Chapter 3—Present Value

Chapter 3—Present Value

MULTIPLE CHOICE

1. Which of the following cannot be calculated?

a. Present value of an annuity.

b. Future value of an annuity.

c. Present value of a perpetuity.

d. Future value of a perpetuity.

ANS: D

DIF: E

REF: 3.4 Present Value of Cash Flow Streams

2. You have the choice between two investments that have the same maturity and the same nominal

return. Investment A pays simple interest, investment B pays compounded interest. Which one should

you pick?

a. A, because it has a higher effective annual return.

b. A and B offer the same return, thus they are equally as good.

c. B, because it has higher effective annual return.

d. Not enough information.

ANS: C

DIF: M

REF: 3.5 Special Applications of Time Value

3. For a positive r,

a. future value will always exceed present value.

b. future and present will always be the same.

c. present value will always exceed future value.

d. None of the above is true.

ANS: A

DIF: M

REF: 3.2 Present Value of a Lump Sum

4. Which of the following statements is true?

a. In an annuity due payments occur at the end of the period.

b. In an ordinary annuity payments occur at the end of the period.

c. A perpetuity will mature at some point in the future.

d. One cannot calculate the present value of a perpetuity.

ANS: B

DIF: E

REF: 3.4 Present Value of Cash Flow Streams

5. The Springfield Crusaders just signed their quarterback to a 10 year $50 million contract. Is this

contract really worth $50 million? (assume r >0)

a. Yes, because the payments over time add up to $50 million.

b. No, it is worth more because he can invest the money.

c. No, it would only be worth $50 million if it were all paid out today.

d. Yes, because his agent told him so.

ANS: C

DIF: M

REF: 3.4 Present Value of Cash Flow Streams

6. Last national bank offers a CD paying 7% interest (compounded annually). If you invest $1,000 how

much will you have at the end of year 5.

a....