1.

The future value and present value equations also help in finding the interest rate and the number of years that correspond to present and future value calculations.

If a security currently worth $9,200 will be worth $15,767.18 seven years in the future, what is the implied interest rate the investor will earn on the securityassuming that no additional deposits or withdrawals are made?

(a)6.40%

(b)1.71%

(c)0.24%

(d)8.00%

2.If an investment of $50,000 is earning an interest rate of 8.00%, compounded annually, then it will take (a)0.22 years (b)7.50 years (c) 1.78 years (d)0.24 years for this investment to reach a value of $89,052.92assuming that no additional deposits or withdrawals are made during this time.

3.

Which of the following statements is trueassuming that no additional deposits or withdrawals are made?

(a)An investment of $50 at an annual rate of 5% will return a higher value in five years than $25 invested at an annual rate of 10% in the same time.

(b)An investment of $25 at an annual rate of 10% will return a higher value in five years than $50 invested at an annual rate of 5% in the same time.

4.To find the present value of a cash flow expected to be paid or received in the future, you will (a) divide (b)multiply the future value cash flow by (1 + I)NN.

What is the value today of a $12,000 cash flow expected to be received eight years from now based on an annual interest rate of 6%?

(a)$11,670

(b)$7,529

(c)$6,023

(d)$9,411

5.

Your broker called earlier today and offered you the opportunity to invest in a security. As a friend, she suggested that you compare the current, or present value, cost of the security and the discounted value of its expected future cash flows before deciding whether or not to invest. The decision rule that should be used to decide whether or not to invest should be:

(a)Everything else being equal, you should invest if the current cost of the security is greater than the present value of the securitys expected future cash flows.

(b)Everything else being equal, you should invest if the present value of the securitys expected future cash flows is less than the current cost of the security.

(c)Everything else being equal, you should invest if the discounted value of the securitys expected future cash flows is greater than or equal to the current cost of the security.

6.

Now that youve thought about the decision rule that should be applied to your decision, apply it to the following security offered by your broker:

Jing Associates, LLC, a large law firm in Denver, is building a new office complex. To pay for the construction, Jing Associates is selling a security that will pay the investor the lump sum of $6,750 in five years. The current market price of the security is $5,896.

Assuming that you can earn an annual return of 3.75% on your next most attractive investment, how much is the security worth to you today?

(a)$5,615

(b)$7,019

(c)$5,334

7.

From strictly a financial perspective, should you invest in the Jing security?

(a)Yes

(b)No

8.

Why or why not?

(a)Because the cost (market value) of the security is greater than the discounted value of the securitys future cash flows.

(b)Because the discounted value of the securitys future cash flows is greater than the cost of the security.