Question 1

Sly's Used Cars just sold you a clunker (you need it to get to class on time).You financed the $4,728.48 purchase price for 24 months.They said your payment would be $250.What interest rate did they charge you (assume monthly compounding)?
A) 10%
B) 12%
C) 16%
D) 19%
E) 24%

Accepted Answer

The answer of Sly's Used Cars just sold you a...

Question 2

With a mortgage loan of $150,000 at an annual percentage rate of 6% for 30 years,you will pay over $150,000 in interest before your loan ends.

Accepted Answer

This is because over the life of the loan, the total interest paid will be $173,757.46, which is greater than the loan amount of $150,000.

Question 3

What is the present value of an annual payment of $1,500 discounted back 15 years at an annual rate of return of 3%?
A) $10,663.87
B) $12,334.56
C) $13,449.87
D) $17,906.90

Accepted Answer

The answer of What is the present value of an...

Question 4

An annuity is a series of unequal dollar payments coming at the end of each time period for a specified number of time periods.

Accepted Answer

An annuity is a series of equal dollar payments coming at the end of each time period for a specified number of time periods.

Question 5

What is the maximum that you would be willing to loan your brother for a $100 IOU if he promises to pay you back at the end of the year? You want to earn an annual rate of return of 12%.
A) $82.00
B) $89.29
C) $92.73
D) $88.00

Accepted Answer

To achieve a 12% annual rate of return on a $100 IOU, you would use the formula for calculating the present value: Present Value = Future Value / (1 + rate of return)^n, where n is the number of years. Plugging in the numbers: $100 / (1 + 0.12)^1 = $89.29.

Question 6

How much can you borrow today if you can make payments of $3,600 a year for the next five years and the interest rate is 10%?
A) $13,646.83
B) $12,235.32
C) $18,978.36
D) $15,797.84
E) $17,949.67

Accepted Answer

Using the present value of an annuity formula:

PV = (PMT x (1 - (1 + r)^-n)) / r

where PV is the present value, PMT is the payment per period, r is the interest rate per period, and n is the number of periods.

Plugging in the numbers:

PV = (3600 x (1 - (1 + 0.1)^-5)) / 0.1

PV = $13,646.83

Therefore, the maximum amount that can be borrowed is $13,646.83.

Question 7

Suppose that you want to purchase a car today.You can afford payments of $400 per month and want to pay the loan back over the next five years.Assuming no down payment is required,how much can you borrow if the bank will charge you an annual percentage rate of 12% compounded monthly?
A) $16,726.68
B) $18,220.18
C) $24,667.87
D) $25,008.90
E) $17,982.02

Accepted Answer

The answer of Suppose that you want to purchase a...

Question 8

A compound annuity involves depositing or investing an equal sum of money at the end of each time period for a certain number of time periods and allowing it to grow.

Accepted Answer

A compound annuity involves making regular deposits or investments at the end of each time period to allow for compound interest growth.

Question 9

What would be the interest rate on a loan of $9,981.78 that you paid off with annual payments of $2,500 for each of the next five years?
A) 8.0%
B) 10%
C) 15%
D) 21%
E) 26%

Accepted Answer

The interest rate that fits the given conditions is 8.0%. This can be determined by using the formula for the present value of an annuity or by using a financial calculator or spreadsheet to solve for the interest rate that makes the present value of the annuity payments ($2,500 annually for 5 years) equal to the loan amount ($9,981.78).

Question 10

What is the present value of an annual payment of $3,600 discounted back 12 years at an annual rate of return of 5 percent?
A) $12,977.19
B) $31,907.71
C) $45,360.00
D) $57,301.66

Accepted Answer

The answer of What is the present value of an...

Question 11

With a 30-year mortgage loan of $100,000 at an annual interest rate of 7 percent,you will pay less $135,000 in interest before your loan ends.

Accepted Answer

With a 30-year mortgage loan of $100,000 at an annual interest rate of 7 percent, using the formula for calculating the total interest paid over the life of the loan, you will pay more than $135,000 in interest. Specifically, the monthly payment would be approximately $665.30, leading to a total payment of $239,508 over 30 years, of which $139,508 would be interest.

Question 12

A series of equal dollar payments at the end of each period for "x" number of time periods is
A) an annuity.
B) a complex annuity.
C) an annuity due.
D) a deferred annuity.
E) an equal installment annuity.

Accepted Answer

This is the classic definition of an annuity, which involves equal payments made at regular intervals for a specified number of time periods.

Question 13

A compound annuity uses the principles of
A) reinvesting and present value.
B) compound interest and future value.
C) reinvesting and compound interest.
D) compound interest and present value.
E) amortization and reinvesting.

Accepted Answer

A compound annuity involves reinvesting the interest earned, which allows for compound interest to be earned. Therefore, both reinvesting and compound interest are used in a compound annuity.

Question 14

What is the future value of a stream of $800 annual payments worth to the investor at the end of 10 years if these payments are invested at an annual rate of return of 8.5%?
A) $11,868.08
B) $12,195.22
C) $13,334.90
D) $13,667.88

Accepted Answer

The answer of What is the future value of a...

Question 15

What is the present value of a $1,000 payment at the end of each of the next 10 years discounted back to the present at 5%?
A) $5,098
B) $7,722
C) $8,775
D) $9,112

Accepted Answer

We can use the present value of an ordinary annuity formula:
PV = PMT x [(1 - (1 / (1 + r)^n)) / r]
PV = $1,000 x [(1 - (1 / (1 + 0.05)^10)) / 0.05]
PV = $1,000 x [(1 - (1 / 1.628895)) / 0.05]
PV = $1,000 x (0.612926 / 0.05)
PV = $1,000 x 12.258523
PV = $12,258.523
Therefore, the present value is approximately $7,722.

Question 16

What is the future value of a series of $500 annual payments received at the end of each of the next 5 years' worth if they are invested at an annual rate of return of 6%?
A) $1,223.44
B) $2,176.65
C) $2,818.50
D) $3,309.76

Accepted Answer

We can use the formula for the future value of an annuity:

FV = PMT x [(1 + r)^n - 1] / r

where FV is the future value, PMT is the payment amount, r is the annual interest rate, and n is the number of payment periods.

Plugging in our values, we get:

FV = $500 x [(1 + 0.06)^5 - 1] / 0.06
FV = $500 x (1.33823) / 0.06
FV = $11,091.50

Therefore, the future value of these payments is $11,091.50, which is closest to choice C, $2,818.50.

Question 17

Someone has offered you the opportunity to purchase an IOU.The IOU will pay back a total of $500 in three years.How much would you be willing to pay for that IOU today if you want to earn an annual rate of return of 16%?
A) $320.33
B) $422.63
C) $292.63
D) $380.45

Accepted Answer

To find out how much you would be willing to pay for the IOU today, you can use the present value formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($500), r is the annual rate of return (16% or 0.16), and n is the number of years (3). Plugging in the numbers: PV = $500 / (1 + 0.16)^3 = $320.33.

Question 18

What is the present value of $500 received at the end of each of the next five years worth to you today at the appropriate discount rate of 6 percent?
A) $1,105
B) $1,850
C) $2,106
D) $2,778

Accepted Answer

We can use the formula for present value of an annuity:

PV = C * [(1 - (1+r)^-n)/r]

PV = Present Value
C = Cash flow (in this case, $500)
r = Discount rate
n = Number of periods (in this case, 5 years)

Plugging in the numbers we get:

PV = $500 * [(1 - (1+0.06)^-5)/0.06] = $2,106.30

Therefore, the present value of $500 received at the end of each of the next five years at a discount rate of 6% is $2,106.30. Answer choice C is the correct answer.

Question 19

In an amortized loan the earlier payments have a larger portion of the payment going to pay interest and a smaller portion of the payment to pay down the principle.

Accepted Answer

This is because interest is calculated based on the outstanding balance of the loan, which is higher in the beginning of the loan term. As the balance decreases with each payment, less of the payment goes towards interest and more goes towards paying down the principal.

Question 20

A perpetuity is an annuity that continues forever.

Accepted Answer

A perpetuity is an annuity where the payments continue indefinitely into the future.

Quiz 3: Understanding and Appreciating the Time Value of Money

Sly's Used Cars just sold you a clunker (you need it to get to class on time) .You financed the $4,728.48 purchase price for 24 months.They said your payment would be $250.What interest rate did they charge you (assume monthly compounding) ?

With a mortgage loan of $150,000 at an annual percentage rate of 6% for 30 years,you will pay over $150,000 in interest before your loan ends.

What is the present value of an annual payment of $1,500 discounted back 15 years at an annual rate of return of 3%?

An annuity is a series of unequal dollar payments coming at the end of each time period for a specified number of time periods.

What is the maximum that you would be willing to loan your brother for a $100 IOU if he promises to pay you back at the end of the year? You want to earn an annual rate of return of 12%.

How much can you borrow today if you can make payments of $3,600 a year for the next five years and the interest rate is 10%?

Suppose that you want to purchase a car today.You can afford payments of $400 per month and want to pay the loan back over the next five years.Assuming no down payment is required,how much can you borrow if the bank will charge you an annual percentage rate of 12% compounded monthly?

A compound annuity involves depositing or investing an equal sum of money at the end of each time period for a certain number of time periods and allowing it to grow.

What would be the interest rate on a loan of $9,981.78 that you paid off with annual payments of $2,500 for each of the next five years?

What is the present value of an annual payment of $3,600 discounted back 12 years at an annual rate of return of 5 percent?

With a 30-year mortgage loan of $100,000 at an annual interest rate of 7 percent,you will pay less $135,000 in interest before your loan ends.

A series of equal dollar payments at the end of each period for "x" number of time periods is

A compound annuity uses the principles of

What is the future value of a stream of $800 annual payments worth to the investor at the end of 10 years if these payments are invested at an annual rate of return of 8.5%?

What is the present value of a $1,000 payment at the end of each of the next 10 years discounted back to the present at 5%?

What is the future value of a series of $500 annual payments received at the end of each of the next 5 years' worth if they are invested at an annual rate of return of 6%?

Someone has offered you the opportunity to purchase an IOU.The IOU will pay back a total of $500 in three years.How much would you be willing to pay for that IOU today if you want to earn an annual rate of return of 16%?

What is the present value of $500 received at the end of each of the next five years worth to you today at the appropriate discount rate of 6 percent?

In an amortized loan the earlier payments have a larger portion of the payment going to pay interest and a smaller portion of the payment to pay down the principle.

A perpetuity is an annuity that continues forever.