MCQs of Time Value of Money

Question: The concept of Time Value of Money (TVM) states that:

a) Money invested today is worth more than the same amount in the future.

b) Money invested today is worth less than the same amount in the future.

c) Money invested today will remain the same value in the future.

d) Money invested today and in the future cannot be compared.

 

Answer: a) Money invested today is worth more than the same amount in the future.

 

Question: The formula to calculate the future value of a present amount with compound interest is:

a) FV = PV * (1 + r)^n

b) FV = PV / (1 + r)^n

c) FV = PV * r^n

d) FV = PV / r^n

 

Answer: a) FV = PV * (1 + r)^n

 

Question: An investment offers an annual interest rate of 6%. How long will it take for the investment to double in value with compound interest?

a) 6 years

b) 8 years

c) 10 years

d) 12 years

 

Answer: c) 10 years

 

Question: Which of the following is true regarding the relationship between interest rates and present value?

a) As interest rates increase, present value decreases.

b) As interest rates increase, present value increases.

c) Interest rates do not affect present value.

d) Present value is inversely related to interest rates.

 

Answer: a) As interest rates increase, present value decreases.

 

Question: What does the term "discounting" refer to in the context of Time Value of Money?

a) Calculating the future value of an investment.

b) Calculating the present value of future cash flows.

c) The process of compounding interest over time.

d) Determining the interest rate for an investment.

 

Answer: b) Calculating the present value of future cash flows.

 

Question: An annuity payment is a series of equal cash flows received or paid:

a) At regular intervals over a specified period.

b) At irregular intervals over an indefinite period.

c) In a lump sum at the end of the period.

d) In a lump sum at the beginning of the period.

 

Answer: a) At regular intervals over a specified period.

 

Question: What is the present value of $5,000 to be received five years from now, assuming a discount rate of 8% (rounded to the nearest dollar)?

a) $3,680

b) $3,862

c) $4,117

d) $4,454

 

Answer: c) $4,117

 

Question: Which of the following is NOT a component of the time value of money?

a) Principal amount

b) Interest rate

c) Time period

d) Currency exchange rate

 

Answer: d) Currency exchange rate

 

Question: What does the term "compounding" refer to in the context of Time Value of Money?

a) Calculating the future value of an investment.

b) Calculating the present value of future cash flows.

c) The process of earning interest on both the principal amount and previously earned interest.

d) The process of converting future cash flows into present value.

 

Answer: c) The process of earning interest on both the principal amount and previously earned interest.

 

Question: If the interest rate is 5% per annum, what is the present value of $1,500 to be received after three years? (rounded to the nearest dollar)

a) $1,328

b) $1,385

c) $1,429

d) $1,500

 

Answer: a) $1,328

 

Question: The future value of an investment is influenced by:

a) The initial investment amount and the interest rate.

b) The initial investment amount and the time period.

c) The interest rate and the time period.

d) The initial investment amount, the interest rate, and the time period.

 

Answer: d) The initial investment amount, the interest rate, and the time period.

 

Question: The process of converting future cash flows into their equivalent value in present terms is known as:

a) Compounding

b) Discounting

c) Amortization

d) Appreciation

 

Answer: b) Discounting

 

Question: What is the future value of $2,000 invested for 6 years with a 7% interest rate compounded annually? (rounded to the nearest dollar)

a) $2,812

b) $2,854

c) $2,920

d) $2,986

 

Answer: c) $2,920

 

Question: The time value of money concept is essential for making financial decisions related to:

a) Investments, loans, and project evaluations.

b) Taxation and accounting practices.

c) Currency exchange and trade agreements.

d) Marketing and sales strategies.

 

Answer: a) Investments, loans, and project evaluations.

 

Question: Which of the following statements is correct regarding the time value of money?

a) Money has a fixed value over time.

b) The value of money decreases with time due to inflation.

c) Time has no impact on the value of money.

d) The value of money increases with time due to interest.

 

Answer: b) The value of money decreases with time due to inflation.