## Test Bank For M and B 2, 2nd Edition by Dean Croushore

**Chapter 4—Present Value**

**MULTIPLE CHOICE**

1. Which of the following would you rather have if your rate of discount is 20 percent?

a.

$300 in one year

b.

$350 in two years

c.

$420 in three years

d.

$1500 in ten years

ANS: A PTS: 1 DIF: Moderate

TOP: The Present Value of One Future Payment TYP: Conceptual

2. Suppose the rate of discount is 5 percent, 6 percent, 7 percent, or 8 percent. Suppose that you would rather have $425 in one year instead of $400 today. Also, you would rather have $400 today instead of $445 in two years. What is the rate of discount?

a.

5 percent

b.

6 percent

c.

7 percent

d.

8 percent

ANS: B PTS: 1 DIF: Moderate

TOP: The Present Value of One Future Payment TYP: Conceptual

3. The amount of money you would need to invest today to yield a given future amount is called

a.

future value.

b.

present value.

c.

the rate of discount.

d.

the discount factor.

ANS: B PTS: 1 DIF: Basic

TOP: The Present Value of One Future Payment TYP: Factual

4. Present value is

a.

the cost of a bond today, minus the future value of interest payments.

b.

the future value of interest payments times the rate of discount.

c.

the future value of interest payments times the discount factor.

d.

the amount of money you would need to invest today to yield a given future amount.

ANS: D PTS: 1 DIF: Basic

TOP: The Present Value of One Future Payment TYP: Factual

5. Earning interest on interest that was earned in prior years is called

a.

discounting.

b.

compounding.

c.

present valuing.

d.

bonding.

ANS: B PTS: 1 DIF: Basic

TOP: The Present Value of One Future Payment TYP: Factual

6. In the one-period present-value equation, *P = F/*(1 + *i*), the term 1 + *i* is known as

a.

future value.

b.

present value.

c.

the rate of discount.

d.

the discount factor.

ANS: D PTS: 1 DIF: Basic

TOP: The Present Value of One Future Payment TYP: Factual

7. In the one-period present-value equation, *P = F/*(1 + *i*), the discount factor is

a.

1 + *i*.

b.

*i*.

c.

*P*.

d.

*F*.

ANS: A PTS: 1 DIF: Basic

TOP: The Present Value of One Future Payment TYP: Factual

8. Discounting is the process of dividing a future value by the ________ to obtain the ________ value.

a.

discount factor; past

b.

discount factor; present

c.

rate of discount; past

d.

rate of discount; present

ANS: B PTS: 1 DIF: Basic

TOP: The Present Value of One Future Payment TYP: Factual

9. In the one-period present-value equation, *P = F/*(1 + *i*), the term *i* is known as

a.

future value.

b.

present value.

c.

the rate of discount.

d.

the discount factor.

ANS: C PTS: 1 DIF: Basic

TOP: The Present Value of One Future Payment TYP: Factual

10. In the one-period present-value equation, *P = F/*(1 + *i*), the rate of discount is

a.

1 + *i*.

b.

*i*.

c.

*P*.

d.

*F*.

ANS: B PTS: 1 DIF: Basic

TOP: The Present Value of One Future Payment TYP: Factual

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