CHAPTER 05—TIME VALUE OF MONEY
Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in
multiple-choice questions.
Multiple Choice: True/False
1. Starting to invest early for retirement increases the benefits of compound interest.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Knowledge
2. Starting to invest early for retirement reduces the benefits of compound interest.
a. True
b. Fals
e
ANSWER:
False

POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Knowledge
3. A time line is meaningful even if all cash flows do not occur annually.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
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CHAPTER 05—TIME VALUE OF MONEY
STATE STANDARDS:
TOPICS:
KEYWORDS:

United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
Compounding
Bloom's: Knowledge

4. A time line is not meaningful unless all cash flows occur annually.
a. True
b. Fals
e
ANSWER:
False
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of

money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Knowledge
5. Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Knowledge
6. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
a. True
b. Fals
e

ANSWER:
False
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
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CHAPTER 05—TIME VALUE OF MONEY
STATE STANDARDS:
TOPICS:
KEYWORDS:

United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
Compounding
Bloom's: Knowledge

7. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
a. True
b. Fals
e
ANSWER:

True
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Knowledge
8. Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
a. True
b. Fals
e
ANSWER:
False
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking

STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Knowledge
9. Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven
amounts.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
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CHAPTER 05—TIME VALUE OF MONEY
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of

money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Knowledge
10. Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.
a. True
b. Fals
e
ANSWER:
False
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Knowledge
11. If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the
future value of the same series.
a. True
b. Fals

e
ANSWER:
False
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-3 Present Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
PV versus FV
KEYWORDS:
Bloom's: Comprehension
12. If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the
present value of the same series.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
EASY
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CHAPTER 05—TIME VALUE OF MONEY
REFERENCES:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
TOPICS:
KEYWORDS:

5-3 Present Values
FOFM.BRIG.16.05.03 - Present Values
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
PV versus FV
Bloom's: Comprehension

13. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future
value.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:

EASY
REFERENCES:
5-3 Present Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
PV versus FV
KEYWORDS:
Bloom's: Comprehension
14. Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present
value.
a. True
b. Fals
e
ANSWER:
False
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-3 Present Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money

TOPICS:
PV versus FV
KEYWORDS:
Bloom's: Comprehension
15. If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.
a. True
b. Fals
e
ANSWER:
False
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CHAPTER 05—TIME VALUE OF MONEY
POINTS:
DIFFICULTY:
REFERENCES:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
TOPICS:
KEYWORDS:

1
EASY
5-16 Comparing Interest Rates
FOFM.BRIG.16.05.16 - Comparing Interest Rates
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills

United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
Effective annual rate
Bloom's: Comprehension

16. If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
EASY
REFERENCES:
5-16 Comparing Interest Rates
LEARNING OBJECTIVES: FOFM.BRIG.16.05.16 - Comparing Interest Rates
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Effective annual rate
KEYWORDS:
Bloom's: Comprehension
17. The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum
investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.
a. True
b. Fals

e
ANSWER:
False
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Compounding
KEYWORDS:
Bloom's: Comprehension
18. The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum
investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.
a. True
b. Fals
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CHAPTER 05—TIME VALUE OF MONEY
e
ANSWER:

POINTS:
DIFFICULTY:
REFERENCES:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
TOPICS:
KEYWORDS:

True
1
MODERATE
5-2 Future Values
FOFM.BRIG.16.05.02 - Future Values
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
Compounding
Bloom's: Comprehension

19. Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security
B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the
compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
a. True
b. Fals
e
ANSWER:
True
RATIONALE:
Work out the numbers with a calculator:

PV
FVA =
1000
$1,710.34
Rate on A
2 × FVA =
5%
$3,420.68
Rate on B
FVB =
12%
$3,478.55
Years
FVB > 2 × FVA, so TRUE
11
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-2 Future Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.02 - Future Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Comparative compounding
KEYWORDS:
Bloom's: Evaluation

20. Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security
B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than
twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
a. True
b. Fals
e
ANSWER:
False
RATIONALE:
Work out the numbers with a calculator:
PV
FVA =
1000
$1,710.34
Rate on A
2
×
FV
=
5%
$3,420.68
A
Rate on B
FV
=
12%
$3,478.55
B
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CHAPTER 05—TIME VALUE OF MONEY
Years
POINTS:
DIFFICULTY:
REFERENCES:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
TOPICS:
KEYWORDS:

11

FVB > 2 × FVA, so FALSE

1
MODERATE
5-2 Future Values
FOFM.BRIG.16.05.02 - Future Values
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
Comparative compounding
Bloom's: Evaluation

21. The present value of a future sum decreases as either the discount rate or the number of periods per year increases,
other things held constant.

a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-3 Present Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
PV of a sum
KEYWORDS:
Bloom's: Comprehension
22. The present value of a future sum increases as either the discount rate or the number of periods per year increases,
other things held constant.
a. True
b. Fals
e
ANSWER:
False
POINTS:
1
DIFFICULTY:

MODERATE
REFERENCES:
5-3 Present Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
PV of a sum
KEYWORDS:
Bloom's: Comprehension
23. All other things held constant, the present value of a given annual annuity decreases as the number of periods per year
increases.
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CHAPTER 05—TIME VALUE OF MONEY
a. True
b. Fals
e
ANSWER:
True
RATIONALE: One could make up an example and see that the statement is true. Alternatively,
one could simply recognize that the PV of an annuity declines as the discount
rate increases and recognize that more frequent compounding increases the
effective rate.


POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O
BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:

1
MODERATE
5-9 Present Value of an Ordinary Annuity
FOFM.BRIG.16.05.09 - Present Value of an Ordinary Annuity
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
PV of an annuity
Bloom's: Comprehension

24. All other things held constant, the present value of a given annual annuity increases as the number of periods per year
increases.
a. True
b. Fals
e
ANSWER:
False
RATIONALE: One could make up an example and see that the statement is false. Alternatively,

one could simply recognize that the PV of an annuity declines as the discount
rate increases and recognize that more frequent compounding increases the
effective rate.

POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O
BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:

1
MODERATE
5-9 Present Value of an Ordinary Annuity
FOFM.BRIG.16.05.09 - Present Value of an Ordinary Annuity
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
PV of an annuity
Bloom's: Comprehension

25. If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the
periodic rate by the number of periods per year.
a. True
b. Fals

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CHAPTER 05—TIME VALUE OF MONEY
e
ANSWER:
POINTS:
DIFFICULTY:
REFERENCES:
LEARNING OBJECTIVES:

True
1
MODERATE
5-15 Semiannual and Other Compounding Periods
FOFM.BRIG.16.05.15 - Semiannual and Other Compounding
Periods
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Periodic and nominal rates
KEYWORDS:
Bloom's: Knowledge
26. If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the
periodic rate by the number of periods per year.
a. True

b. Fals
e
ANSWER:
False
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-15 Semiannual and Other Compounding Periods
LEARNING OBJECTIVES: FOFM.BRIG.16.05.15 - Semiannual and Other Compounding
Periods
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Periodic and nominal rates
KEYWORDS:
Bloom's: Knowledge
27. As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than
the nominal rate on the deposit (or loan).
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:

MODERATE
REFERENCES:
5-16 Comparing Interest Rates
LEARNING OBJECTIVES: FOFM.BRIG.16.05.16 - Comparing Interest Rates
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Effective and nominal rates
KEYWORDS:
Bloom's: Comprehension
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CHAPTER 05—TIME VALUE OF MONEY
28. As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the
nominal rate on the deposit (or loan).
a. True
b. Fals
e
ANSWER:
False
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:

5-16 Comparing Interest Rates
LEARNING OBJECTIVES: FOFM.BRIG.16.05.16 - Comparing Interest Rates
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Effective and nominal rates
KEYWORDS:
Bloom's: Comprehension
29. When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the
early years, and the principal repayment's percentage declines in the loan's later years.
a. True
b. Fals
e
ANSWER:
False
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-18 Amortized Loans
LEARNING OBJECTIVES: FOFM.BRIG.16.05.18 - Amortized Loans
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Amortization

KEYWORDS:
Bloom's: Comprehension
30. When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the
early years, and the principal repayment's percentage increases in the loan's later years.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-18 Amortized Loans
LEARNING OBJECTIVES: FOFM.BRIG.16.05.18 - Amortized Loans
NATIONAL STANDARDS: United States - BUSPROG.FFMC.BRIG.15.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
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CHAPTER 05—TIME VALUE OF MONEY
TOPICS:
KEYWORDS:

Amortization

Bloom's: Comprehension

31. The payment made each period on an amortized loan is constant, and it consists of some interest and some principal.
The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of
principal.
a. True
b. Fals
e
ANSWER:
True
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-18 Amortized Loans
LEARNING OBJECTIVES: FOFM.BRIG.16.05.18 - Amortized Loans
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Amortization
KEYWORDS:
Bloom's: Comprehension
32. The payment made each period on an amortized loan is constant, and it consists of some interest and some principal.
The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of
principal.
a. True
b. Fals

e
ANSWER:
False
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-18 Amortized Loans
LEARNING OBJECTIVES: FOFM.BRIG.16.05.18 - Amortized Loans
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Amortization
KEYWORDS:
Bloom's: Comprehension
33. Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to
the percentage that represents repayment of principal. This is true regardless of the original life of the loan or the interest
rate on the loan.
a. True
b. Fals
e
ANSWER:
False
RATIONALE: There is no reason to think that this statement would always be true. The portion
of the payment representing interest declines, while the portion representing
principal repayment increases. Therefore, the statement is false. We could also


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CHAPTER 05—TIME VALUE OF MONEY
work out some numbers to prove this point. Here's an example for a 3-year loan
at a 10% and a 41.45% annual interest rate. The interest component is not equal
to the principal repayment component except at the high interest rate.
Original loan
$1,000 Original loan
$1,000
Rate
10% Rate
41.45%
Life
3 Life
3
Payment
$402.11 Payment
$640.98
Beg.
End.
Beg.
End.
Balance Interest Principal
Bal.
Balance Interest Principal
Bal.
1 $1,000.00 $100.00 $302.11 $697.89 1 $1,000.00 $414.50 $226.48 $773.52

2 $ 697.89 $ 69.79 $332.33 $365.56 2 $ 773.52 $320.62 $320.36 $453.15
3 $ 365.56 $ 36.56 $365.56 $ 0.00 3 $ 453.15 $187.83 $453.15 $ 0.00

POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O
BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:

1
CHALLENGING
5-18 Amortized Loans
FOFM.BRIG.16.05.18 - Amortized Loans
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Amortization
Bloom's: Comprehension

34. Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to,
less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original
life of the loan and the interest rate.
a. True
b. Fals

e
ANSWER:
True
RATIONALE: This statement is true. The portion of the payment representing interest declines,
while the portion representing principal repayment increases. The interest portion
could be equal to, greater than, or less than the principal portion. We can work
out some numbers to prove this point. Here's an example for a 3-year loan at a
10% and a 41.45% annual interest rate. The interest component is less than the
principal at 10%, equal at about 41.45%, and greater at rates above 41.45%.
Original loan
$1,000 Original loan
$1,000
Rate
10% Rate
41.45%
Life
3 Life
3
Payment
$402.11 Payment
$640.98
Beg.
End.
Beg.
End.
Balance Interest Principal
Bal.
Balance Interest Principal
Bal.
1 $1,000.00 $100.00 $302.11 $697.89 1 $1,000.00 $414.50 $226.48 $773.52

2 $ 697.89 $ 69.79 $332.33 $365.56 2 $ 773.52 $320.62 $320.36 $453.15
3 $ 365.56 $ 36.56 $365.56 $ 0.00 3 $ 453.15 $187.83 $453.15 $ 0.00

POINTS:
1
DIFFICULTY: CHALLENGING
REFERENCES 5-18 Amortized Loans
:
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Page 13


CHAPTER 05—TIME VALUE OF MONEY
LEARNING O
BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:

FOFM.BRIG.16.05.18 - Amortized Loans
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Amortization
Bloom's: Comprehension

Multiple Choice: Conceptual

Please note that some of the answer choices, or answers that are very close, are used in different questions. This has
caused us no difficulties, but please take this into account when you make up exams.
35. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b.Time lines are useful for visualizing complex problems prior to doing actual
calculations.
c. Time lines cannot be constructed in situations where some of the cash flows occur
annually but others occur quarterly.
d.Time lines cannot be constructed for annuities where the payments occur at the
beginning of the periods.
e. Some of the cash flows shown on a time line can be in the form of annuity payments,
but none can be uneven amounts.
ANSWER:
b
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-1 Time Lines
LEARNING OBJECTIVES: FOFM.BRIG.16.05.01 - Time Lines
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Time lines
KEYWORDS:
Bloom's: Knowledge
OTHER:

Multiple Choice: Conceptual
36. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b.Time lines are not useful for visualizing complex problems prior to doing actual
calculations.
c. Time lines cannot be constructed in situations where some of the cash flows occur
annually but others occur quarterly.
d.Time lines can be constructed for annuities where the payments occur at either the
beginning or the end of the periods.
e. Some of the cash flows shown on a time line can be in the form of annuity payments,
but none can be uneven amounts.
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Page 14


CHAPTER 05—TIME VALUE OF MONEY
ANSWER:
POINTS:
DIFFICULTY:
REFERENCES:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
TOPICS:
KEYWORDS:
OTHER:

d
1

MODERATE
5-1 Time Lines
FOFM.BRIG.16.05.01 - Time Lines
United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
Time lines
Bloom's: Knowledge
Multiple Choice: Conceptual

37. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b.Time lines are not useful for visualizing complex problems prior to doing actual
calculations.
c. Time lines can be constructed to deal with situations where some of the cash flows
occur annually but others occur quarterly.
d.Time lines can only be constructed for annuities where the payments occur at the end
of the periods, i.e., for ordinary annuities.
e. Time lines cannot be constructed where some of the payments constitute an annuity
but others are unequal and thus are not part of the annuity.
ANSWER:
c
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-1 Time Lines
LEARNING OBJECTIVES: FOFM.BRIG.16.05.01 - Time Lines
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking

STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Time lines
KEYWORDS:
Bloom's: Knowledge
OTHER:
Multiple Choice: Conceptual
38. Which of the following statements is CORRECT?
a. A time line is not meaningful unless all cash flows occur annually.
b.Time lines are not useful for visualizing complex problems prior to doing actual
calculations.
c. Time lines cannot be constructed to deal with situations where some of the cash flows
occur annually but others occur quarterly.
d.Time lines can only be constructed for annuities where the payments occur at the end
of the periods, i.e., for ordinary annuities.
e. Time lines can be constructed where some of the payments constitute an annuity but
others are unequal and thus are not part of the annuity.
ANSWER:
e
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Page 15


CHAPTER 05—TIME VALUE OF MONEY
POINTS:
DIFFICULTY:
REFERENCES:

LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
TOPICS:
KEYWORDS:
OTHER:

1
MODERATE
5-1 Time Lines
FOFM.BRIG.16.05.01 - Time Lines
United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
Time lines
Bloom's: Knowledge
Multiple Choice: Conceptual

39. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected
cash flows. Which of the following would lower the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You
learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is
for $20,000 rather than for $10,000.
b.The discount rate increases.
c. The riskiness of the investment's cash flows decreases.
d.The total amount of cash flows remains the same, but more of the cash flows are
received in the earlier years and less are received in the later years.
e. The discount rate decreases.
ANSWER:
b

POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-3 Present Values
LEARNING OBJECTIVES: FOFM.BRIG.16.05.03 - Present Values
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Effects of factors on PVs
KEYWORDS:
Bloom's: Analysis
OTHER:
Multiple Choice: Conceptual
40. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected
cash flows. Which of the following would increase the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You
learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is
for $10,000 rather than for $20,000.
b.The discount rate decreases.
c. The riskiness of the investment's cash flows increases.
d.The total amount of cash flows remains the same, but more of the cash flows are
received in the later years and less are received in the earlier years.
e. The discount rate increases.
ANSWER:
b
POINTS:

1
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Page 16


CHAPTER 05—TIME VALUE OF MONEY
DIFFICULTY:
REFERENCES:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
TOPICS:
KEYWORDS:
OTHER:

MODERATE
5-3 Present Values
FOFM.BRIG.16.05.03 - Present Values
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
Effects of factors on PVs
Bloom's: Analysis
Multiple Choice: Conceptual

41. Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the
periods.
b.If a series of unequal cash flows occurs at regular intervals, such as once a year, then

the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the ends of the periods.
d.The cash flows for an annuity must all be equal, and they must occur at regular
intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the ends,
then we have what the textbook defines as a variable annuity.
ANSWER:
d
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-6 Annuities
LEARNING OBJECTIVES: FOFM.BRIG.16.05.06 - Annuities
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Annuities
KEYWORDS:
Bloom's: Knowledge
OTHER:
Multiple Choice: Conceptual
42. Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the
periods.
b.If a series of unequal cash flows occurs at regular intervals, such as once a year, then
the series is by definition an annuity.

c. The cash flows for an annuity due must all occur at the beginning of the periods.
d.The cash flows for an annuity may vary from period to period, but they must occur at
regular intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the ends,
then we have what the textbook defines as a variable annuity.
ANSWER:
c
POINTS:
1
DIFFICULTY:
MODERATE
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Page 17


CHAPTER 05—TIME VALUE OF MONEY
REFERENCES:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
TOPICS:
KEYWORDS:
OTHER:

5-6 Annuities
FOFM.BRIG.16.05.06 - Annuities
United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money

Annuities
Bloom's: Knowledge
Multiple Choice: Conceptual

43. Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following
statements is CORRECT?
a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
b. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than
6%.
d. The periodic rate of interest is 3% and the effective rate of interest is 6%.
e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.
ANSWER:
c
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-16 Comparing Interest Rates
LEARNING OBJECTIVES: FOFM.BRIG.16.05.16 - Comparing Interest Rates
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Quarterly compounding
KEYWORDS:
Bloom's: Application
OTHER:

Multiple Choice: Conceptual
44. Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following
statements is CORRECT?
a. The periodic rate of interest is 2% and the effective rate of interest is 4%.
b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
e. The periodic rate of interest is 8% and the effective rate of interest is also 8%.
ANSWER:
d
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
5-16 Comparing Interest Rates
LEARNING OBJECTIVES: FOFM.BRIG.16.05.16 - Comparing Interest Rates
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Quarterly compounding
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Page 18


CHAPTER 05—TIME VALUE OF MONEY
KEYWORDS:

OTHER:

Bloom's: Application
Multiple Choice: Conceptual

45. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is
CORRECT?
a. The annual payments would be larger if the interest rate were lower.
b.If the loan were amortized over 10 years rather than 7 years, and if the interest rate
were the same in either case, the first payment would include more dollars of interest
under the 7-year amortization plan.
c. The proportion of each payment that represents interest as opposed to repayment of
principal would be lower if the interest rate were lower.
d.The last payment would have a higher proportion of interest than the first payment.
e. The proportion of interest versus principal repayment would be the same for each of
the 7 payments.
ANSWER:
c
RATIONALE: a, d, and e can be ruled out as incorrect by simple reasoning. b is also incorrect
because interest in the first year would be loan amount × interest rate regardless
of the life of the loan, so the interest payment would be identical for the first
payment. Think about the situation where r = 0%, statement c is the “most logical
guess.” One could also set up an amortization schedule and change the numbers
to confirm that only c is correct.

POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O

BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:
OTHER:

1
MODERATE
5-18 Amortized Loans
FOFM.BRIG.16.05.18 - Amortized Loans
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Amortization
Bloom's: Analysis
Multiple Choice: Conceptual

46. A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is
CORRECT?
a. The annual payments would be larger if the interest rate were lower.
b.If the loan were amortized over 10 years rather than 7 years, and if the interest rate
were the same in either case, the first payment would include more dollars of interest
under the 7-year amortization plan.
c. The proportion of each payment that represents interest as opposed to repayment of
principal would be higher if the interest rate were lower.
d.The proportion of each payment that represents interest versus repayment of principal
would be higher if the interest rate were higher.
e. The proportion of interest versus principal repayment would be the same for each of

the 7 payments.
ANSWER:
d
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Page 19


CHAPTER 05—TIME VALUE OF MONEY
RATIONALE: a, c, and e are obviously incorrect. b is also incorrect because interest in the first
year would be loan amount × interest rate regardless of the life of the loan. That
makes d the “most logical guess.” One could also set up an amortization
schedule and change the numbers to confirm that only d is correct.

POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O
BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:
OTHER:

1
MODERATE

5-18 Amortized Loans
FOFM.BRIG.16.05.18 - Amortized Loans
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Amortization
Bloom's: Analysis
Multiple Choice: Conceptual

47. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT?
(Ignore taxes and transactions costs.)
a. The remaining balance after three years will be $125,000 less one third of the interest
paid during the first three years.
b.Because it is a fixed-rate mortgage, the monthly loan payments (which include both
interest and principal payments) are constant.
c. Interest payments on the mortgage will increase steadily over time, but the total
amount of each payment will remain constant.
d.The proportion of the monthly payment that goes towards repayment of principal will
be lower 10 years from now than it will be the first year.
e. The outstanding balance declines at a slower rate in the later years of the loan's life.
ANSWER:
b
RATIONALE: b is the correct answer. Thinking through the question, the other answers can all
be eliminated. One could also set up an amortization schedule to prove that only
statement b is correct.

POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O

BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:
OTHER:

1
MODERATE
5-18 Amortized Loans
FOFM.BRIG.16.05.18 - Amortized Loans
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Amortization
Bloom's: Analysis
Multiple Choice: Conceptual

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Page 20


CHAPTER 05—TIME VALUE OF MONEY
48. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT?
(Ignore taxes and transactions costs.)
a. The remaining balance after three years will be $125,000 less one third of the interest
paid during the first three years.
b.Because the outstanding balance declines over time, the monthly payments will also

decline over time.
c. Interest payments on the mortgage will increase steadily over time, but the total
amount of each payment will remain constant.
d.The proportion of the monthly payment that goes towards repayment of principal will
be lower 10 years from now than it will be the first year.
e. The outstanding balance declines at a faster rate in the later years of the loan's life.
ANSWER:
e
RATIONALE: e is the correct answer. Thinking through the question, the other answers can all
be eliminated. One could also set up an amortization schedule to prove that only
statement e is correct.

POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O
BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:
OTHER:

1
MODERATE
5-18 Amortized Loans
FOFM.BRIG.16.05.18 - Amortized Loans

United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Amortization
Bloom's Analysis
Multiple Choice: Conceptual

49. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest
rate of 10% is CORRECT?
a. The monthly payments will decline over time.
b.A smaller proportion of the last monthly payment will be interest, and a larger
proportion will be principal, than for the first monthly payment.
c. The total dollar amount of principal being paid off each month gets smaller as the loan
approaches maturity.
d.The amount representing interest in the first payment would be higher if the nominal
interest rate were 7% rather than 10%.
e. Exactly 10% of the first monthly payment represents interest.
ANSWER:
b
b is correct. a is clearly wrong, as are c and d. It is not obvious whether e is
RATIONALE:
correct or not, but we could set up an example to see:
Loan
100000 Term
Rate
10% Periods/Year
Periodic rate
0.008333333 Total periods
Payment
Interest as % of total #360
payment:

Cengage Learning Testing, Powered by Cognero

−$877.57
1%

Interest, Month 1
Interest, Month 360

30
12
360
$833.33
$7.25
Page 21


CHAPTER 05—TIME VALUE OF MONEY
Principal as % of total #360
payment

POINTS:
DIFFICULTY:
REFERENCES:
LEARNING OBJ
ECTIVES:
NATIONAL STA
NDARDS:
STATE STANDA
RDS:
TOPICS:

KEYWORDS:
OTHER:

99%

Principal, Month 360

$870.32

1
MODERATE
5-18 Amortized Loans
FOFM.BRIG.16.05.18 - Amortized Loans
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Amortization
Bloom's: Analysis
Multiple Choice: Conceptual

50. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest
rate of 10% is CORRECT?
a. The monthly payments will increase over time.
b.A larger proportion of the first monthly payment will be interest, and a smaller
proportion will be principal, than for the last monthly payment.
c. The total dollar amount of interest being paid off each month gets larger as the loan
approaches maturity.
d.The amount representing interest in the first payment would be higher if the nominal
interest rate were 7% rather than 10%.
e. Exactly 10% of the first monthly payment represents interest.
ANSWER:

b
b is correct. a is clearly wrong, as are c and d. It is not obvious whether e is
RATIONALE:
correct or not, but we could set up an example to see:
Loan
100000 Term
Rate
10% Periods/Year
Periodic rate
0.00833333 Total periods
Payment
Interest as % of total
payment:

POINTS:
DIFFICULTY:
REFERENCES:
LEARNING OBJ
ECTIVES:
NATIONAL STA
NDARDS:
STATE STANDA
RDS:
TOPICS:
KEYWORDS:
OTHER:

30
12
360


−$877.57 Interest Month 1
$833.33
95%, which is much larger than 10%.

1
MODERATE
5-18 Amortized Loans
FOFM.BRIG.16.05.18 - Amortized Loans
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Amortization
Bloom's: Analysis
Multiple Choice: Conceptual

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Page 22


CHAPTER 05—TIME VALUE OF MONEY
51. Which of the following investments would have the highest future value at the end of 10 years? Assume that the
effective annual rate for all investments is the same and is greater than zero.
a. Investment A pays $250 at the beginning of every year for the next 10 years (a total of
10 payments).
b.Investment B pays $125 at the end of every 6-month period for the next 10 years (a
total of 20 payments).
c. Investment C pays $125 at the beginning of every 6-month period for the next 10 years
(a total of 20 payments).
d. Investment D pays $2,500 at the end of 10 years (just one payment).

e. Investment E pays $250 at the end of every year for the next 10 years (a total of 10
payments).
ANSWER:
a
RATIONALE: A dominates B because it provides the same total amount, but it comes faster,
hence it can earn more interest over the 10 years. A also dominates C and E for
the same reason, and it dominates D because with D no interest whatever is
earned. We could also do these calculations to answer the question:
A
$4,382.79
Largest
EFF%
10.00%
10
250
B
$4,081.59
NOM%
9.76%
125
C
$4,280.81
125
D
$2,500.00
2500
E
$3,984.36
250


POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O
BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:
OTHER:

1
MODERATE
Comprehensive
FOFM.BRIG.16.05.00 - Comprehensive
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Time value concepts
Bloom's: Analysis
Multiple Choice: Conceptual

52. Which of the following investments would have the lowest present value? Assume that the effective annual rate for all
investments is the same and is greater than zero.
a. Investment A pays $250 at the end of every year for the next 10 years (a total of 10
payments).
b.Investment B pays $125 at the end of every 6-month period for the next 10 years (a
total of 20 payments).

c. Investment C pays $125 at the beginning of every 6-month period for the next 10 years
(a total of 20 payments).
d. Investment D pays $2,500 at the end of 10 years (just one payment).
e. Investment E pays $250 at the beginning of every year for the next 10 years (a total of
10 payments).
ANSWER:
d
RATIONALE: A is smaller than E and B is smaller than C because the money comes in later. A
is smaller than B because a larger annuity is received later. So, now the choice

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Page 23


CHAPTER 05—TIME VALUE OF MONEY
comes down to either A or D. Since all of D is received at the end, this is the
logical choice. We could also do these calculations to answer the question:
A
$1,536.14
EFF%
10.00%
10
B
$1,573.63
NOM%
9.76%
C
$1,650.44
D

$ 963.86
Smallest
E
$1,689.76

POINTS:
DIFFICULTY:
REFERENCES
:
LEARNING O
BJECTIVES:
NATIONAL ST
ANDARDS:
STATE STAND
ARDS:
TOPICS:
KEYWORDS:
OTHER:

250
125
125
2500
250

1
MODERATE
Comprehensive
FOFM.BRIG.16.05.00 - Comprehensive
United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills

United States - OH - DISC.FOFM.BRIG.16.04 - Time value of money
Time value concepts
Bloom's: Analysis
Multiple Choice: Conceptual

53. A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%,
semiannual compounding. Which of the following statements is CORRECT?
a. The periodic interest rate is greater than 3%.
b.The periodic rate is less than 3%.
c. The present value would be greater if the lump sum were discounted back for more
periods.
d. The present value of the $1,000 would be smaller if interest were compounded
monthly rather than semiannually.
e. The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year,
$333.33 ordinary annuity.
ANSWER:
d
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
Comprehensive
LEARNING OBJECTIVES: FOFM.BRIG.16.05.00 - Comprehensive
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Time value concepts

KEYWORDS:
Bloom's: Analysis
OTHER:
Multiple Choice: Conceptual
54. A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%,
semiannual compounding. Which of the following statements is CORRECT?
a. The periodic interest rate is greater than 3%.
b.The periodic rate is less than 3%.
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CHAPTER 05—TIME VALUE OF MONEY
c. The present value would be greater if the lump sum were discounted back for more
periods.
d. The present value of the $1,000 would be larger if interest were compounded monthly
rather than semiannually.
e. The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year,
$333.33 ordinary annuity.
ANSWER:
e
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
Comprehensive
LEARNING OBJECTIVES: FOFM.BRIG.16.05.00 - Comprehensive
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills

STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Time value concepts
KEYWORDS:
Bloom's: Analysis
OTHER:
Multiple Choice: Conceptual
55. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
a. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar
ordinary annuity.
b.A 30-year, $150,000 amortized mortgage will have larger monthly payments than an
otherwise similar 20-year mortgage.
c. A bank loan's nominal interest rate will always be equal to or less than its effective
annual rate.
d.If an investment pays 10% interest, compounded annually, its effective annual rate will
be less than 10%.
e. Banks A and B offer the same nominal annual rate of interest, but A pays interest
quarterly and B pays semiannually. Deposits in Bank B will provide the higher future
value if you leave your funds on deposit.
ANSWER:
c
POINTS:
1
DIFFICULTY:
MODERATE
REFERENCES:
Comprehensive
LEARNING OBJECTIVES: FOFM.BRIG.16.05.00 - Comprehensive

NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills
STATE STANDARDS:
United States - OH - DISC.FOFM.BRIG.16.04 - Time value of
money
TOPICS:
Time value concepts
KEYWORDS:
Bloom's: Analysis
OTHER:
Multiple Choice: Conceptual
56. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
a. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar
ordinary annuity.
b.A 30-year, $150,000 amortized mortgage will have larger monthly payments than an
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Page 25