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Personal Finance: An Integrated Planning Approach, 8e (Frasca)
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Chapter 2
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The Time Value of Money: All Dollars Are Not Created Equal
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1)
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Compounding refers to the
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A)
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mistake of confusing present values with future values.
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B)
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process of accumulating value over time.
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C)
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task of finding a present value.
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D)
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projection of future payments.
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Answer:
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B
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Diff: 1
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Topic:
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Interest compounding
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2)
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Assuming positive interest rates, a present value of $1,000
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A)
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is always more desirable to a future value of $1,000.
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B)
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is always less desirable than a future value of $1,000.
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C)
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is no more or no less desirable than a future value of $1,000.
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D)
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You can't answer without more information.
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Answer:
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A
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Diff: 1
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Topic:
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Interest compounding
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3)
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Given recent market experience a dollar today is worth
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A)
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more than a dollar five years from now.
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B)
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less than a dollar five years from now.
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C)
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about the same as a dollar five years from now.
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D)
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more or less than a dollar five years from now.
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Answer:
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A
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Diff: 1
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Topic:
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Economic trends
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4)
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You have just put $1,000 in an investment that offers a 12% annual yield, using a simple interest calculation. At the end of two years your interest earned will be
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A)
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$120.00.
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B)
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$144.00.
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C)
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$240.00.
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D)
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$254.40.
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Answer:
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C
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Diff: 1
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Topic:
10
Interest compounding
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5)
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You have just put $500 in an investment that offers an 8% annual yield, with interest compounded annually. Your total interest earned after two years will be
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A)
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$83.20.
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B)
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$80.00.
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C)
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$44.60.
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D)
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$40.00.
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Answer:
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A
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Diff: 2
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Topic:
10
Interest compounding
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6)
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At 12% interest (compounded annually), $20,000 invested today will grow to $______in three years.
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A)
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27,200
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B)
10
28,099
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C)
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31,471
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D)
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40,000
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Answer:
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B
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Diff: 1
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Topic:
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Future value
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7)
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You have just put $5,000 into an investment that offers a 10% annual yield, using a simple interest calculation. At the end of two years your interest earned will be
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A)
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$500.
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B)
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$550.
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C)
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$1,000.
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D)
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$1,100.
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Answer:
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C
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Diff: 2
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Topic:
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Interest compounding
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8)
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You have just put $5,000 into an investment that offers a 10% annual yield, with interest compounded annually. Your total interest earned after two years will be
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A)
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$550.
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B)
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$1,000.
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C)
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$1,050.
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D)
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$1,100.
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Answer:
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C
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Diff: 2
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Topic:
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Interest compounding
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9)
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The text discusses the topic of compounding over a large number of compounding periods. To illustrate, it shows that $1,000 invested at 8% for 40 years (annual compounding) grows to $21,724. But if you could earn 10% instead of 8%, you would earn ______more at the end of 40 years.
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A)
10
$4,431
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B)
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25 percent
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C)
10
$23,535
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D)
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$1,250
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Answer:
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C
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Diff: 3
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Topic:
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Interest compounding
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10)
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The future value of $12,000 invested today at 6% interest compounded annually for 4 years is
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A)
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$23,259.
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B)
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$15,150.
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C)
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$12,190.
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D)
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$9,505.
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Answer:
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B
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Diff: 1
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Topic:
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Future value
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11)
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The future value of $5,000 invested today at 3% interest compounded annually for 5 years is
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A)
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$5,255.
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B)
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$5,520.
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C)
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$5,628.
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D)
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$5,796.
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Answer:
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D
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Diff: 3
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Topic:
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Future value
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12)
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You expect a 3% rate of inflation to continue indefinitely into the future. A $10,000 vacation today will cost $______twenty years from now. (Table or calculator required.)
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A)
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10,300
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B)
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14,988
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C)
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18,061
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D)
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42,944
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Answer:
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C
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Diff: 3
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Topic:
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Future value
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13)
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You are deciding whether to start a 40-year retirement investing plan now, or ten years from now. You think rates of return will be about the same in the future as they are now. Discussion in the text of this decision shows
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A)
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very little difference in the future value of an investment made now versus one made 10 years from now.
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B)
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an investment made now will accumulate about 20% more (at a 10% rate of interest, compounded annually) than the investment made later.
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C)
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the same facts as in response b, but the accumulation is only 10% greater.
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D)
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that you will accumulate more in the additional 10 years than you do for the first 30 years.
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Answer:
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D
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Diff: 2
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Topic:
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Interest compounding
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14)
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With an interest rate of 9%, $5,000 will grow to $10,000 in approximately
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A)
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8 years.
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B)
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4 years.
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C)
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12 years.
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D)
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24 years.
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Answer:
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A
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Diff: 1
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Topic:
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Rule of 72
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15)
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If you wish to double your money in 6 years, you must earn an interest rate of about
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A)
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8%.
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B)
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24%.
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C)
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12%.
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D)
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36%.
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Answer:
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C
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Diff: 1
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Topic:
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Rule of 72
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16)
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At an interest rate of 10% it will take approximately how many years to double your investment?
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A)
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Less than five years
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B)
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Between 7 and 8 years
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C)
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Between 9 and 10 years
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D)
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More than 10 years
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Answer:
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B
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Diff: 1
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Topic:
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Rule of 72
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17)
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An annuity is
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A)
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a sum received in the future.
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B)
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a sum earned in the future but received now.
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C)
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a series of unequal payments.
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D)
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a series of equal payments.
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Answer:
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D
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Diff: 1
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Topic:
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Annuities
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18)
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In relation to an ordinary annuity paid in any given year, an annuity due is
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A)
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a larger amount.
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B)
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a smaller amount.
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C)
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an equal amount.
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D)
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an unrelated amount.
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Answer:
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A
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Diff: 1
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Topic:
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Annuities
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19)
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The future value of a $500 ordinary annuity received for three years is $______, assuming an investment rate of 10%:
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A)
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1,655.00
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B)
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665.50
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C)
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1,820.50
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D)
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335.65
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Answer:
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A
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Diff: 3
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Topic:
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Annuities
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20)
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The future value of a $500 annuity due received for three years is $______, assuming an investment rate of 10%.
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A)
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1,655.00
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B)
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665.50
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C)
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1,820.50
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D)
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335.65
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Answer:
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C
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Diff: 3
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Topic:
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Annuities
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21)
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You will need $228,790 in 28 years to supplement your retirement funds. If you can earn 8% interest, you must save $______each year. (Table or calculator required.)
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A)
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8,100
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B)
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6,300
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C)
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3,600
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D)
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2,400
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Answer:
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D
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Diff: 3
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Topic:
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Future value
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22)
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An ordinary annuity assumes ______-of-period payments, while an annuity due assumes ______-of-period payments.
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A)
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end; beginning
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B)
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beginning; end
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C)
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end; middle
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D)
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beginning; middle
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Answer:
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A
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Diff: 2
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Topic:
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Annuities
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23)
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Assuming a discount rate of 10%, the present value of $1,000 received one year from now is
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A)
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$1,100.00.
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B)
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$1,900.00.
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C)
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$909.09.
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D)
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$990.00.
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Answer:
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C
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Diff: 3
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Topic:
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Present value
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24)
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Assuming a discount rate of 10%, the present value of $1,000 received two years from now is
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A)
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$800.00.
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B)
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$826.45.
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C)
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$899.90
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D)
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$900.00
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Answer:
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B
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Diff: 3
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Topic:
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Present value
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25)
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You will buy a lottery ticket. If you win, you have a choice of receiving $995,000 now or three equal end-of-year payments of $400,000. You should take the payments
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A)
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because $1,200,000 is greater than $995,000.
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B)
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if you earn 20% or more on your investments.
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C)
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if you earn 11% or more on your investments.
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D)
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if you earn less than 10% on your investments.
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Answer:
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D
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Diff: 3
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Topic:
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Present value
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26)
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An annuity contract will pay you $4,000 a year (end of year) for the next three years. Or, you can choose to receive $12,610 at the end of the third. Assuming that you can earn 8% on investments, you should
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A)
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choose to receive the $4,000 annuity payments.
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B)
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choose to receive the $12,610 payment.
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C)
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flip a coin to make the choice; each is equally attractive.
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D)
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flip a coin to make the choice; each is equally unattractive.
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Answer:
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A
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Diff: 3
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Topic:
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Annuities
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27)
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Which item below is not associated with goal planning?
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A)
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Constructing a budget
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B)
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Adjusting for inflation
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C)
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Making goals concrete
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D)
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Determining a savings schedule
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Answer:
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A
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Diff: 1
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Topic:
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Planning
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28)
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Generally speaking, planners can usually seek higher return investments to meet
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A)
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short-term goals.
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B)
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long-term goals.
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C)
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goals of any term.
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D)
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dreams, but not goals.
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Answer:
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B
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Diff: 2
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Topic:
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Planning
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29)
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A savings schedule with a zero ending balance means that
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A)
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annual deposits are sufficient to meet all goals.
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B)
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more savings are needed each year.
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C)
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the most desirable schedule has been determined.
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D)
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some goals will not be achieved.
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Answer:
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A
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Diff: 2
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Topic:
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Planning
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30)
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Young people most likely prefer a savings schedule with
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A)
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a zero ending balance.
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B)
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increasing annual deposits.
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C)
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decreasing annual deposits.
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D)
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negative balances in the early years.
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Answer:
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B
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Diff: 2
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Topic:
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Planning
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31)
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Compounding is the process of increasing present value to future values.
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Answer:
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TRUE
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Diff: 1
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Topic:
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Interest compounding
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32)
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Discounting is the process of reducing future values to present values.
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Answer:
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TRUE
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Diff: 1
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Topic:
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Present value
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33)
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The present value of $500 received at the end of each of the next three years is $1,243 (assuming a 10% interest rate).
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Answer:
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TRUE
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Diff: 2
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Topic:
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Present value
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34)
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You invest $100 today in a two-year certificate of deposit that pays a 10% annual interest rate compounded annually. At maturity, your CD will give you $120.
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Answer:
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FALSE
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Diff: 1
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Topic:
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Interest compounding
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35)
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A simple interest calculation assumes you reinvest all interest earned in the investment.
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Answer:
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FALSE
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Diff: 1
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Topic:
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Interest compounding
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36)
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Looking at a future value of $1 table, you find the number 4.661 for 20 years and 8%. This means that a dollar invested today will grow to $4.661 at the end of 20 years.
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Answer:
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TRUE
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Diff: 1
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Topic:
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Future value
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37)
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Compounding is the process of increasing present value to future value.
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Answer:
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TRUE
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Diff: 1
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Topic:
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Interest compounding
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38)
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At an 8% rate, you must invest $5,000 to have $10,000 in about 6 years.
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Answer:
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FALSE
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Diff: 2
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Topic:
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Future value
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39)
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At a 12% interest rate, $2,000 invested today will be worth approximately $8,000 in about 12 years.
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Answer:
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TRUE
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Diff: 2
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Topic:
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Future value
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40)
10
You can double your investment in 6 years if you can earn 12% on your investments.
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Answer:
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TRUE
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Diff: 2
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Topic:
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Rule of 72
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41)
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John cashed in an annuity contract and received $10,000. John bought the contract 24 years ago for $5,000. These amounts indicate a contract rate of approximately 3%.
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Answer:
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TRUE
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Diff: 3
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Topic:
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Interest compounding
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42)
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The future value of $500 invested at the end of each of the next three years is $1,555 (assuming a 10% interest rate).
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Answer:
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FALSE
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Diff: 2
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Topic:
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Future value
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43)
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Given identical data, the future value of an ordinary annuity is greater than the future value of an annuity due.
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Answer:
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FALSE
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Diff: 1
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