Question 1

An annuity is a series of ________.

Accepted Answer

A) variable cash payments at regular intervals across time 
B) equal cash payments at regular intervals across time 
C) variable cash payments at different intervals across time 
D) equal cash payments at different intervals across time 
A) variable cash payments at regular intervals across time 
B) equal cash payments at regular intervals across time 
C) variable cash payments at different intervals across time 
D) equal cash payments at different intervals across time B

Question 2

Your firm wishes to purchase a financial contract that provides equal end-of-the-year cash flows of $18,000 per year for the next seven years.What is the present value of these cash flows if you choose to discount them at a rate of 8% per year?

Accepted Answer

PV = PMT × $\frac { 1 - \frac { 1 } { ( 1 + r ) ^ { n } }
\mathrm { }}{r}$ = $18,000 × $\frac { 1 - \frac { 1 } { ( 1.08 ) ^ { 7 } } } { .08 }$ = $93,714.66. MODE = END INPUT 7 8 ? -18,000 0 KEY N I/Y PV PMT FV CPT 93,714.66

Question 3

If you borrow $40,000 at an annual interest rate of 11% for seven years,what is the annual payment (prior to maturity)on an interest-only type of loan?

Accepted Answer

A) $4,400.00 
B) $6,000.00 
C) $8,333.33 
D) $12,161.29 
A) $4,400.00 
B) $6,000.00 
C) $8,333.33 
D) $12,161.29 A

Question 4

Which of the following is NOT a form of perpetuity?

Accepted Answer

A) A British consol bond 
B) Preferred stock that pays the same dividend forever 
C) A philanthropic endowment fund that pays the same charitable amount every year forever 
D) All are examples of perpetuities. 
A) A British consol bond 
B) Preferred stock that pays the same dividend forever 
C) A philanthropic endowment fund that pays the same charitable amount every year forever 
D) All are examples of perpetuities.

Question 5

Derek and his father have an agreement.If Derek can save $15,000,his father will pay the balance toward a used car (up to a total of $20,000).If Derek can save $3,800 per year,how long will it take him to reach $15,000 if he invests the money into an account earning an annual rate of 4.25%? Use a financial calculator.

Accepted Answer

The financial calculator makes short wor

Question 6

You are presented with two cash flow options: Option Near,a $5,000 annuity for three years,with the first cash flow one year from today,or Option Far,a $5,000 annuity for six years with the first cash flow ten years from today.Assuming an interest rate of 7.0%,which set of cash flows has a greater present value?

Accepted Answer

A) Option Near has a greater PV of $13,121.58 vs.Option Far PV of $12,963.41. 
B) Option Far has a greater PV of $13,121.58 vs.Option Near PV of $12,963.41. 
C) Option Far has a greater PV of $30,000 vs.Option Near PV of $15,000. 
D) Option Near and Option Far have the same PV of $12,963.41. 
A) Option Near has a greater PV of $13,121.58 vs.Option Far PV of $12,963.41. 
B) Option Far has a greater PV of $13,121.58 vs.Option Near PV of $12,963.41. 
C) Option Far has a greater PV of $30,000 vs.Option Near PV of $15,000. 
D) Option Near and Option Far have the same PV of $12,963.41.

Question 7

The furniture store offers you no-money-down on a new set of living room furniture.Further,you may pay for the furniture in three equal annual end-of-the-year payments of $750 each with the first payment to be made one year from today.If the discount rate is 5%,what is the present value of the furniture payments?

Accepted Answer

A) $2,042.44 
B) $2,214.27 
C) $2,333.39 
D) $2,673.01 
A) $2,042.44 
B) $2,214.27 
C) $2,333.39 
D) $2,673.01

Question 8

When solving for present value,we use the term compounding of cash flows rather than the term discounting of cash flows.

Accepted Answer

A) True 
 B)False

Question 9

Given positive equal annual cash flows and a positive interest rate,the present value of an annuity will be greater than the sum of the cash flows.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) 8.00 years 
B) 9.10 years 
C) 9.35 years 
D) 10.14 years 
A) 8.00 years 
B) 9.10 years 
C) 9.35 years 
D) 10.14 years

Question 11

What is the present value today of an ordinary annuity cash flow of $4,000 per year for thirty years at an interest rate of 6.0% per year?

Accepted Answer

A) $120,000.00 
B) $55,059.32 
C) $45,139.89 
D) $32,270.87 
A) $120,000.00 
B) $55,059.32 
C) $45,139.89 
D) $32,270.87

Question 12

When solving for the future value of a stream of unequal cash flows,it is important to add together the values BEFORE applying the future value formula to determine their future value.

Accepted Answer

A) True 
 B)False

Question 13

The formula for the Future Value Interest Factor of an Annuity (FVIFA)is $\frac { ( 1 + r ) ^ { n } - 1 } { r }$ .

Accepted Answer

A) True 
 B)False

Question 14

Ordinary annuity payments occur at the beginning of the period,whereas annuity due payments occur at the end of the period.

Accepted Answer

A) True 
 B)False

Question 15

Given positive equal annual cash flows and a positive interest rate,the future value of an annuity will be greater than the sum of the cash flows.

Accepted Answer

A) True 
 B)False

Question 16

You just won a lottery-CONGRATULATIONS! Your parents have always told you to plan for the future,so since you already have a well-paying job you decide to invest rather than spend your lottery winnings.The payment schedule from the lottery commission is $100,000 after taxes at the end of year one and 19 more payments of exactly $100,000 after taxes in equal annual end-of-the-year deposits (i.e.,20 deposits of $100,000 each,the first deposit is one year from today)into your account paying 8.5% compounded annually.How much money will be in your account after the last deposit is made?

Accepted Answer

A) $2,000,000.00 
B) $3,637,896.48 
C) $4,099,549.23 
D) $4,837,701.32 
A) $2,000,000.00 
B) $3,637,896.48 
C) $4,099,549.23 
D) $4,837,701.32

Question 17

Which of the following is greater (answers rounded to the nearest cent)?

Accepted Answer

A) An ordinary annuity of $100.00 per year for three years discounted at 10% per year 
B) A present value of $248.69 
C) A future value of $331.00 three years from today,given an interest rate of 10% per year 
D) You would be indifferent to the three choices since they all have the same present value when using an interest rate of 10% per year. 
A) An ordinary annuity of $100.00 per year for three years discounted at 10% per year 
B) A present value of $248.69 
C) A future value of $331.00 three years from today,given an interest rate of 10% per year 
D) You would be indifferent to the three choices since they all have the same present value when using an interest rate of 10% per year.

Question 18

You have a choice between a lottery lump sum payout of $5,509,253.62 today or a series of twenty annual annuity payments of $500,000 each (first cash flow one year from today).At what discount rate are you indifferent between the two choices?

Accepted Answer

A) 4.50% 
B) 5.50% 
C) 6.50% 
D) 7.50% 
A) 4.50% 
B) 5.50% 
C) 6.50% 
D) 7.50%

Question 19

You sign a contract to pay back all of the interest and principal of a loan at the maturity date.This is an example of an interest-only loan.

Accepted Answer

A) True 
 B)False

Question 20

If you borrow $40,000 at an annual interest rate of 11% for seven years,what is the annual payment (prior to maturity)on a discount loan?

Accepted Answer

A) $0.00 
B) $6,000.00 
C) $8,333.33 
D) $12,161.29 
A) $0.00 
B) $6,000.00 
C) $8,333.33 
D) $12,161.29

An annuity is a series of ________.

Your firm wishes to purchase a financial contract that provides equal end-of-the-year cash flows of $18,000 per year for the next seven years.What is the present value of these cash flows if you choose to discount them at a rate of 8% per year?

If you borrow $40,000 at an annual interest rate of 11% for seven years,what is the annual payment (prior to maturity)on an interest-only type of loan?

Which of the following is NOT a form of perpetuity?

When solving for present value,we use the term compounding of cash flows rather than the term discounting of cash flows.

Given positive equal annual cash flows and a positive interest rate,the present value of an annuity will be greater than the sum of the cash flows.

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.

What is the present value today of an ordinary annuity cash flow of $4,000 per year for thirty years at an interest rate of 6.0% per year?

When solving for the future value of a stream of unequal cash flows,it is important to add together the values BEFORE applying the future value formula to determine their future value.

The formula for the Future Value Interest Factor of an Annuity (FVIFA)is $\frac { ( 1 + r ) ^ { n } - 1 } { r }$ .

Ordinary annuity payments occur at the beginning of the period,whereas annuity due payments occur at the end of the period.

Given positive equal annual cash flows and a positive interest rate,the future value of an annuity will be greater than the sum of the cash flows.

Which of the following is greater (answers rounded to the nearest cent)?

You have a choice between a lottery lump sum payout of $5,509,253.62 today or a series of twenty annual annuity payments of $500,000 each (first cash flow one year from today).At what discount rate are you indifferent between the two choices?

You sign a contract to pay back all of the interest and principal of a loan at the maturity date.This is an example of an interest-only loan.

If you borrow $40,000 at an annual interest rate of 11% for seven years,what is the annual payment (prior to maturity)on a discount loan?

Financial Management

Financial Statements

The Time Value of Money Part 1

Interest Rates

Bonds and Bond Valuation

Stocks and Stock Valuation

Risk and Return

Capital Budgeting Decision Models

Cash Flow Estimation

The Cost of Capital

Forecasting and Short-Term Financial Planning

Working Capital Management

Financial Ratios and Firm Performance

Raising Capital

Capital Structure

Dividends, Dividend Policy, and Stock Splits

International Financial Management

Filters

Exam 4: The Time Value of Money Part 2

An annuity is a series of ________.

Your firm wishes to purchase a financial contract that provides equal end-of-the-year cash flows of $18,000 per year for the next seven years.What is the present value of these cash flows if you choose to discount them at a rate of 8% per year?

If you borrow $40,000 at an annual interest rate of 11% for seven years,what is the annual payment (prior to maturity)on an interest-only type of loan?

Which of the following is NOT a form of perpetuity?

When solving for present value,we use the term compounding of cash flows rather than the term discounting of cash flows.

Given positive equal annual cash flows and a positive interest rate,the present value of an annuity will be greater than the sum of the cash flows.

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.

What is the present value today of an ordinary annuity cash flow of $4,000 per year for thirty years at an interest rate of 6.0% per year?

When solving for the future value of a stream of unequal cash flows,it is important to add together the values BEFORE applying the future value formula to determine their future value.

The formula for the Future Value Interest Factor of an Annuity (FVIFA)is (1+r)n−1r\frac { ( 1 + r ) ^ { n } - 1 } { r }r(1+r)n−1​ .

Ordinary annuity payments occur at the beginning of the period,whereas annuity due payments occur at the end of the period.

Given positive equal annual cash flows and a positive interest rate,the future value of an annuity will be greater than the sum of the cash flows.

Which of the following is greater (answers rounded to the nearest cent)?

You have a choice between a lottery lump sum payout of $5,509,253.62 today or a series of twenty annual annuity payments of $500,000 each (first cash flow one year from today).At what discount rate are you indifferent between the two choices?

You sign a contract to pay back all of the interest and principal of a loan at the maturity date.This is an example of an interest-only loan.

If you borrow $40,000 at an annual interest rate of 11% for seven years,what is the annual payment (prior to maturity)on a discount loan?

Financial Management

Financial Statements

The Time Value of Money Part 1

Interest Rates

Bonds and Bond Valuation

Stocks and Stock Valuation

Risk and Return

Capital Budgeting Decision Models

Cash Flow Estimation

The Cost of Capital

Forecasting and Short-Term Financial Planning

Working Capital Management

Financial Ratios and Firm Performance

Raising Capital

Capital Structure

Dividends, Dividend Policy, and Stock Splits

International Financial Management

Filters

The formula for the Future Value Interest Factor of an Annuity (FVIFA)is $\frac { ( 1 + r ) ^ { n } - 1 } { r }$ .