Question 1

Assume a five-year equal payment amortization schedule with an annual interest rate of 7% and annual payments.If the beginning principal is $8,000,then the first interest payment will be how large?
A)$560.00
B)$960.00
C)$1,219.28
D)There is not enough information to answer this question.

Accepted Answer

The first interest payment is calculated by multiplying the initial principal by the annual interest rate: $8,000 * 7% = $560.

Question 2

You have a choice among three types of loan and wish to pay the LEAST total cash flows.An amortized loan will result in fewer dollars paid out than a discount or an interest-only loan for the same amount,positive interest rate,and time period.

Accepted Answer

An amortized loan includes both principal and interest payments, whereas a discount or interest-only loan only includes interest payments. Therefore, an amortized loan will result in fewer total cash flows over time because you are paying off both principal and interest.

Question 3

Amortization tables are common and can be used for all but which of the following?
A)Car loans
B)Mortgage loans
C)Consumer product loans
D)Amortization tables may be used for all of the above.

Accepted Answer

Amortization tables can be used for all types of loans, including car loans, mortgage loans, and consumer product loans. The table shows the amount of interest and principal paid with each payment and the remaining balance to be paid off over time.

Question 4

Amortization tables are useful for each of the following reasons EXCEPT ________.
A)determining the principal balance due if the loan is being paid off early
B)determining how much of a total payment is interest and how much is principal for tax purposes
C)determining the regular periodic total payment
D)All of these are useful purposes of an amortization table.

Accepted Answer

Amortization tables are indeed useful for determining the principal balance due if the loan is being paid off early, how much of a total payment is interest versus principal (which is important for tax purposes), and the regular periodic total payment. Therefore, there is no exception listed among the options provided.

Question 5

Marie has a $1,200,000 investment portfolio and she wishes to spend $87,500 per year as an ordinary annuity.If the investment account earns 5% annually,how long will her portfolio last? Use a calculator to determine your answer.
A)11.43 years
B)14.17 years
C)19.86 years
D)23.72 years

Accepted Answer

The answer of Marie has a $1,200,000 investment portfolio and...

Question 6

Your firm intends to finance the purchase of a new construction crane.The cost is $2,500,000.What is the size of the first payment if the crane is financed with an interest-only loan at an annual rate of 7.50%?
A)$187,500.00
B)$127,500.00
C)$3,391,475.16
D)There is not enough information to answer this question.

Accepted Answer

The first payment for an interest-only loan would be the annual interest on the total amount borrowed. This is calculated as $2,500,000 * 7.50% = $187,500.00.

Question 7

If you borrow $5,000 at an annual interest rate of 9.0% for six years,what will your repayment(s)be if this is a discount loan?

Accepted Answer

The answer of If you borrow $5,000 at an annual...

Question 8

Your firm intends to finance the purchase of a new construction crane.The cost is $2,500,000.How large is the payment at the end of year ten if the crane is financed at a rate of 7.50% as a discount loan?
A)$5,152,578.91
B)$4,158,364.87
C)$3,391,475.16
D)There is not enough information to answer this question.

Accepted Answer

The payment at the end of year ten can be calculated using the formula for the future value of a lump sum: FV = PV(1 + r)^n. Here, PV = $2,500,000, r = 7.50% or 0.075, and n = 10 years. Plugging these values into the formula gives FV = $2,500,000 * (1 + 0.075)^10 = $5,152,578.91.

Question 9

Your parents have an investment portfolio of $450,000,and they wish to take out cash flows of $60,000 per year as an ordinary annuity.How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%? Use a calculator to determine your answer.
A)8.00 years
B)9.10 years
C)9.35 years
D)10.14 years

Accepted Answer

To find out how long the portfolio will last, we can use the formula for the present value of an ordinary annuity:

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

where PV is the present value of the annuity, C is the annual cash flow, r is the annual interest rate, and n is the number of periods (in years).

Substituting the given values, we get:

450,000 = (60,000/0.045) x (1 - (1+0.045)^(-n))

Multiplying both sides by (0.045/60,000) and simplifying, we get:

n = -ln(1 - 0.045/60,000 x 450,000)/ln(1+0.045) = 9.35 years

Therefore, the best choice is C.

Question 10

The first interest payment on a 5-year,8%,$100,000,fully-amortized loan with annual payments will be less than the last interest payment.

Accepted Answer

The interest portion of each payment decreases over time as the loan is paid off, so the first interest payment will be higher than the last interest payment.

Question 11

Complete the equal-payments three-year amortization table. $$\begin{array} { | c | c | c | c | c | c | } 
\hline \text { Year } & \begin{array} { c } 
\text { Beginning } \
\text { Principal }
\end{array} & \text { Payment } & \begin{array} { c } 
\text { Interest } \
\text { Expense }
\end{array} & \begin{array} { c } 
\text { Principal } \
\text { Reduction }
\end{array} & \begin{array} { c } 
\text { Ending } \
\text { Principal }
\end{array} \
\hline 1 & \$ 6,000.00 & & \$ 480.00 & & \$ 4,151.80 \
\hline 2 & & \$ 2,328.20 & & \$ 1,996.06 & \
\hline 3 & \$ 2,155.74 & & & & \
\hline
\end{array}$$

Accepted Answer

The answer of Complete the equal-payments three-year amortization table. \[\begin{array}...

Question 12

Your firm intends to finance the purchase of a new construction crane.The cost is $2,500,000.What is the size of the annual ordinary annuity payment if the loan is amortized over a ten-year period at a rate of 7.50%?
A)$228,611.56
B)$364,214.82
C)$3,391,475.16
D)There is not enough information to answer this question.

Accepted Answer

The answer of Your firm intends to finance the purchase...

Question 13

You have saved $44,000 for college and wish to use $12,000 per year.If you use the money as an ordinary annuity and earn 5.15% on your investment,how many years will your annuity last? Use a calculator to determine your answer.
A)4.27 years
B)4.17 years
C)3.59 years
D)3.36 years

Accepted Answer

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

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

where PV is the present value (in this case, the amount saved for college), PMT is the yearly payment (in this case, $12,000), r is the annual interest rate (5.15%), and n is the number of years.

Plugging in the values, we get:

$44,000 = $12,000 x ((1 - (1+0.0515)^(-n))/0.0515)

Solving for n using a calculator or spreadsheet, we get:

n = 4.17 years

So the answer is choice B.

Question 14

If you borrow $5,000 at an annual interest rate of 9.0% for six years,what will your repayment(s)be if this is an interest-only loan?

Accepted Answer

The answer of If you borrow $5,000 at an annual...

Question 15

The last interest payment on a 12-year,6%,$138,000,fully-amortized loan with annual payments will be less than the first interest payment.

Accepted Answer

In a fully amortized loan, the payments are structured so that the amount of interest decreases over time as the principal is paid down, making the last interest payment less than the first.

Question 16

Once you begin making payments on an amortization schedule for a loan such as a mortgage or car loan,most contracts clearly state that you may NOT pay off the loan early.

Accepted Answer

Most contracts do not prohibit early loan repayment, in fact, many loans offer incentives for early repayment such as lower interest rates or no prepayment penalties. However, it is always important to read the terms and conditions of any loan contract to fully understand the repayment options and any associated fees or penalties.

Question 17

Which of the following is NOT true with regard to an amortization table?
A)The interest payment for a period is equal to the periodic interest rate multiplied by the beginning-of-the-period principal balance.
B)The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment.
C)The total payment is calculated by using the present value of an annuity formula.
D)All of the above are true.

Accepted Answer

The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal balance less the principal portion of the payment for that period, not less the total payment. The total payment includes both principal and interest components.

Question 18

Which of the following is NOT true regarding the total payment in an equal payment amortization table?
A)The total payment for any period is equal to the principal plus interest payments for that same period.
B)The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment.
C)The final total payment will be greater than the beginning principal for the final period,assuming a positive interest rate.
D)All of the above are true.

Accepted Answer

The answer of Which of the following is NOT true...

Question 19

William wishes to save enough money to purchase a retirement lake cabin.He is willing to spend $200,000 for the cabin and he can save $20,000 per year and invest the money into an account earning 7.00% per year.If his investments come in the form of equal annual end-of-the-year cash flows and the first cash flow is in exactly one year,how long will it take him to save enough money to buy the lake cabin?
A)Between 7 and 8 years
B)Between 9 and 10 years
C)Between 10 and 11 years
D)Exactly 10 years

Accepted Answer

To solve this, we use the future value of an annuity formula: FV = P * [((1 + r)^n - 1) / r], where FV is the future value ($200,000), P is the annual payment ($20,000), r is the annual interest rate (7% or 0.07), and n is the number of years. Rearranging the formula to solve for n gives us n = log[(FV*r/P)+1] / log(1+r). Plugging in the values gives us n = log[(200,000*0.07/20,000)+1] / log(1.07), which calculates to a value between 7 and 8 years.

Question 20

Home mortgage loans are commonly paid off by making equal monthly payments consisting of both interest and principal.This is an example of an amortized loan.

Accepted Answer

An amortized loan is a loan that is paid off in equal monthly payments that include both principal and interest. Home mortgage loans are typically amortized loans.

Quiz 4: The Time Value of Money Part 2

Assume a five-year equal payment amortization schedule with an annual interest rate of 7% and annual payments.If the beginning principal is $8,000,then the first interest payment will be how large?

You have a choice among three types of loan and wish to pay the LEAST total cash flows.An amortized loan will result in fewer dollars paid out than a discount or an interest-only loan for the same amount,positive interest rate,and time period.

Amortization tables are common and can be used for all but which of the following?

Amortization tables are useful for each of the following reasons EXCEPT ________.

Marie has a $1,200,000 investment portfolio and she wishes to spend $87,500 per year as an ordinary annuity.If the investment account earns 5% annually,how long will her portfolio last? Use a calculator to determine your answer.

Your firm intends to finance the purchase of a new construction crane.The cost is $2,500,000.What is the size of the first payment if the crane is financed with an interest-only loan at an annual rate of 7.50%?

If you borrow $5,000 at an annual interest rate of 9.0% for six years,what will your repayment(s)be if this is a discount loan?

Your firm intends to finance the purchase of a new construction crane.The cost is $2,500,000.How large is the payment at the end of year ten if the crane is financed at a rate of 7.50% as a discount loan?

Your parents have an investment portfolio of $450,000,and they wish to take out cash flows of $60,000 per year as an ordinary annuity.How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%? Use a calculator to determine your answer.

The first interest payment on a 5-year,8%,$100,000,fully-amortized loan with annual payments will be less than the last interest payment.

Your firm intends to finance the purchase of a new construction crane.The cost is $2,500,000.What is the size of the annual ordinary annuity payment if the loan is amortized over a ten-year period at a rate of 7.50%?

You have saved $44,000 for college and wish to use $12,000 per year.If you use the money as an ordinary annuity and earn 5.15% on your investment,how many years will your annuity last? Use a calculator to determine your answer.

If you borrow $5,000 at an annual interest rate of 9.0% for six years,what will your repayment(s)be if this is an interest-only loan?

The last interest payment on a 12-year,6%,$138,000,fully-amortized loan with annual payments will be less than the first interest payment.

Once you begin making payments on an amortization schedule for a loan such as a mortgage or car loan,most contracts clearly state that you may NOT pay off the loan early.

Which of the following is NOT true with regard to an amortization table?

Which of the following is NOT true regarding the total payment in an equal payment amortization table?

Home mortgage loans are commonly paid off by making equal monthly payments consisting of both interest and principal.This is an example of an amortized loan.