$12,903

12. Refer to the above problem. What is the geometric average rate of return?

8.9%
Try the following practice questions:
Review Problems
1. Suppose you are trying to find the present value of two different cash flows. One is $100 two
periods from now, the other a $100 flow three periods from now. Which of the following is/are
true about the discount factors used to value the cash flows?
a. The factor for the flow three periods away is always less than the factor for the flow that is
received two periods from now.
b. The factor for the flow three periods away is always more than the factor for the flow that is
received two periods from now.
c. Whether one factor is larger than the other will depend on the interest rate.
d. Since the payments are for the same amount, the factors will yield present values that are the
same.
e. None of the above statements are true.

2. What is the present value of a stream of $2,500 semiannual payments received at the
end of each period for the next 10 years? The APR is 6%.
a. 37,194
b. 38,310
c. 35,810
d. 36,885

3. What is the future value in 10 years of $1,500 payments received at the end of each year for the
next 10 years? Assume an interest rate of 8%.
a. $25,260
b. $23,470
c. $21,730
d. $18,395
e. $15,000

4. You are given the option of receiving $1,000 now or an annuity of $85 per month for 12
months. Which of the following is correct?
a. You cannot choose between the two without computing present values.
b. You cannot choose between the two without computing future values.
c. You will always choose the lump sum payment.
d. You will always choose the annuity.
e. The choice you would make when comparing the future value of each would be the same
as the choice you would make when comparing present values.

5. You open a savings account that pays 4.5% annually. How much must you deposit
each year in order to have $50,000 five years from now?
a. $8,321
b. $9,629
c. $8,636
d. $9,140
e. $6,569

6. You are considering an investment in a 6-year annuity. At the end of each year for the
next six years you will receive cash flows of $90. The initial investment is $414.30. To the
nearest percent, what rate of return are you expecting from this investment? (Annual
Compounding)
a. 8%
b. 9%
c. 12%
d. 21%
e. 10%
 7. You are saving up for a down payment on a house. You will deposit $600 a month for the next
24 months in a money market fund. How much will you have for your down payment in 24
months if the fund earns 10% APR compounded monthly?
a. $14,480
b. $15,870
c. $12,930
d. $10,560
e. $ 9,890

8. Your mortgage payment is $600 per month. There is exactly 180 payments
remaining on the mortgage. The interest rate s 8.0%, compounded monthly. The
first payment is due in exactly one month. What is the balance of the loan?
[Balance = PV of remaining payments.]
a. $62,784
b. $77,205
c. $63,203
d. $82,502
e. $85,107

9. Your mortgage payment is $755 per month. It is a 30-year mortgage at 9.0%

Possibly New Problems.

10. What is the value of the following set of cash flows today? The interest rate is 8.5%.
Year Cash Flow

0: -$1,000 1: $ 200 2: $ 400 3: $ 600 4:

a. $ 800
b. $ 571
c. $1072
d. $ 987
e. $ 520

11. The present value interest factor of an annuity due for 3 years at 8% equals:
a. 1/(1.08)3
b. 1/(1.24)
c. [1 + 1/(1.08) + 1/(1.08)2]
d. [1/(1.08) + 1/(1.08)2 + 1/(1.08)3]
e. None of the above.

12. What is the present value of $2,500 semiannual payments received at the beginning of
each period for the next 10 years? The APR is 6%.
a. 37,194.70
b. 38,309.50
c. 35,809.50
d. 36,884.80
13. Your mortgage payment is $600 per month. There are exactly 180 payments
remaining on the mortgage. The interest rate s 8.0%, compounded monthly. The next
payment is due immediately. What is the balance of the loan? [Hint: This is an
annuity due.]
a. $63,203
b. $77,205
c. $62,784
d. $82,502
e. $85,107

14. Your mortgage payment is $600 per month. There are exactly 180 payments
remaining on the mortgage. The interest rate s 8.0%, compounded monthly. The next
payment is due in 15 days. What is the balance of the loan? [Hint: Assume 30 days
per month.]
a $62,993
b $76,949
c $62,576
d $82,228
e $84,825

15. The present value interest factor of an annual ordinary annuity for 3 years at 8%
equals:
a. 1/(1.08)3
b. 1/(1.24)
c. [1 + 1/(1.08) + 1/(1.08)2]
d. [1/(1.08) + 1/(1.08)2 + 1/(1.08)3]
e. None of the above.

16. The present value interest factor of a semiannual ordinary annuity for 3 years at 8%
equals:
a [1/(1.04) + 1/(1.04)2 + 1/(1.04)3]
b. [1/(1.08) + 1/(1.08)2 + 1/(1.08)3 +1/(1.08)4 + 1/(1.08)5 + 1/(1.08)6]
c. [1/(1.04) + 1/(1.04)2 + 1/(1.04)3 + 1/(1.04)4 + 1/(1.04)5 + 1/(1.04)6]
d. [1/(1.08) + 1/(1.08)2 + 1/(1.08)3]
e. None of the above.

17. The future value interest factor of an ordinary annuity for 3 years at 8% equals:
a. (1.08)3
b. (1.24)
c. [1 + (1.08) + 1.08)2]
d. [(1.08) + (1.08)2 + (1.08)3]
e. None of the above.

18. Suppose an annuity costs $40,000 and produces cash flows of $10,000 over each of
the following eight years. What is the rate of return on the annuity?
a. 0%
b. 10.5%
c. 18.6%
d. 25.0%
e. 50.0%

Key: 1. A 2. A 3. C 4. E 5. D 6. A 7. B
8. A 9. A 10. B
11. C 12. B 13. A 14. A 15. D 16. C 17. D 18. C