Question 1

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A)   8.46%
B)   8.90%
C)   9.37%
D)   9.86%
E)   10.38%F) B) and D)
G) B) and E)

Question 2

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 3

At the end of 10 years,which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)   Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments) .
B)   Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments) .
C)   Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments) .
D)   Investment D pays $2,500 at the end of 10 years (just one payment) .
E)   Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments) .F) A) and D)
G) A) and B)

Question 4

Your cousin will sell you his coffee shop for $250,000,with "seller financing," at a 6.0% nominal annual rate.The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years,and then make an additional final (balloon) payment of $50,000 at the end of the last month.What would your equal monthly payments be?

Accepted Answer

A)   $4,029.37
B)   $4,241.44
C)   $4,464.67
D)   $4,699.66
E)   $4,947.01F) B) and C)
G) A) and C)

Question 5

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 6

You want to buy new kitchen appliances 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?

Accepted Answer

A)   $15,260
B)   $16,063
C)   $16,908
D)   $17,754
E)   $18,642F) None of the above
G) C) and E)

Question 7

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Accepted Answer

A)   8.95%
B)   9.39%
C)   9.86%
D)   10.36%
E)   10.88%F) All of the above
G) C) and D)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   If CF0 is positive and all the other CFs are negative, then you can still solve for I.
B)   If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
C)   If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
D)   To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.
E)   If you solve for I and get a negative number, then you must have made a mistake.F) All of the above
G) B) and C)

Question 9

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

Accepted Answer

A)   20,701
B)   $21,791
C)   $22,938
D)   $24,085
E)   $25,289F) All of the above
G) A) and C)

Question 10

Pacific Bank pays a 4.50% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%) does the bank pay?

Accepted Answer

A)   3.72%
B)   4.13%
C)   4.59%
D)   5.05%
E)   5.56%F) All of the above
G) A) and E)

Question 11

A $150,000 loan is to be amortized over 6 years,with annual end-of-year payments.Which of these statements is CORRECT?

Accepted Answer

A)   The proportion of interest versus principal repayment would be the same for each of the 7 payments.
B)   The annual payments would be larger if the interest rate were lower.
C)   If the loan were amortized over 10 years rather than 6 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 6-year amortization plan.
D)   The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.
E)   The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.F) C) and E)
G) None of the above

Question 12

Your aunt wants to retire and has $375,000.She expects to live for another 25 years,and she also expects to earn 7.5% on her invested funds.How much could she withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)   $28,243.21
B)   $29,729.70
C)   $31,294.42
D)   $32,859.14
E)   $34,502.10F) B) and E)
G) A) and E)

Question 13

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Accepted Answer

A)   The discount rate decreases.
B)   The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
C)   The discount rate increases.
D)   The riskiness of the investment's cash flows decreases.
E)   The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.F) A) and B)
G) A) and E)

Question 14

If the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
B)   A time line is not meaningful unless all cash flows occur annually.
C)   Time lines are not useful for visualizing complex problems prior to doing actual calculations.
D)   Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
E)   Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.F) A) and E)
G) A) and B)

Question 16

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Accepted Answer

A)   $1,412.84
B)   $1,487.20
C)   $1,565.48
D)   $1,643.75
E)   $1,725.94F) C) and D)
G) B) and D)

Question 17

Suppose a State of New Mexico bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%,how much is the bond worth today?

Accepted Answer

A)   $651.60
B)   $684.18
C)   $718.39
D)   $754.31
E)   $792.02F) A) and C)
G) A) and E)

Question 18

Suppose you are buying your first home for $145,000,and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Accepted Answer

A)   $741.57
B)   $780.60
C)   $821.69
D)   $862.77
E)   $905.91F) A) and D)
G) C) and D)

Question 19

Now that your uncle has decided to retire,he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Accepted Answer

A)   $1,063,968
B)   $1,119,966
C)   $1,178,912
D)   $1,240,960
E)   $1,303,008F) All of the above
G) D) and E)

Question 20

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)   $438.03
B)   $461.08
C)   $485.35
D)   $510.89
E)   $537.78F) B) and E)
G) C) and D)

Exam 4: Time Value of Money

You want to buy new kitchen appliances 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?

Correct Answer
verified

Now that your uncle has decided to retire,he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Correct Answer
verified

Pacific Bank pays a 4.50% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%) does the bank pay?

Correct Answer
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A $150,000 loan is to be amortized over 6 years,with annual end-of-year payments.Which of these statements is CORRECT?

Correct Answer
verified

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Correct Answer
verified

At the end of 10 years,which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct Answer
verified

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Correct Answer
verified

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Correct Answer
verified

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Correct Answer
verified

Suppose you are buying your first home for $145,000,and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Correct Answer
verified

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Correct Answer
verified

Your aunt wants to retire and has $375,000.She expects to live for another 25 years,and she also expects to earn 7.5% on her invested funds.How much could she withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Correct Answer
verified

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

Correct Answer
verified

Correct Answer
verified

Suppose a State of New Mexico bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%,how much is the bond worth today?

Correct Answer
verified

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Correct Answer
verified

Exam 4: Time Value of Money

You want to buy new kitchen appliances 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?

Correct AnswerverifiedShow Answer

Now that your uncle has decided to retire,he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Correct AnswerverifiedShow Answer

Pacific Bank pays a 4.50% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%) does the bank pay?

Correct AnswerverifiedShow Answer

A $150,000 loan is to be amortized over 6 years,with annual end-of-year payments.Which of these statements is CORRECT?

Correct AnswerverifiedShow Answer

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Correct AnswerverifiedShow Answer

At the end of 10 years,which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct AnswerverifiedShow Answer

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Correct AnswerverifiedShow Answer

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Correct AnswerverifiedShow Answer

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Correct AnswerverifiedShow Answer

Suppose you are buying your first home for $145,000,and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Correct AnswerverifiedShow Answer

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Correct AnswerverifiedShow Answer

Your aunt wants to retire and has $375,000.She expects to live for another 25 years,and she also expects to earn 7.5% on her invested funds.How much could she withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Correct AnswerverifiedShow Answer

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose a State of New Mexico bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%,how much is the bond worth today?

Correct AnswerverifiedShow Answer

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Correct AnswerverifiedShow Answer

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