Time Value of

Money
1. Given that an asset generates CF’s of Rs. 100 in Year 1, Rs. 120 in Year 2 and negative Rs.
100 in year 3 and is finally sold for Rs. 1,750 at the end of year 4, what is the PV of the asset
assuming a discount rate of 10%?
A. Rs. 2,412 C. Rs. 1310
B. Rs. 1680

2. For a set of CF’s of same dollar amounts (such as $100, $300, $710) and assuming the same
discount rate what can we say about the relationship of the PV of the CF to the timing of the CF?
A. is larger the later they occur in timeline C. insufficient information
B. is larger the earlier they occur in timeline

3. Ram Prasad invests S$ 500,000 in a fixed deposit for 10 years with OCBC bank in
Singapore. The deposit will earn an interest of 7% per annum. Assume annual compounding,
what will be the value of Mr. Prasad’s investment at the end of 10 years?
A. S$ 984,000 C. S$ 786,600
B. insufficient data.

4. If an investment promises to pay DM 100 one year from today, DM 200 two years from today
and DM 300 three years from today, what is the present value of this investment if the
required return is 14% per annum? (Assume annual compounding)
A. DM 445 C. DM 363
B. DM 421

5. A teacher is hoping to have Rs. 10 lakhs in savings when he retires in 20 years. Assuming an
average annual rate of return of 10%, compounded annually what would be the amount of
money needed today in order for him to achieve his goal?
A. Rs. 2,10,000 C. Rs. 1,54,000
B. Rs. 1,49,000

6. A professional couple plans to save GBP 20,000 per year in a pension plan that is expected
to earn 7% per year. If they start making contributions one year from now what will be the
lump sum available at retirement 20 years from now?
A. GBP 820,000 C. insufficient data
B. GBP 845,000

7. A bank pays an interest rate of 8% (stated.) What is the effective annual rate assuming
quarterly compounding?
A. 8.1% C. 9.00%
B. 8.24%

8. We can view the concept of interest rates as:

A. the required rate of return C. all of the above
B. the discount rate
9. The parents of Hari Krishna are planning for his engineering education. He is expected to
attend university in 12 years time when the cost of his education is expected to be Rs.
100,000. How much will they need to invest today assuming that the diversified mutual fund
(they plan to invest in) is expected to return 10% annually?

A. Rs. 31,900 C. Rs. 29,600

B. Rs. 33,900

10. A retired lawyer wants to purchase an annuity that will pay Rs. 25,000 at the end of each of
the next 15 years. If the lawyer can earn 8% per year on the annuity, the purchase price of
the annuity is closest to:

A. Rs. 215,000 C. Rs. 310,000

B. Rs. 245,000

11. What is the future value of Rs. 1000 received at the end of each year for the next 5 years if
the expected rate of return is 6% compounded continually?

A. Rs. 5,700 C. Rs. 5,500

B. Rs. 6,100

12. Mr. Iyer has obtained a mortgage loan of $ 97,200 from Wadia to purchase a condominium.
The loan is to be repaid over the next 30 years with an EMI of $1000. What is the interest rate
that he is paying? (expressed in conventional terms)

A. 14% C. 16%
B. 12%

13. Mr. Shah has just purchased a computer for $ 1,000 from Best Buy on an installment loan
that requires equal monthly payments at the end of each of the next 3 years. What is the
payment amount if the interest rate is 10% per annum?
A. $ 334 C. $ 402
B. $ 366

14. Mr. Jai Farzanwala saves $ 2000 per year for 30 years at Clearwater Credit Union. The credit
union pays 5% per year in interest. How much will Mr. Farzanwala have at the end of 30
years?
A. $146,000 C. $133,000
B. $163,000

15. Mr. Choudhary has just purchased a Tercel car from the neighborhood Toyota dealer. He is
required to pay $200 per month for the next 3 years with the first payment due 1 month from
today. If the interest rate is 1% per month what was the price of the car (assuming he funded
his purchase entirely with this loan.)
A. $6,000 C. $7,500
 B. $10,500
16. Bank of America quotes a stated rate of interest of 8% for a time deposit. If the effective rate
works out to be 8.16%, how often does the bank compound the interest?
A. Semi-Annually C. Continuously
B. Monthly

17. In an uncertain world what factors need to be considered in arriving at a fair rate of interest (in
addition to opportunity cost)
A. Only Risk C. Both Inflation and Risk
B. Only inflation

18. Suppose HDFC bank offers a Certificate of Deposit that pays Rs. 10,000 in 3 years in
exchange for Rs. 7,938.32 today. What is the interest rate that HDFC bank is offering?

A. 8.15% C. 8.00%
B. 8.40%

19. Mr. John Crenshaw is currently 37 years old. He hopes to retire with an annual income of $
100,000 per year at the age of 63. He is planning for a retirement horizon of 20 years. How
much does Mr. Crenshaw need to save each year starting one year from now (during the
accumulation phase of 25 years) in order to achieve his retirement goals if his 401K
retirement plan currently has a balance of $ 54,304 (Assume rate of interest to be 8%)?
A. $9,230 C. $8,340
B. $8,420

20. Which of the following is true?

A. Annuity due has 1st CF 1 year from now C. Perpetuity has 1st CF at infinity
B. Ordinary annuity has 1st CF 1 year from now

21. Honda Motors is offering either a cash back of $1,500 or a special financing at 3.9% APR for
its Accord model, which is priced at $20,000. If the prevailing rate of interest for a car loan
(from People’s bank) is 8% APR should a rational purchaser opt for the special financing offer
or go with the cash discount and borrow from People’s bank?

A. Take the cash discount and borrow C. Both are the same
B. Take the special financing offer