Q: Which formula correctly calculates the future value of an investment with compound interest?

$$Future\ value = Present\ value \times (1 + Interest\ rate)^n$$

Question 1

Which of the following best describes the concept of the time value of money?

Accepted Answer

Money earns interest over time, making its future value greater than its present value.

Question 2

You invest $4,545 in a corporate bond that pays 10% interest annually. What will be the value of your investment after one year?

Accepted Answer

$5,000

Question 3

Which formula correctly calculates the future value of an investment with compound interest?

Accepted Answer

$$Future\ value = Present\ value 	imes (1 + Interest\ rate)^n$$

Question 4

If you are to receive $5,000 two years from now and the annual interest rate is 10%, what is the present value of this future payment?

Accepted Answer

$$4,132$$

Question 5

Which of the following is NOT required to calculate the future value of an investment?

Accepted Answer

The investor's credit score

Question 6

What is the main difference between simple interest and compound interest?

Accepted Answer

Simple interest is calculated only on the principal, while compound interest is calculated on principal plus previously earned interest.

Question 7

A car dealership offers a 5-year loan at a 6% annual interest rate, compounded monthly, for a $18,000 car. What is the monthly payment?

Accepted Answer

$347.99

Question 8

Which equation is used to calculate the present value of a future payment?

Accepted Answer

$$Present\ value = \dfrac{Future\ value}{(1 + Interest\ rate)^n}$$

Question 9

Suppose you invest $75 per week for 45 years in a retirement account earning 7% annual interest, compounded weekly. What is the future value of your investment?

Accepted Answer

$$1,241,687$$

Question 10

Which of the following best describes 'discounting' in financial accounting?

Accepted Answer

Reducing the value of a future payment to reflect the time value of money.

Question 11

An investor is considering buying a bond with a face value of $100,000, a 9% annual interest rate paid semiannually, and a market rate of 10% annually. What is the present value (market price) of the bond?

Accepted Answer

$$96,149$$

Question 12

Which Microsoft Excel function is used to calculate the present value of an annuity?

Accepted Answer

PV

Question 13

If the interest rate is 8% and you expect to receive $20,000 per year for 20 years, which Excel function and inputs would you use to calculate the present value?

Accepted Answer

PV function; rate = 0.08, nper = 20, pmt = -20000

Question 14

Which of the following statements about interest is correct?

Accepted Answer

To lenders, interest is revenue earned.

Question 15

A $4,545 investment earns 10% interest annually. What is the future value after 5 years, using compound interest?

Accepted Answer

$$7,321$$

Question 16

Which of the following is a key input when using a financial calculator to compute the present value of a bond?

Accepted Answer

The number of periods (N)

Question 17

If you want to calculate the present value of $5,000 to be received in one year at a 10% interest rate, which calculation is correct?

Accepted Answer

$$Present\ value = \dfrac{5,000}{1.10} = 4,545$$

Question 18

Which of the following best explains why the present value of a future payment is less than the payment itself?

Accepted Answer

Because money can earn interest over time, so receiving it later is less valuable than receiving it now.

Question 19

Which of the following is true about the use of Microsoft Excel in financial accounting?

Accepted Answer

Excel allows calculation of present value for any interest rate and period.

Question 20

A bond pays 4.5% interest semiannually, with a face value of $100,000 and a market rate of 10% annually. How many periods are used in the present value calculation?

Accepted Answer

10 periods

Time Value of Money: Financial Accounting Study Notes

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