Time Value of Money Exam Questions and Answers

Sample Questions and Answers

Question 1:
What does the term “time value of money” mean in finance?
A. Money increases in value due to inflation over time.
B. A dollar today is worth more than a dollar in the future.
C. A dollar in the future is worth more than a dollar today.
D. Money has no real value over time.
Answer: B

Question 2:
Which of the following is an example of compounding?
A. Receiving simple interest annually.
B. Earning interest on both the principal and previously earned interest.
C. Only calculating interest on the original investment.
D. Ignoring time value and focusing on nominal returns.
Answer: B

Question 3:
What is the formula for future value (FV) in compound interest?
A. FV = PV × (1 + r × n)
B. FV = PV ÷ (1 + r)^n
C. FV = PV × (1 + r)^n
D. FV = PV × r × n
Answer: C

Question 4:
If $1,000 is invested today at an annual interest rate of 5% for 3 years, what will be the future value?
A. $1,157.63
B. $1,150.00
C. $1,105.00
D. $1,200.00
Answer: A

Question 5:
The present value (PV) of $1,000 to be received in 5 years, with a discount rate of 8%, is closest to:
A. $680.58
B. $735.03
C. $805.00
D. $1,000.00
Answer: B

Question 6:
If you want to double your money in 10 years, approximately what annual interest rate must you earn?
A. 5.5%
B. 6.9%
C. 7.2%
D. 8.0%
Answer: C

Question 7:
The Rule of 72 is used to estimate:
A. The interest rate needed to reach a specific future value.
B. How long it takes to double an investment.
C. The future value of an investment.
D. The discount rate for present value calculations.
Answer: B

Question 8:
An annuity is best described as:
A. A single lump sum investment.
B. A series of equal payments made at regular intervals.
C. A one-time payment received in the future.
D. A fixed interest investment.
Answer: B

Question 9:
What is the future value of a $500 annual payment received for 5 years, assuming an interest rate of 6%?
A. $2,818.00
B. $2,638.50
C. $3,000.00
D. $2,689.40
Answer: A

Question 10:
What is the present value of a $1,000 annual payment received for 4 years, assuming a discount rate of 10%?
A. $3,486.85
B. $3,170.00
C. $4,000.00
D. $2,985.00
Answer: A

Question 11:
The discount rate used in time value of money calculations represents:
A. The inflation rate.
B. The cost of capital or required return.
C. The nominal rate of return.
D. The average rate of interest in the market.
Answer: B

Question 12:
Which of the following has the highest present value, assuming the same discount rate?
A. $1,000 received in 5 years.
B. $1,000 received in 2 years.
C. $1,000 received in 10 years.
D. $1,000 received today.
Answer: D

Question 13:
The future value of a lump sum increases as:
A. The time period decreases.
B. The interest rate decreases.
C. The compounding frequency increases.
D. The principal amount decreases.
Answer: C

Question 14:
What is the effective annual rate (EAR) if the nominal annual interest rate is 8% compounded semiannually?
A. 8.16%
B. 8.00%
C. 8.24%
D. 8.36%
Answer: A

Question 15:
What happens to the present value of a future cash flow when the discount rate increases?
A. It increases.
B. It decreases.
C. It stays the same.
D. It becomes negative.
Answer: B

Question 16:
If $5,000 is invested at 7% interest compounded annually for 4 years, what will the future value be?
A. $6,529.85
B. $6,420.00
C. $6,786.00
D. $6,635.50
Answer: A

Question 17:
The number of compounding periods in a year for monthly compounding is:
A. 6
B. 12
C. 24
D. 4
Answer: B

Question 18:
A perpetuity pays $1,000 annually, and the discount rate is 8%. What is its present value?
A. $12,500
B. $10,000
C. $15,000
D. $8,000
Answer: B

Question 19:
What is the present value of $10,000 to be received in 3 years, with a discount rate of 9% compounded annually?
A. $7,972.79
B. $7,720.00
C. $7,868.13
D. $8,100.00
Answer: A

Question 20:
Which factor will not affect the future value of an investment?
A. Time period.
B. Interest rate.
C. Compounding frequency.
D. Inflation rate.
Answer: D

Question 21:
Which type of annuity involves payments at the end of each period?
A. Perpetuity.
B. Ordinary annuity.
C. Annuity due.
D. Deferred annuity.
Answer: B

Question 22:
How much would you need to invest today at 5% to have $2,000 in 10 years?
A. $1,227.83
B. $1,550.00
C. $1,398.63
D. $1,564.12
Answer: A

Question 23:
Which of the following represents an annuity due?
A. Monthly rent payments.
B. Monthly loan payments.
C. Annual dividend payments.
D. Quarterly bond coupon payments.
Answer: A

Question 24:
If the future value of $1,000 invested for 5 years at 10% is $1,610.51, what type of compounding is applied?
A. Quarterly compounding.
B. Annual compounding.
C. Monthly compounding.
D. Daily compounding.
Answer: B

Question 25:
A bond pays interest semiannually at a rate of 6%. What is the effective annual rate?
A. 6.00%
B. 6.09%
C. 6.12%
D. 6.15%
Answer: C

Question 26:
The present value of a perpetuity can be calculated by dividing the payment by:
A. The discount rate.
B. The time period.
C. The interest rate.
D. The inflation rate.
Answer: A

Question 27:
If interest rates rise, the present value of future cash flows:
A. Decreases.
B. Increases.
C. Remains constant.
D. Doubles.
Answer: A

Question 28:
What does the term “discounting” refer to in finance?
A. Calculating future values.
B. Estimating cash flow volatility.
C. Converting future values to present values.
D. Compounding the principal amount.
Answer: C

Question 29:
If an investment earns 6% compounded quarterly, the annual effective rate (EAR) is:
A. 6.09%
B. 6.14%
C. 6.20%
D. 6.50%
Answer: B

Question 30:
What is the future value of a $2,000 investment compounded quarterly at an annual rate of 4% for 5 years?
A. $2,432.40
B. $2,400.00
C. $2,431.79
D. $2,450.00
Answer: C

 

Question 31:
Which of the following formulas is used to calculate the present value of a perpetuity?
A. PV = Payment × (1 + r)^n
B. PV = Payment / r
C. PV = Payment × r
D. PV = Payment / (1 + r)^n
Answer: B

Question 32:
What is the future value of $3,000 invested at 8% annual interest, compounded quarterly, for 6 years?
A. $4,893.27
B. $4,847.13
C. $5,000.00
D. $4,925.33
Answer: A

Question 33:
A $10,000 investment is made today and grows to $15,000 in 5 years. What is the annual rate of return?
A. 8.45%
B. 7.85%
C. 9.62%
D. 10.00%
Answer: B

Question 34:
What is the present value of $50,000 to be received in 8 years, if the discount rate is 5%?
A. $33,667.85
B. $34,205.00
C. $30,500.00
D. $35,000.00
Answer: A

Question 35:
If $2,000 is invested today at an annual rate of 10% compounded monthly, what will its value be in 2 years?
A. $2,428.50
B. $2,427.63
C. $2,420.00
D. $2,432.79
Answer: B