# Quiz 4: Time Value of Money

Business

Q 1Q 1

Cash flow time lines are used primarily for decisions involving paying off debt or investing in financial securities.
They cannot be used when making decisions about investments in physical assets.

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True False

False

Q 2Q 2

One of the potential benefits of investing early for retirement is that an investor can receive greater benefits from the compounding of interest.

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True False

True

Q 3Q 3

Of all the techniques used in finance, the least important is the concept of the time value of money.

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True False

False

Q 4Q 4

Compounding is the process of converting today's values, which are termed present value, to future value.

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True False

Q 5Q 5

The coupon rate is the rate of return you could earn on alternative investments of similar risk.

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True False

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True False

Q 7Q 7

An amortized loan is a loan that requires equal payments over its life; its payments include both interest and repayment of the debt.

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True False

Q 8Q 8

The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity.

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True False

Q 9Q 9

Suppose an investor can earn a steady 5% annually with investment A, while investment B will yield a constant 12% annually.Within 11 years time, the compounded value of investment B will be more than twice the compounded value of investment A (ignore risk).

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True False

Q 10Q 10

Solving for the interest rate associated with a stream of uneven cash flows, without the use of a calculator, usually involves a trial and error process.

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True False

Q 11Q 11

When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan.

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True False

Q 12Q 12

The effective annual rate is always greater than the simple rate as a result of compounding effects.

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True False

Q 13Q 13

Because we usually assume positive interest rates in time value analyses, the present value of a three-year annuity will always be less than the future value of a single lump sum, if the sum of the annuity payments equals the original lump sum investment.

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True False

Q 14Q 14

All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the sooner the dollar is received the more quickly it can be invested to earn a positive return.

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True False

Q 15Q 15

An annuity is a series of equal payments made at fixed equal-length intervals for a specified number of periods.

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True False

Q 16Q 16

The difference between an ordinary annuity and an annuity due is that each of the payments of the annuity due earns interest for one additional year (period).

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True False

Q 17Q 17

The difference between the PV of an annuity due and the PV of an ordinary annuity is that each of the payments of the annuity due is discounted by one more year.

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True False

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True False

Q 19Q 19

Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will
A)Be higher.
B)Be lower.
C)Stay the same.
D)Cannot tell.
E)Be variable.

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Multiple Choice

Q 20Q 20

You have determined the profitability of a planned project by finding the present value of all the cash flows form that project.Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?
A)The discount rate decreases.
B)The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.
C)The discount rate increases.
D)Answers b and c above.
E)Answers a and b above.

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Multiple Choice

Q 21Q 21

As the discount rate increases without limit, the present value of the future cash inflows
A)Gets larger without limit.
B)Stays unchanged.
C)Approaches zero.
D)Gets smaller without limit, i.e., approaches minus infinity.
E)Goes to ern.

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Multiple Choice

Q 22Q 22

Which of the following statements is most correct?
A)If annual compounding is used, the effective annual rate equals the simple rate.
B)If annual compounding is used, the effective annual rate equals the periodic rate.
C)If a loan has a 12 percent simple rate with semiannual compounding, its effective annual rate is equal to 11.66 percent.
D)Both answers a and b are correct.
E)Both answers a and c are correct.

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Multiple Choice

Q 23Q 23

Why is the present value of an amount to be received (paid) in the future less than the future amount?
A)Deflation causes investors to lose purchasing power when their dollars are invested for greater than one year.
B)Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future.
C)Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted.
D)Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future.
E)None of the above is a correct answer.

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Multiple Choice

Q 24Q 24

By definition, what type of annuity best describes payments such as rent and magazine subscriptions (assuming the costs do not change over time)?
A)ordinary annuity
B)annuity due
C)nonconstant annuity
D)annuity in arrears

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Multiple Choice

Q 25Q 25

What is the effective annual return (EAR) for an investment that pays 10 percent compounded annually?
A)equal to 10 percent
B)greater than 10 percent
C)less than 10 percent
D)This question cannot be answered without knowing the dollar amount of the investment.
E)None of the above is correct.

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Multiple Choice

Q 26Q 26

What is the term used to describe an annuity with an infinite life?
A)perpetuity
B)infinuity
C)infinity due
D)There is no special term for an infinite annuity.

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Multiple Choice

Q 27Q 27

Everything else equal, which of the following conditions will result in the lowest present value of an amount to be received in the future?
A)annual compounding
B)quarterly compounding
C)monthly compounding
D)daily compounding

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Multiple Choice

Q 28Q 28

Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity.If you are a rational wealth-maximizing investor which annuity would you choose?
A)The annuity due.
B)The deferred annuity.
C)Either one, because as the problem is set up, they have the same present value.
D)Without information about the appropriate interest rate, we cannot find the values of the two annuities, hence we cannot tell which is better.
E)The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred.

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Multiple Choice

Q 29Q 29

Which of the following statements is correct?
A)For all positive values of r and n, FVIFr, n ≥ 1.0 and PVIFAr, n ≥ n.
B)You may use the PVIF tables to find the present value of an uneven series of payments.However, the PVIFA tables can never be of use, even if some of the payments constitute an annuity (for example, $100 each year for Years 3, 4, and 5), because the entire series does not constitute an annuity.
C)If a bank uses quarterly compounding for saving accounts, the simple rate will be greater than the effective annual rate.
D)The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases.
E)All of the above statements are false.

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Multiple Choice

Q 30Q 30

Which of the following statements is correct?
A)Other things held constant, an increase in the number of discounting periods per year increases the present value of a given annual annuity.
B)Other things held constant, an increase in the number of discounting periods per year increases the present value of a lump sum to be received in the future.
C)The payment made each period under an amortized loan is constant, and it consists of some interest and some principal.The later we are is the loan's life, the smaller the interest portion of the payment.
D)There is an inverse relationship between the present value interest factor of an annuity and the future value interest factor of an annuity, (i.e., one is the reciprocal of the other).
E)Each of the above statements is true.

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Multiple Choice

Q 31Q 31

A $10,000 loan is to be amortized over 5 years, with annual end-of-year payments.Given the following facts, which of these statements is correct?
A)The annual payments would be larger if the interest rate were lower.
B)If the loan were amortized over 10 years rather than 5 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 5-year amortization plan.
C)The last payment would have a higher proportion of interest than the first payment.
D)The proportion of interest versus principal repayment would be the same for each of the 5 payments.
E)The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were higher.

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Multiple Choice

Q 32Q 32

Which of the following statements is correct?
A)Simple rates can't be used in present value or future value calculations because they fail to account for compounding effects.
B)The periodic interest rate can be used directly in calculations as long as the number of payments per year is greater than or equal to the number of compounding periods per year.
C)In all cases where interest is added or payments are made more frequently than annually, the periodic rate is less than the annual rate.
D)Generally, the APR is greater than the EAR as a result of compounding effects.
E)If the compounding period is semiannual then the periodic rate will equal the effective annual rate divided by two.

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Multiple Choice

Q 33Q 33

All else equal, if you expect to receive a certain amount in the future, say, $500 in ten (10) years, the present value of that future amount will be lowest if the interest earned on such investments is compounded
A)daily
B)weekly
C)monthly
D)quarterly
E)annually

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Multiple Choice

Q 34Q 34

Which of the following payments (receipts) would probably not be considered an annuity due? Based on your knowledge and using logic, think about the timing of the payments.
A)rent payments associated with a five-year lease
B)payments for a magazine subscription for a two-year period where the payments are made annually
C)interest payments associated with a corporate bond that was issued today
D)annual payments associated with lottery winnings that are paid out as an annuity

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Multiple Choice

Q 35Q 35

All else equal, the future value of a lump-sum amount invested today will increase if the
A)interest rate that is earned is lowered.
B)number of compounding periods is increased.
C)investment time period is shortened.
D)amount initially invested is lowered.
E)Two or more of the above answers are correct.

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Multiple Choice

Q 36Q 36

Susan just signed a long-term lease on a townhouse in New York City (near Central Park) that requires her to make equal monthly payments for the next five years.The payments Susan has promised to make represent a(n)
the landlord.
A)ordinary annuity
B)annuity due
C)series of uneven cash flows
D)perpetuity

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Multiple Choice

Q 37Q 37

Suppose that the present value of receiving a guaranteed $450 in two years is $385.80.The opportunity rate of return on similar risk investments is 8 percent.According to this information, all else equal, which of the following statements is correct?
A)It always would be preferable to wait two years to receive the $450 because this value is greater than the present value.
B)Risk averse investors always would prefer to take the $385.80 today because it is a guaranteed amount whereas there is uncertainty as to whether the future amount will be paid.
C)No investor should be willing to pay more than $385.80 for such an investment.
D)It is apparent the present value was computed incorrectly because the present value of a future amount always should be greater than the future value.
E)None of the above is a correct answer.

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Multiple Choice

Q 38Q 38

You plan to invest an amount of money in five-year certificate of deposit (CD) at your bank.The stated interest rate applied to the CD is 12 percent, compounded monthly.How much must you invest if you want the balance in the CD account to be $8,500 in five years?
A)$4,678.82
B)$4,823.13
C)$13,600.00
D)$14,979.90
E)$7,589.29

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Multiple Choice

Q 39Q 39

Vegit Corporation needs to borrow funds to support operations during the summer.Vegit's CFO is trying to decide whether to borrow from the Bank of Florida or the Bank of Georgia.The loan offered by Bank of Florida has a 12.5 percent simple interest rate with annual interest payments, whereas the loan offered by the Bank of Georgia has a 12 percent simple interest rate with monthly payments.Which bank should Vegit use for the loan?
A)Bank of Georgia, because the 12 percent simple interest is cheaper than the 12.5 percent simple interest at Bank of Florida.
B)Bank of Georgia, because the effective interest rate on the loan is less than 12 percent, whereas the effective interest rate on the loan at the Bank of Florida is greater than 12.5 percent.
C)Bank of Florida, because the simple interest rate is higher, which means that Vegit will be able to invest the proceeds from the loan at a higher rate of return.
D)Bank of Florida, because the effective interest rate on the loan is 12.5 percent, which is less than the 12.7 percent effective interest rate on the loan offered by the Bank of Georgia.
E)There is not enough information to answer this question.

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Multiple Choice

Q 40Q 40

Alice's investment advisor is trying to convince her to purchase an investment that pays $250 per year.The investment has no maturity; therefore the $250 payment will continue every year forever.Alice has determined that her required rate of return for such an investment should be 14 percent and that she would hold the investment for 10 years and then sell it.If Alice decides to buy the investment, she would receive the first $250 payment one year from today.How much should Alice be willing to pay for this investment?
A)$1,304.03, because this is the present value of an ordinary annuity that pays $250 a year for 10 years at 14 percent.
B)$1,486.59, because this is the present value of an annuity due that pays $250 a year for 10 years at 14 percent.
C)$1,785.71, because this is the present value of a $250 perpetuity at 14 percent.
D)There is not enough information to answer this question, because the selling price of the investment in 10 years is not known today.
E)None of the above is correct.

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Multiple Choice

Q 41Q 41

At approximately what rate would you have to invest a lump-sum amount today if you need the amount to triple in six years? Assume interest is compounded annually.
A)20%
B)12%
C)24%
D)Not enough information is provided to answer the question.
E)None of the above is a correct answer.

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Multiple Choice

Q 42Q 42

Sarah is thinking about purchasing an investment from HiBond Investing.If she buys the investment, Sarah will receive $100 every three months for five years.The first $100 payment will be made as soon as she purchases the investment.If Sarah's required rate of return is 16 percent, to the nearest dollar, how much should she be willing to pay for this investment?
A)$1,359
B)$1,413
C)$1,112
D)$1,519
E)$1,310

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Multiple Choice

Q 43Q 43

Which of the following statements is most correct?
A)The first payment under a 3-year, annual payment, amortized loan for $1,000 will include a smaller percentage (or fraction) of interest if the interest rate is 5 percent than if it is 10 percent.
B)If you are lending money, then, based on effective interest rates, you should prefer to lend at a 10 percent simple, or quoted, rate but with semiannual payments, rather than at a 10.1 percent simple rate with annual payments.However, as a borrower you should prefer the annual payment loan.
C)The value of a perpetuity (say for $100 per year) will approach infinity as the interest rate used to evaluate the perpetuity approaches zero.
D)Statements a, b, and c are all true.
E)Only statements b and c are true.

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Multiple Choice

Q 44Q 44

A recent advertisement in the financial section of a magazine carried the following claim: "Invest your money with us at 14 percent, compounded annually, and we guarantee to double your money sooner than you imagine." Ignoring taxes, how long would it take to double your money at a simple rate of 14 percent, compounded annually?
A)Approximately 3.5 years
B)Approximately 5 years
C)Exactly 7 years
D)Approximately 10 years
E)Exactly 14 years

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Multiple Choice

Q 45Q 45

At an effective annual interest rate of 20 percent, how many years will it take a given amount to triple in value? (Round to the closest year.)
A)5
B)8
C)6
D)10
E)9

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Multiple Choice

Q 46Q 46

You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college.Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account.How much money will you receive?
A)$1,171
B)$1,126
C)$1,082
D)$1,163
E)$1,008

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Multiple Choice

Q 47Q 47

What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?
A)$670.44
B)$842.91
C)$1,169.56
D)$1,522.64
E)$1,348.48

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Multiple Choice

Q 48Q 48

If a 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment?
A)$240.42
B)$263.80
C)$300.20
D)$315.38
E)$346.87

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Multiple Choice

Q 49Q 49

You have the opportunity to buy a perpetuity which pays $1,000 annually.Your required rate of return on this investment is 15 percent.You should be essentially indifferent to buying or not buying the investment if it were offered at a price of
A)$5,000.00
B)$6,000.00
C)$6,666.67
D)$7,500.00
E)$8,728.50

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Multiple Choice

Q 50Q 50

Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Y all cash flows to be received at the end of the year.If you require a 14 percent rate of return, what is the present val cash flows?
A)$9,851
B)$13,250
C)$11,714
D)$15,129
E)$17,353

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Multiple Choice

Q 51Q 51

If $100 is placed in an account that earns a simple 4 percent, compounded quarterly, what will it be worth in 5 years?
A)$122.02
B)$105.10
C)$135.41
D)$120.90
E)$117.48

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Multiple Choice

Q 52Q 52

In 1958 the average tuition for one year at an Ivy League school was $1,800.Thirty years later, in 1988, the average cost was $13,700.What was the growth rate in tuition over the 30-year period?
A)12%
B)9%
C)6%
D)7%
E)8%

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Multiple Choice

Q 53Q 53

At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years.How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4%?
A)12 years
B)15 years
C)18 years
D)20 years
E)23 years

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Multiple Choice

Q 54Q 54

Gomez Electronics needs to arrange financing for its expansion program.Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent.Bank B will charge 9 percent, with interest due at the end of the year.What is the difference in the effective annual rates charged by the two banks?
A)0.25%
B)0.50%
C)0.70%
D)1.00%
E)1.25%

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Multiple Choice

Q 55Q 55

Assume that you can invest to earn a stated annual rate of return of 12 percent, but where interest is compounded semiannually.If you make 20 consecutive semiannual deposits of $500 each, with the first deposit being made today, what will your balance be at the end of Year 20?
A)$52,821.19
B)$57,900.83
C)$58,988.19
D)$62,527.47
E)$64,131.50

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Multiple Choice

Q 56Q 56

Assume you are to receive a 20-year annuity with annual payments of $50.The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 20.You will invest each payment in an account that pays 10 percent.What will be the value in your account at the end of Year 30?
A)$6,354.81
B)$7,427.83
C)$7,922.33
D)$8,591.00
E)$6,752.46

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Multiple Choice

Q 57Q 57

You expect to receive $1,000 at the end of each of the next 3 years.You will deposit these payments into an account which pays 10 percent compounded semiannually.What is the future value of these payments, that is, the value at the end of the third year?
A)$3,000
B)$3,310
C)$3,318
D)$3,401
E)$3,438

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Multiple Choice

Q 58Q 58

You just graduated, and you plan to work for 10 years and then to leave for the Australian "Outback" bush country. You figure you can save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years.These savings cash flows will start one year from now.In addition, your family has just given you a $5,000 graduation gift.If you put the gift now, and your future savings when they start, into an account which pays 8 percent compounded annually, what will your financial "stake" be when you leave for Australia 10 years from now?
A)$21,432
B)$28,393
C)$16,651
D)$31,148
E)$20,000

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Multiple Choice

Q 59Q 59

As the winning contestant in a television game show, you are considering the prizes to be awarded.You must indicat sponsor which of the following two choices you prefer, assuming you want to maximize your wealth.Assume it is no January 1, and there is no danger whatever that the sponsor won't pay off. (1)
$1,000 now and another $1,000 at the beginning of each of the 11 subsequent months during the remainder of the year, to be deposited in an account paying 12 percent simple annual rate, but compounded monthly (to be left on deposit for the year).
(2) $12,750 at the end of the year.
Which one would you choose?
A)Choice 1
B)Choice 2
C)Choice 1, if the payments were made at the end of the year.
D)The choice would depend on how soon you need the money.
E)Either one, since they have the same present value.

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Multiple Choice

Q 60Q 60

You want to buy a Nissan 350Z on your 27th birthday.You have priced these cars and found that they currently sell for $30,000.You believe that the price will increase by 5 percent per year until you are ready to buy.You can presently invest to earn 14 percent.If you just turned 20 years old, how much must you invest at the end of each of the next 7 years to be able to purchase the Nissan in 7 years?
A)$4,945.57
B)$3,933.93
C)$7,714.72
D)$3,450.82
E)$6,030.43

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Multiple Choice

Q 61Q 61

Assume that your required rate of return is 12 percent and you are given the following stream of cash flows: If payments are made at the end of each period, what is the present value of the cash flow stream?
A)$66,909
B)$57,323
C)$61,815
D)$52,345
E)$62,029

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Multiple Choice

Q 62Q 62

You are given the following cash flows.What is the present value (t = 0) if the discount rate is 12 percent?
A)$3,277
B)$4,804
C)$5,302
D)$4,289
E)$2,804

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Multiple Choice

Q 63Q 63

You are given the following cash flow information.The appropriate discount rate is 12 percent for Years 1-5 and 10 percent for Years 6-10.Payments are received at the end of the year. Year Amount
1-5 $20,000
6-10 $25,000
What should you be willing to pay right now to receive the income stream above?
A)$166,866
B)$158,791
C)$225,000
D)$125,870
E)$198,433

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Multiple Choice

Q 64Q 64

A project with a 3-year life has the following probability distributions for possible end of year cash flows in each of the next three years: Using an interest rate of 8 percent, find the expected present value of these uncertain cash flows.(Hint: Find the expected cash flow in each year, then evaluate those cash flows.)
A)$1,204.95
B)$835.42
C)$1,519.21
D)$1,580.00
E)$1,347.61

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Multiple Choice

Q 65Q 65

If you buy a factory for $250,000 and the terms are 20 percent down, the balance to be paid off over 30 years at a 1 rate of interest on the unpaid balance, what are the 30 equal annual payments?
A)$20,593
B)$31,036
C)$24,829
D)$50,212
E)$6,667

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Multiple Choice

Q 66Q 66

In its first year of operations, 2002, the Gourmet Cheese Shoppe had earnings per share (EPS) of $0.26.Four years l in 2006, EPS was up to $0.38, and 7 years after that, in 2013, EPS was up to $0.535.It appears that the first 4 years represented a supernormal growth situation and since then a more normal growth rate has been sustained.What are rates of growth for the earlier period and for the later period?
A)6%; 5%
B)6%; 3%
C)10%; 8%
D)10%; 5%
E)12%; 7%

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Multiple Choice

Q 67Q 67

Steaks Galore needs to arrange financing for its expansion program.One bank offers to lend the required $1,000,000 on a loan which requires interest to be paid at the end of each quarter.The quoted rate is 10 percent, and the principal must be repaid at the end of the year.A second lender offers 9 percent, daily compounding (365-day year), with interest and principal due at the end of the year.What is the difference in the effective annual rates (EFF%) charged by the two banks?
A)0.31%
B)0.53%
C)0.75%
D)0.96%
E)1.25%

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Multiple Choice

Q 68Q 68

You are currently at time period 0, and you will receive the first payment on an annual payment annuity of $100 in perpetuity at the end of this year.Six full years from now you will receive the first payment on an additional $150 in perpetuity, and at the end of time period 10 you will receive the first payment on an additional $200 in perpetuity.If you require a 10 percent rate of return, what is the combined present value of these three perpetuities?
A)$2,349.50
B)$2,526.85
C)$2,685.42
D)$2,779.58
E)$2,975.40

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Multiple Choice

Q 69Q 69

Find the present value of an income stream which has a negative flow of $100 per year for 3 years, a positive flow o $200 in the 4th year, and a positive flow of $300 per year in Years 5 through 8.The appropriate discount rate is 4 percent for each of the first 3 years and 5 percent for each of the later years.Thus, a cash flow accruing in Year 8 should be discounted at 5 percent for some years and 4 percent in other years.All payments occur at year-end.
A)$528.21
B)$1,329.00
C)$792.49
D)$1,046.41
E)$875.18

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Multiple Choice

Q 70Q 70

Assume that you are graduating, that you plan to work for 4 years, and then to go to law school for 3 years.Right now, going to law school would require $17,000 per year (for tuition, books, living expenses, etc.), but you expect this cost to rise by 8 percent per year in all future years.You now have $25,000 invested in an investment account which pays a simple annual rate of 9 percent, quarterly compounding, and you expect that rate of return to continue into the future.You want to maintain the same standard of living while in law school that $17,000 per year would currently provide.You plan to save and to make 4 equal payments (deposits) which will be added to your account at the end of each of the next 4 years; these new deposits will earn the same rate as your investment account currently earns. How large must each of the 4 payments be in order to permit you to make 3 withdrawals, at the beginning of each of your 3 years in law school? (Note: (1) The first payment is made a year from today and the last payment 4 years from today, (2) the first withdrawal is made 4 years from today, and (3) the withdrawals will not be of a constant amount.)
A)$13,242.67
B)$6,562.13
C)$10,440.00
D)$7,153.56
E)$14,922.85

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Multiple Choice

Q 71Q 71

You want to borrow $1,000 from a friend for one year, and you propose to pay her $1,120 at the end of the year. She agrees to lend you the $1,000, but she wants you to pay her $10 of interest at the end of each of the first 11 months plus $1,010 at the end of the 12th month.How much higher is the effective annual rate under your friend's proposal than under your proposal?
A)0.00%
B)0.45%
C)0.68%
D)0.89%
E)1.00%

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Multiple Choice

Q 72Q 72

Suppose you put $100 into a savings account today, the account pays a simple annual interest rate of 6 percent, but compounded semiannually, and you withdraw $100 after 6 months.What would your ending balance be 20 years afte initial $100 deposit was made?
A)$226.20
B)$115.35
C)$62.91
D)$9.50
E)$3.00

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Multiple Choice

Q 73Q 73

A bank pays a quoted annual (simple) interest rate of 8 percent.However, it pays interest (compounds) daily using a 365-day year.What is the effective annual rate of return?
A)7.86%
B)7.54%
C)8.57%
D)8.33%
E)9.21%

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Multiple Choice

Q 74Q 74

You can deposit your savings at the Darlington National Bank, which offers to pay 12.6 percent interest compounded monthly, or at the Bartlett Bank, which will pay interest of 11.5 percent compounded daily.(Assume 365 days in a year.) Which bank offers the higher effective annual rate?
A)Darlington National Bank.
B)Bartlett Bank.
C)Both banks offer the same effective rate.
D)Cannot be determined from the information provided.
E)Workable only if the banks use the same compounding period.

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Multiple Choice

Q 75Q 75

You have just taken out a 30-year, $120,000 mortgage on your new home.This mortgage is to be repaid in 360 equal of-month installments.If each of the monthly installments is $1,500, what is the effective annual interest rate on this mortgage?
A)15.87%
B)14.75%
C)13.38%
D)16.25%
E)16.49%

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Multiple Choice

Q 76Q 76

You have just borrowed $20,000 to buy a new car.The loan agreement calls for 60 monthly payments of $444.89 ea to begin one month from today.If the interest is compounded monthly, then what is the effective annual rate on this loan?
A)12.68%
B)14.12%
C)12.00%
D)13.25%
E)15.08%

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Multiple Choice

Q 77Q 77

Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually.Bank B offers a 2- year CD that is compounded semi-annually.The CDs have identical risk.What is the stated, or simple, rate that Bank B would have to offer to make you indifferent between the two investments?
A)9.67%
B)9.76%
C)9.83%
D)9.87%
E)9.93%

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Multiple Choice

Q 78Q 78

Assume that you inherited some money.A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling some securities which call for four payments, $50 at the end of each of the next 3 years, plus a payment of $1,050 at the end of Year 4.Your friend says she can get you some of these securities at a cost of $900 each.Your money is now invested in a bank that pays an 8 percent simple (quoted) interest rate, but with quarterly compounding.You regard the securities as being just as safe, and as liquid, as your bank deposit, so your required effective annual rate of return on the securities is the same as that on your bank deposit.You must calculate the value of the securities to decide whether they are a good investment.What is their present value to you?
A)$1,000
B)$866
C)$1,050
D)$901
E)$893

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Multiple Choice

Q 79Q 79

Your company is planning to borrow $1,000,000 on a 5-year, 15 percent, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal?
A)29.83%
B)57.18%
C)35.02%
D)64.45%
E)72.36%

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Multiple Choice

Q 80Q 80

The Desai Company just borrowed $1,000,000 for 3 years at a quoted rate of 8 percent, quarterly compounding.The loan is to be amortized in end-of-quarter payments over its 3-year life.How much interest (in dollars) will your company have to pay during the second quarter?
A)$15,675.19
B)$18,508.81
C)$21,205.33
D)$24,678.89
E)$28,111.66

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Multiple Choice

Q 81Q 81

You have a 30-year mortgage with a simple annual interest rate of 8.5 percent.The monthly payment is $1,000. What percentage of your total payments over the first three years goes toward the repayment of principal?
A)1.50%
B)3.42%
C)5.23%
D)6.75%
E)8.94%

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Multiple Choice

Q 82Q 82

Your company must make payments of $100,000 each year for 10 years, with the first payment to be made 10 years from today.To prepare for these payments, your company must make 10 equal annual deposits into an account whic pays a simple interest rate of 7 percent, daily compounding (360-day year).Funds will remain in the account during both the accumulation period (the first 10 years) and the distribution period (the last 10 years), and the same interest rate will be earned throughout the entire 20 years.The first deposit will be made immediately.How large must each deposit be?
A)$47,821.11
B)$49,661.86
C)$51,234.67
D)$52,497.33
E)$53,262.39

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Multiple Choice

Q 83Q 83

Assume that you just had a child, and you are now planning for her college education.You would like to make 43 equal payments over the next 21 years (the first payment to be made immediately, all other payments to be made at 6-month intervals, with the final payment to be made at her 21st birthday) so that you will be able to cover her expected expenses while in school.You expect to pay expenses on her 18th, 19th, 20th, and 21st birthdays.Assume that the current (time period 0) annual cost of college is $6,000, that you expect annual inflation to be 8 percent for the next 5 years, and then 5 percent thereafter.If you expect to be able to earn a return of 4 percent every 6 months on your investments (a simple rate of 8 percent with semiannual compounding), what will be the amount of each of the 43 payments?
A)$705.86
B)$731.93
C)$692.15
D)$650.46
E)$785.72

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Multiple Choice

Q 84Q 84

Your father, who is 60, plans to retire in 2 years, and he expects to live independently for 3 years.He wants a retirement income which has, in the first year, the same purchasing power as $40,000 has today.However, his retirement income will be of a fixed amount, so his real income will decline over time.His retirement income will start the day he retires, 2 years from today, and he will receive a total of 3 retirement payments.Inflation is expected to be constant at 5 percent.Your father has $100,000 in savings now, and he can earn 8 percent on savings now and in the future.How much must he save each year, starting today, to meet his retirement goals?
A)$1,863
B)$2,034
C)$2,716
D)$5,350
E)$6,102

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Multiple Choice

Q 85Q 85

You are considering an investment in a 40-year security.The security will pay $25 a year at the end of each of the first three years.The security will then pay $30 a year at the end of each of the next 20 years.The simple interest rate is assumed to be 8 percent, and the current price (present value) of the security is $360.39.Given this information, what is the equal annual payment to be received from Year 24 through Year 40 (i.e., for 17 years)?
A)$35
B)$38
C)$40
D)$45
E)$50

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Multiple Choice

Q 86Q 86

You are currently saving for your child's college education.The current cost of college is $10,000 a year.You expect that college costs will continue to increase at a rate of 5 percent a year.Your child is scheduled to begin attending a four-year college 10 years from now .You currentl have $25,000 in an account which earns 6 percent after taxes.You would like to have all of the necessary savings by the time your child enters college, and you would like to contribute a constant amount at the beginning of each of the next 10 years in order to provide the necessary amount.(You want to make 10 equal contributions starting in Year 0 and ending at Year 9.) How much should you contribute to the account each year in order to fully provide for your child's education?
A)$1,133.16
B)$1,393.42
C)$1,477.02
D)$1,507.81
E)$1,622.33

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Multiple Choice

Q 87Q 87

You will receive a $100 annual perpetuity, the first payment to be received now, at Year 0, a $300 annual perpetuity payable starting at the end of Year 5, and a $200 semiannual (2 payments per year) perpetuity payable starting midw through Year 10.If you require an effective annual interest rate of 14.49 percent, what is the present value of all thr perpetuities together at Year 0? (Hint: The semiannual annuity can be thought of as two annual annuities.)
A)$2,091.86
B)$2,785.14
C)$4,213.51
D)Infinite; the present value of any perpetuity is infinite.
E)Cannot determine the value since some payments are annually and some semiannually.

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Multiple Choice

Q 88Q 88

You have some money on deposit in a bank account which pays a simple (or quoted) rate of 8.0944 percent, but with interest compounded daily (using a 365-day year).Your friend owns a security which calls for the payment of $10,000 after 27 months.The security is just as safe as your bank deposit, and your friend offers to sell it to you for
$8,000.If you buy the security, by how much will the effective annual rate of return on your investment change?
A)1.87%
B)1.53%
C)2.00%
D)0.96%
E)0.44%

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Multiple Choice

Q 89Q 89

Your employer has agreed to make 80 quarterly payments of $400 each into a trust account to fund your early retirement.The first payment will be made 3 months from now.At the end of 20 years (80 payments), you will be pa 10 equal annual payments, with the first payment to be made at the beginning of Year 21 (or the end of Year 20).Th funds will be invested at a simple rate of 8.0 percent, quarterly compounding, during both the accumulation and the distribution periods.How large will each of your 10 receipts be? (Hint: You must find the EAR and use it in one of your calculations.)
A)$7,561
B)$10,789
C)$11,678
D)$12,342
E)$13,119

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Multiple Choice