Question 1

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

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The answer of Suppose you have $1,500 and plan to...

Question 2

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 3

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Accepted Answer

Bank 5 offers the highest effective rate of interest with daily compounding as it compounds interest 365 times a year, resulting in a higher return compared to other options.

Question 4

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

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The answer of Which of the following investments would have...

Question 5

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

Compound interest results in a higher effective annual rate than the nominal rate. Therefore, if an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%. The other statements are either false or do not provide enough information to determine their accuracy.

Question 6

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

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The answer of Which of the following investments would have...

Question 7

You are considering two equally risky annuities, each of which pays
$5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Accepted Answer

An annuity due has payments at the beginning of each period, so its present value is higher than that of an ordinary annuity, which has payments at the end of each period.

Question 8

You are considering two equally risky annuities, each of which pays
$5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Accepted Answer

An ordinary annuity (ORD) pays at the end of each period, while an annuity due (DUE) pays at the beginning of each period. The future value of an annuity due is always greater than the future value of an ordinary annuity given the same interest rate and number of payments because payments are made one period sooner. For this reason, we can eliminate choices A and C.

To compare the present values of ORD and DUE, we need to discount each cash flow for each annuity. Since both annuities have the same payments and interest rates, their present values will differ only because of the timing of payments. As stated before, the payments from DUE occur one period sooner than the payments from ORD, so the present value of DUE will be higher than the present value of ORD. Therefore, we eliminate choices A and E.

The only option left is choice D, which states that the present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. This is correct, so the answer is D.

Question 9

Which of the following bank accounts has the lowest effective annual return?

Accepted Answer

The answer of Which of the following bank accounts has...

Question 10

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

The answer of Which of the following statements is CORRECT,...

Question 11

Which of the following statements regarding a 15-year (180-month)
$125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Accepted Answer

A fixed-rate mortgage has a constant monthly payment, which includes both interest and principal payments. The payment remains constant throughout the entire duration of the loan. The other options are incorrect because they either suggest the balance or payments change over time, which is not true for a fixed-rate mortgage.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 13

A $150,000 loan is to be amortized over 7 years, with annual end-of- year payments. Which of these statements is CORRECT?

Accepted Answer

The answer of A $150,000 loan is to be amortized...

Question 14

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Accepted Answer

The proportion of interest to principal in each monthly payment is determined by the amortization schedule, which is based on the loan amount, interest rate, and term. In a 30-year mortgage with a nominal interest rate of 10%, the first few years of payments will be mostly interest and less principal, while the later years will be mostly principal and less interest. Therefore, the answer is B.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 16

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Accepted Answer

For a 30-year monthly payment amortized mortgage with a nominal interest rate of 10%, the monthly payments will remain the same, but the proportion of the payment that goes towards interest and principal will change over time. In the early years, a larger portion of the payment will go towards interest, while in the later years, a larger portion will go towards principal. Therefore, the statement that a smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment, is correct. The statement that the total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity is incorrect, as the opposite is true, and the statement about the interest rate comparison is irrelevant to the question. The statement that exactly 10% of the first monthly payment represents interest is also incorrect.

Question 17

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Accepted Answer

The answer of Last year Rocco Corporation's sales were $225...

Question 18

Which of the following statements is CORRECT?

Accepted Answer

The present value of an annuity due is greater than that of an ordinary annuity because payments are received earlier, resulting in less discounting.

Question 19

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

The answer of Suppose you have $2,000 and plan to...

Question 20

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Accepted Answer

The answer of A U.S. Treasury bond will pay a...

Quiz 4: Time Value of Money

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Which of the following statements is CORRECT?

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

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

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Which of the following bank accounts has the lowest effective annual return?

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Which of the following statements is CORRECT?

A $150,000 loan is to be amortized over 7 years, with annual end-of- year payments. Which of these statements is CORRECT?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Which of the following statements is CORRECT?

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?