Deck 9: Time Value of Moneypart Ii: Annuities

Question 1

Prime mortgages are provided to borrowers with outstanding credit scores.

Answer 1

True

Question 2

Subprime loans are provided to borrowers who have excellent credit scores.

Answer 2

False

Question 3

Your employer gives you a stock bonus of $1,000 in your company at the beginning of each year. You plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the value of your stock be in 20 years? This problem would be solved by using the formula for the

A) future value of a lump sum.
B) future value of an annuity due.
C) future value of an ordinary annuity.
D) present value of a lump sum.
E) present value of an ordinary annuity.

Answer 3

future value of an annuity due.

Question 4

Subprime mortgages have low risk.

Question 5

An annuity is a stream of equal payments.

Question 6

In an annuity due, payments are made at the end of each period.

Question 7

Subprime mortgages are affected by Adjustable Rate Mortgages (ARMs).

Question 8

Banks calculate the monthly payment on a loan as

A) as an annuity due with payment made at end of month.
B) as an annuity due with payment made one month in advance.
C) as an ordinary annuity with payment made at end of month.
D) as an ordinary annuity with payment made one month is advance.

Question 9

An annuity is a stream of unequal payments.

Question 10

Subprime mortgages have very high risk.

Question 11

Subprime loans are provided to borrowers who have poor credit scores.

Question 12

In an ordinary annuity, payments are made at the beginning of each period.

Question 13

Your employer gives you a stock bonus of $1,000 in your company at the end of each year. You plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the value of your gain on the stock be for the 20 years?

A) $52,035.00
B) $97,810.10
C) $82,443.60
D) none of the above

Question 14

Alt A loans are offered to people who are improving their credit rating.

Question 15

Your employer gives you a stock bonus of $1,000 in your company at the end of each year. You plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the value of your stock be in 20 years?

A) $86,421.00
B) $117,810.10
C) $72,035.10
D) $102,443.60
E) Cannot determine with the information provided.

Question 16

The actual rate of return on an investment is the internal rate of return.

Question 17

Your employer gives you a stock bonus of $1,000 in your company at the beginning of each year. You plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the value of your gain on the stock be for the 20 years?

A) $82,443.60
B) $52,035.00
C) $97,810.10
D) none of the above

Question 18

In an ordinary annuity, payments are made at the end of each period.

Question 19

In an annuity due, payments are made at the beginning of each period.

Question 20

Alt A loans are only offered to people with outstanding credit ratings.

Question 21

An entrepreneur would like to buy a piece of equipment for his business. The equipment cost $50,000 and will increase cash flow by $20,000 each year for 5 years. What is his IRR?

A) 28.65%
B) 2.50%
C) 25.55%
D) 40.00%

Question 22

Ira Roth opens up a Roth IRA and places $5,000 in his retirement account at the beginning of each year for 25 years. He believes the account will earn 9 percent interest per year, compounded monthly. How much will he have in his retirement account in 25 years?

A) $355,900.96
B) $490,000.58
C) $390,000.58
D) $490,165.32

Question 23

Calculate the total payments on a $200,000 mortgage if payment is made at the beginning of each month, and the annual interest rate is 5.5 percent for 30 years.

A) $300,160
B) $548,987
C) $3,960,000
D) $408,808

Question 24

Ira Roth opens up a Roth IRA and places $4,500 in his retirement account at the beginning of each year for 20 years. He believes the account will earn 8 percent interest per year, compounded quarterly. How much will he have in his retirement account in 20 years?

A) $187,231.63
B) $219,228.48
C) $228,912.40
D) $266,255.40

Question 25

You have an absolutely brilliant child who is six years old and will be attending a private college in twelve years. You know that in twelve years a four -year college will cost at least $70,000 per year (total $280,000), including tuition, books, and room and board. You determine that you can earn 12 percent on a mutual fund investment during the next twelve years, and invest at the beginning of each year. How much will your total investment be for the twelve -year period?

A) $139,227
B) $53,811
C) $124,310
D) $60,269

Question 26

Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the form of an annuity due. What is the present value of this stream of payments if money can earn 7 percent annual interest?

A) $566,780
B) $977,665
C) $500,000
D) $779,664

Question 27

You have an absolutely brilliant child who is six years old and will be attending a private college in twelve years. You know that in twelve years a four -year college will cost at least $70,000 per year (total $280,000), including tuition, books, and room and board. You determine that you can earn 12 percent on a mutual fund investment during the next twelve years, and invest at the end of each year. How much will your total investment be for the twelve -year period?

A) $177,060
B) $139,227
C) $414,036
D) $60,264

Question 28

You want to send your grandchild to a prestigious university. You heard that a college education will cost $500,000 in 18 years. If you invest $10,000 at the end of each year, what IRR will you need in order to reach your goal of $500,000?

A) 9.07%
B) 12.25%
C) 10.92%
D) 13.35%

Question 29

To determine the mortgage payment on a home loan with payments made at the beginning of each month, you would

A) determine the present value factor of an ordinary annuity and multiply the factor by the loan amount to determine the payment.
B) determine the present value factor of an annuity due and divide the factor into the loan to determine the payment.
C) determine the present value factor of an ordinary annuity and divide the factor into the loan to determine the payment.
D) determine the present value factor of an annuity due and multiply the factor by the loan amount to determine the payment.

Question 30

You have an absolutely brilliant child who is six years old and will be attending a private college in twelve years. You know that in twelve years a four -year college will cost at least $70,000 per year (total $280,000), including tuition, books, and room and board. If you can earn 12 percent on a mutual fund investment during the next twelve years, how much will you have to invest at the end of each year to have enough to send your child to college for four years?

A) $14,755
B) $5,022
C) $11,602
D) $34,503

Question 31

Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the form of an annuity due. What is the present value of this stream of payments if money can earn 8 percent annual interest?

A) $579,139
B) $500,000
C) $530,180
D) $479,035

Question 32

Ira Roth opens up a Roth IRA and places $4,000 in his retirement account at the beginning of each year for 15 years. He believes the account will earn 6 percent interest per year, compounded monthly. How much will he have in his retirement account in 15 years?

A) $108,081
B) $58,145
C) $100,115.22
D) $158,029

Question 33

An entrepreneur would like to buy a piece of equipment for his business. The equipment cost $75,000 and will increase cash flow by $12,000 each year for 15 years. What is his IRR?

A) 10.92%
B) 13.65%
C) 12.25%
D) 8.00%

Question 34

You want to send your grandchild to a very prestigious university. You heard that a college education will cost $800,000 in 18 years. If you invest $10,000 at the end of each year, what IRR will you need in order to reach your goal of $800,000?

A) 12.46%
B) 13.65%
C) 18.00%
D) 15.52%

Question 35

Calculate the monthly payment on a $200,000 mortgage if payment is made at the beginning of each month, and the annual interest rate is 4.25 percent for 15 years.

A) $1,111
B) $13,714.22
C) $1,400.25
D) $1,504.56

Question 36

Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the form of an annuity due. What is the present value of this stream of payments if money can earn 6 percent annual interest?

A) $500,000
B) $607,905
C) $607,004
D) $900,706

Question 37

You have an absolutely brilliant child who is six years old and will be attending a private college in twelve years. You know that in twelve years a four -year college will cost at least $70,000 per year (total $280,000), including tuition, books, and room and board. If you can earn 12 percent on a mutual fund investment during the next twelve years, how much will you have to invest at the beginning of each year to have enough to send your child to college for four years?

A) $4,484.33
B) $10,359.20
C) $5,022.45
D) $11,602.30

Question 38

Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the form of an annuity due. What is the present value of this stream of payments if money can earn 10 percent annual interest?

A) $246,468
B) $500,000
C) $468,246
D) $864,642

Question 39

Calculate the monthly payment on a $200,000 mortgage if payment is made at the beginning of each month, and the annual interest rate is 5.5 percent for 30 years.

A) $11,000.00
B) $1,135.58
C) $1,300.25
D) $1,100.00

Question 40

Calculate the total payments on a $200,000 mortgage if payment is made at the end of each month, and the annual interest rate is 4.25 percent for 15 years.

A) $287,456.36
B) $270,820.80
C) $2,469,985.20
D) $199,980

Question 41

How much will you have in a Roth IRA if you invest $5,000 a year for 35 years, if money earns 5 percent, and you make the investment at the end of each year?

A) $451,601.54
B) $557,173.89
C) $590,604.33
D) $474,181.61

Question 42

How much will you have in a Roth IRA if you invest $5,000 a year for 35 years, if money earns 5 percent, and you make the investment at the beginning of each year?

A) $451,601.54
B) $557,173.89
C) $590,604.33
D) $474,181.61

Question 43

How much will you have in a Roth IRA if you invest $5,000 a year for 35 years, if money earns 6 percent, and you make the investment at the beginning of each year?

A) $474,181.61
B) $557,173.89
C) $451,601.54
D) $590,604.33

Question 44

How much will you have in a Roth IRA if you invest $5,000 a year for 35 years, if money earns 6 percent, and you make the investment at the end of each year?

A) $590,604.33
B) $557,173.89
C) $474,181.61
D) $451,601.54

Question 45

The city of Metropolis borrows $88,000,000 so that it can build a football stadium. It plans to set up a sinking fund that will repay the loan 10 years later. Assume a 6 percent interest rate per year. What will Metropolis have to place in the fund at the beginning of each year in order to pay back the $88,000,000?

A) $6,676,380
B) $536,980
C) $534,309
D) $6,298,472