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Multiple Choice Quiz
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1

The present value of an ordinary annuity and an annuity due will be the same if they have the same payment per period, the same number of periods, and identical discount rates.
A)True
B)False
2

You can find the future value of a set of cash flows by finding the future value of each cash flow individually and then summing these future values.
A)True
B)False
3

In almost all present and future value computations, it is implicitly assumed that the cash flows occur at the end of each period.
A)True
B)False
4

In order to compare different investment opportunities (each with the same risk) with interest rates reported in different manners you should
A)convert each interest rate to an annual nominal rate
B)convert each interest rate to a monthly nominal rate
C)convert each interest rate to an effective annual rate
D)compare them by using the published annual rates
E)convert each interest rate to an APR
5

Which of the following is a true statement?
A)When comparing investments it is best not to rely solely on quoted rates
B)Compounding will typically not lead to differences between the quoted rate and the effective rate
C)The APR on a loan requiring monthly payments is the interest rate you actually pay
D)An APR is the interest rate per period divided by the number of periods per year
E)With monthly compounding, the APR will be larger than the effective annual rate
6

You are examining two perpetuities which are identical in every way, except that perpetuity A will begin making annual payments of $P to you two years from today while the first $P payment of perpetuity B will occur one year from today. It must be true that
A)the current value of perpetuity A is greater than that of B by $P
B)the current value of perpetuity B is greater than that of A by $P
C)the current value of perpetuity B is equal to that of perpetuity A
D)the current value of perpetuity A exceeds that of B by the PV of $P for one year
E)the current value of perpetuity B exceeds that of A by the PV of $P for one year
7

Which of the following describes the equation for finding the annuity present value factor?
A)(1 minus present value factor) times the interest rate
B)(1 plus present value factor) divided by the interest rate
C)(1 plus present value factor) times the interest rate
D)(1 minus present value factor) divided by the interest rate
E)(present value factor minus 1) divided by the interest rate
8

Which of the following describes the equation for finding the annuity future value factor?
A)(future value factor minus 1) times the interest rate
B)(future value factor plus 1) divided by the interest rate
C)(future value factor plus 1) times the interest rate
D)(future value factor minus 1) divided by the interest rate
E)(1 minus present value factor) divided by the interest rate
9

Which of the following is it NOT possible to compute?
A)present value of a perpetuity
B)interest rate on a perpetuity given the present value and payment
C)present value of an annuity due
D)future value of an annuity due
E)future value of a perpetuity
10

You have $500 that you would like to invest. You have 2 choices: Savings Account A which earns 8% compounded annually or Savings Account B which earns 7.75% compounded semiannually. Which would you choose and why?
A)A because it has a higher effective annual rate
B)A because the future value in one year is lower
C)B because it has a higher effective annual rate
D)B because the future value in one year is lower
E)B because it has the higher quoted rate





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