Time Value of Money (TVM) Questions for RBI Grade B with Answer Key & Explanation

Practicing Time Value of Money (TVM) questions is crucial for reinforcing your understanding of TVM concepts and assessing your preparation for the RBI Grade B exam. Below, we have given multiple exam-level questions of TVM that you can attempt. Here’s how you can assess your preparation:

• Start your test and attempt these questions within 20 minutes.
• Once you’re done or the time is up, refer to the given answer key.
• Evaluate your performance to identify areas where you may need further study or practice.

RBI Grade B TVM Practice Questions

Here are 12 practice questions that you can attempt to assess your understanding of TVM concepts:

Time Value of Money Question 1: 

What is the definition of the time value of money? 

[A] The concept that money available today is worth more than the same amount of money in the future.

[B] The concept that money available today is worth less than the same amount of money in the future.

[C] The concept that money available in the future is worth more than the same amount of money today.

[D] The concept that money retains its value regardless of when it is available.

[E] None of the above

Click here for the explanation.

Time Value of Money Question 2: 

What does Present Value (PV) represent and why is it important?

[A] The future value of money and its growth potential.

[B] The current value of a sum of money, providing insight into its present worth.

[C] The average value of money over a period of time.

[D] The potential value of an investment in the distant future.

[E] The value of money from the past.

Click here for the explanation.

Time Value of Money Question 3: 

What is the key characteristic of Simple Interest calculation?

[A] The interest earned or paid is a fixed percentage of the initial sum (principal).

[B] The interest earned or paid varies with the total amount accumulated over time.

[C] The interest earned or paid is compounded annually.

[D] The interest is calculated based on the difference between the future value and the principal.

[E] The interest is calculated based on a variable percentage determined by the lender.

Click here for the explanation.

Time Value of Money Question 4: 

If the interest was compounded semi-annually instead of annually, how many compounding periods would occur over a 3-year period?

 [A] 6 compounding periods

 [B] 3 compounding periods

 [C] 2 compounding periods

 [D] 4 compounding periods

 [E] 12 compounding periods

Click here for the explanation.

Time Value of Money Question 5: 

The term discounting can be best described as_________________.

[A] Discounting calculates the Future Value (FV) from the Present Value (PV).

[B] Discounting calculates the Present Value (PV) from the Future Value (FV).

[C] Discounting calculates the difference between the Present Value (PV) and the Future Value (FV).

[D] Discounting calculates the average value of an investment over time.

[E] Discounting calculates the interest earned on an investment.

Click here for the explanation.

Time Value of Money Question 6: 

Sarah is planning for her retirement and is considering investing in an annuity. She wants to receive a fixed monthly payment after retirement to cover her living expenses. She has two options for the annuity type: ordinary annuity and annuity due. After evaluating both options, Sarah prefers to receive payments at the end of each month.

Which annuity type aligns with Sarah’s preference?

[A] Prescribed annuity

[B] Ordinary annuity

[C] Annuity due

[D] Both ordinary annuity and annuity due

[E] Neither ordinary annuity nor annuity due

Click here for the explanation.

Time Value of Money Question 7: 

What is the relationship between Present Value (PV) and Future Value (FV) ?

[A] PV and FV are inversely related: as PV increases, FV decreases.

[B] PV and FV are directly proportional: as PV increases, FV also increases.

[C] PV and FV are unrelated; one does not affect the other.

[D] PV and FV have a nonlinear relationship; their change is unpredictable.

[E] PV and FV are equal under all circumstances.

Click here for the explanation.

Time Value of Money Question 8: 

What distinguishes an annuity from an ordinary annuity?

[A] Payments occur at the beginning of each period for an annuity due, while at the end of each period for an ordinary annuity.

[B] Payments occur at the end of each period for an annuity due, while at the beginning of each period for an ordinary annuity.

[C] Payments occur irregularly for an annuity due, while regularly for an ordinary annuity.

[D] Payments occur annually for an annuity due, while monthly for an ordinary annuity.

[E] Payments occur in lump sums for an annuity due, while in smaller amounts for an ordinary annuity.

Click here for the explanation.

Time Value of Money Question 9: 

Which of the following would give the maximum amount on compounding?

[A] Rs. 100 invested at 12% p.a. compounded annually

[B] Rs. 100 invested at 12% p.a. compounded semiannually

[C] Rs. 100 invested at 12% p.a. compounded monthly 

[D] Rs. 100 invested at 12% p.a. compounded Quarterly 

[E] None of the above

Click here for the explanation.

Time Value of Money Question 10: 

Using the formula for calculating Simple Interest (SI), if the Principal Amount (P) is Rs. 5,000, the Rate of Interest (R) is 6%, and the Time (T) is 2 years, what is the Simple Interest (SI)?

[A] 200

[B] 300

[C] 400

[D] 500

[E] 600

Click here for the explanation.

Time Value of Money Question 11: 

Consider the following statements:

1. The rule of 72 (rule of 70 and the rule of 69.3) is a shortcut to estimate the number of years required to double your money at a given annual rate of return.

2. Rule of 114 is used to estimate how long it takes to triple your money, divide 114 by your expected interest rate (or rate of return)

3. Rule of 144 is used to estimate how long it takes to sextuple, your money, divide 144 by your expected interest rate (or rate of return)

Which among the above statement/s is/are incorrect?

[A] 1 only

[B] 1 and 2

[C] 2 only

[D] 3 only

[E] All statements are correct

Click here for the explanation.

Time Value of Money Question 12: 

In order to find the present value of a sum of Rs. 20,000 to be received at the end of each year for the next 5 years at a 12% rate, we use which of the following?

[A] Present value of a single cash flow table

[B] Present value using annuity table

[C] Future value of a single cash flow table

[D] Future value using annuity table

[E] None of the above 

Click here for the explanation.

RBI Grade B TVM Practice Questions: Answer Key

Here’s the answer key for the above RBI Grade B TVM practice questions:

Assessment

1. Learn New Concepts

• If you solved 10 or more questions correctly, it indicates that you have a strong understanding of TVM concepts. 
• Now, you can confidently move on to other financial topics like Bonds, Derivatives, Primary and Secondary Markets, Financial Institutions, etc.

2. Need for Revision

• If you couldn’t solve atleast 10 questions correctly, you may need to revise your TVM concepts. 
• Refer to the article, “RBI Grade B TVM Concepts” to enhance your understanding of the TVM concepts and improve your score.

RBI Grade B TVM Practice Questions: Explanation

Here are the detailed explanations for the above questions:

Question 1: Explanation (Click here for the Question)

The time value of money is the concept that money available today is worth more than the same amount of money in the future. 

This is due to the potential to earn returns or interest on the money over time, making it more valuable to have money in hand now than to receive the same amount of money at a later date. 

It is a fundamental principle in finance and plays a crucial role in various financial decisions, including investments, loans, and financial planning. 

Hence, option A is the correct answer.

Question 2: Explanation (Click here for the Question)

Present Value (PV) is the current value of a sum of money, representing its worth in today’s terms. It helps in understanding the value of money at the present moment, considering factors such as interest rates and the time value of money. 

Hence, option B is the correct answer.

Question 3: Explanation (Click here for the Question)

Simple Interest calculation involves earning or paying a fixed percentage of the principal amount, regardless of the total amount accumulated over time. 

Hence, option A is the correct answer.

Question 4: Explanation (Click here for the Question)

When interest is compounded semi-annually, it means there are two compounding periods in a year. Over a 3 year period, there would be a total of 6 compounding periods (2 compounding periods per year for 3 years) 

Hence, option A is the correct answer.

Question 5: Explanation (Click here for the Question)

Discounting is the financial process that calculates the Present Value (PV) from the Future Value (FV), essentially performing the reverse journey of compounding. It helps determine the current worth of a future sum of money. 

Hence, option B is the correct answer.

Question 6: Explanation (Click here for the Question)

A) Prescribed annuity: There is no such term prescribed annuity. Hence, option A is the incorrect answer. 

B) Ordinary annuity: Sarah’s preference is to receive payments at the end of each month. In an ordinary annuity, payments are received at the end of each period, making this the correct choice. Hence, option B is the correct answer. 

C) Annuity due: An annuity due involves receiving payments at the beginning of each period. Since Sarah prefers to receive payments at the end of each month, this option is not aligned with her preference. Hence, option C is the incorrect answer. 

D) Both ordinary annuity and annuity due: This is incorrect because Sarah specifically prefers to receive payments at the end of each month, making the annuity due option not suitable for her. Hence, option D is the incorrect answer. 

E) Neither ordinary annuity nor annuity due: This is incorrect as an ordinary annuity aligns with Sarah’s preference of receiving payments at the end of each month. Hence, option E is the incorrect answer. 

Therefore, option B is the correct answer.

Question 7: Explanation (Click here for the Question)

Present Value (PV) and Future Value (FV) in finance have a direct proportional relationship. When the Present Value (PV) increases, the Future Value (FV) also increases, assuming the interest rate and time period remain constant. 

Hence, option B is the correct answer.

Question 8: Explanation (Click here for the Question)

The key distinction between an annuity due and an ordinary annuity is the timing of payments. The payments in an ordinary annuity occur at the end of each period, whereas in an annuity due, payments occur at the beginning of each period. 

Hence, option A is the correct answer.

Question 9: Explanation (Click here for the Question)

The following two generalizations can be made with respect to frequency of compounding and future and present values 

1. When interest is compounded more than once a year, a future value will always be higher than it would have been with annual compounding, all else being equal.
2. When interest is compounded more than once a year, a present value will always be lower than it would have been with annual compounding, all else being equal.

Case A 

• PV = 100
• N = 1
• R = 12% 
• FV = PV ( 1+ R)N 
• FV = 112

Case B 

• PV = 100
• N = (1 * 2)
• R = 12% / 2
• FV = PV ( 1+ R/M)N*M
• FV = 112.36

Case C 

• PV = 100
• N = ( 1* 12) 
• R = (12 % / 12)
• FV = PV ( 1+ R/M)N*M 
• FV = 112.68

Case D 

• PV = 100
• N = (1* 4)
• R = (12%/4 )
• FV = PV ( 1+ R/M)N*M 
• FV = 112.5

 In the above cases M is the frequency of compounding.

Hence, option C is the correct answer.

Question 10: Explanation (Click here for the Question)

Simple Interest = Principle*Rate*Time / 100

Simple interest = 5,000*6*2 / 100

Simple Interest = 600

Hence, option E is the correct answer.

Question 11: Explanation (Click here for the Question)

1. The rule of 72 (rule of 70 and the rule of 69.3) is a shortcut to estimate the number of years required to double your money at a given annual rate of return. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself. Hence, statement 1 is correct.

2. Rule of 114: To estimate how long it takes to triple your money, divide 114 by your expected interest rate (or rate of return). Hence, statement 2 is correct.

3. Rule of 144: To estimate how long it takes to Quadruple your money, divide 144 by your expected interest rate (or rate of return). Hence, statement 3 is incorrect 

Hence, option D is the correct answer.

Question 12: Explanation (Click here for the Question)

Present value of a single cash flow refers to how much a single cash flow in the future will be worth today. The present value is calculated by discounting the future cash flow for the given time period at a specified discount rate. 

The present value of an annuity refers to how much money would be needed today to fund a series of future annuity payments. Since we need to find out the present value and that too of equal annual amounts, we will use Present value of the annuity table. 

The future value of a single cash flow implies how much will be the worth of money after a few years if it is invested today at a prevalent rate of interest. 

The future value of an annuity is the value of a group of recurring payments at a certain date in the future, assuming a particular rate of return. 

Hence, option B is the correct answer.

After practicing these TVM-related questions, you should also click on the link, “RBI Grade B TVM PYQs”, to practice the actual TVM-related questions asked in the exam.

Conclusion

Attempting TVM questions is probably the best way to determine how well you’re prepared for the topic. 

• If you score well, you can move on to a different topic. 
• If not, you can revise your RBI Grade B TVM Concepts and retake the test.