Question 1

Indicate which of the following is true about annuities.

Accepted Answer

A) An ordinary annuity is an equal payment paid or received at the beginning of each period. 
B) An annuity due is a payment paid or received at the beginning of each period, that increases by an equal amount each period. 
C) An annuity due is an equal payment paid or received at the beginning of each period. 
D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.

Question 2

You borrow $42,500 over a nine year term. Your bank charges an annual rate of 10%. If the loan is repayable in equal end-of-period, annual payments, then what is the loan payment?

Accepted Answer

A) $7,379.72 
B) $7,966.37 
C) $6,916.68 
D) $6,641.75 
E) $8,117.70

Question 3

The present value of $100 received at the end of year 1, $200 received at the end of year 2, and $300 received at the end of year 3, assuming an opportunity cost of 13 percent is: (Round to the nearest whole dollar)

Accepted Answer

A) $453 
B) $416 
C) $1,181 
D) $500

Question 4

Actively managed mutual funds charge higher management fees than passive funds. Assume that the net return to an active fund (after fees)is 9.5% (0.79% per month)and the net return to a passive fund is 10.5% (0.875% per month). Consider an investor who invests $600 per month (end-of-month)over thirty years in the passive fund. What is the future value of her savings? Now consider an investor who invests on a monthly basis over thirty years in the active fund. If the active fund investor wants the same future value as the passive fund investor, then how much more must she invest per month?

Accepted Answer

A) $145.79 
B) $150.62 
C) $59.86 
D) $152.33 
E) $167.92

Question 5

Three years from now you will begin receiving annual payments of $7,200. This will continue for 14 years. At a discount rate of 5.8%, what is the present value of this stream of cash flows?

Accepted Answer

A) $60,534.84 
B) $57,216.29 
C) $64,045.86 
D) $54,523.00 
E) $51,253.11

Question 6

________ is an annuity with an infinite life making continual annual payments.

Accepted Answer

A) Amortized loan 
B) Principal 
C) Perpetuity 
D) APR

Question 7

The present value of a $25,000 perpetuity at a 14 percent discount rate is: (Round to the nearest whole dollar.)

Accepted Answer

A) $178,571 
B) $285,000 
C) $350,000 
D) $219,298

Question 8

The time value concept/calculation used in amortizing a loan is:

Accepted Answer

A) Future value of a dollar 
B) Future value of an annuity 
C) Present value of a dollar 
D) Present value of an annuity

Question 9

Tony plans to deposit $1,000 at the end of each of the next three years. If his funds earn 5% compounded annually, how much will he have at the end of three years?

Accepted Answer

A) $3,150.00 
B) $3,175.50 
C) $3,152.50 
D) $3,500.00 
E) $4,310.10

Question 10

You expect to receive $800 at the end of each of the next twenty years. What is the present value of the stream of payments if the interest rate is 6%?

Accepted Answer

A) $9,175.94 
B) $9,411.26 
C) $9,305.38 
D) $9,687.79 
E) $9,550.30

Question 11

The future value of an ordinary annuity of $1,000 each year for 10 years, deposited at 3 percent, is: (Round to the nearest whole dollar)

Accepted Answer

A) $11,808 
B) $11,464 
C) $8,530 
D) $10,000

Question 12

Peter will receive $1,200 at the beginning of each of the next seven years. What is the future value of this annuity, assuming the interest rate is 9% compounded annually? (Round to the nearest whole dollar)

Accepted Answer

A) $1,200 
B) $11,041 
C) $12,034 
D) $13,234 
E) $8,400

Question 13

You are offered a perpetuity that will pay you $18,000 per year starting in one year. The seller wants you to pay $300,000 for the perpetuity. If you buy it at that price, what return will you earn?

Accepted Answer

A) 6% 
B) 5% 
C) 7% 
D) 8% 
E) 9%

Question 14

You want to buy a Nissan 300Z on your 27th birthday. You have priced these cars and found that they currently sell for $25,000. You believe that the price will increase by 10 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?

Accepted Answer

A) $8,881.21 
B) $4,540.14 
C) $4,652.18 
D) $4,239.56 
E) $5,072.09

Question 15

Molly, president of Molly's Muffins, is considering franchising. She has a potential franchise agreement that would see her receive payments of $28,000, $24,000, and $20,000 at the end of years 1, 2, and 3 respectively, and then $12,000 per year after that for 17 years. If Molly requires a return of 10%, then what is the present value of this stream of cash flows? (Round answer to the nearest whole dollar)

Accepted Answer

A) $132,636 
B) $145,900 
C) $143,354 
D) $156,574 
E) $124,440

Question 16

A generous benefactor to the local ballet plans to make a one-time endowment which would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be?

Accepted Answer

A) $300,000 
B) $3,000,000 
C) $750,000 
D) $1,428,571

Question 17

Gina has planned to start college education in four years from now. To pay for her college education, she has decided to save $1,000 a quarter for the next four years in a bank account paying 12 percent interest (compounded quarterly). How much will she have at the end of fourth year? (Round to the nearest whole dollar)

Accepted Answer

A) $1,574 
B) $19,116 
C) $20,157 
D) $16,000

Question 18

If you buy a factory for $250,000 and the terms are 20% down, the balance to be paid off over 30 years at a 12 percent rate of interest on the unpaid balance, what are the 30 equal annual payments? (Round to the nearest whole dollar)

Accepted Answer

A) $20,593 
B) $31,036 
C) $24,829 
D) $50,212 
E) $6,667

Question 19

You plan to retire at age 65. You want to withdraw $100,000 from your savings account every year starting on your 65 th birthday. You expect to make your final withdrawal on your 84th birthday. How much must you have accumulated by your 65 th birthday in order to support your desired withdrawals if you earn 3% on your savings?

Accepted Answer

A) $1,532,379.91 
B) $1,587,747.49 
C) $1,475,351.31 
D) $1,432,379.91 
E) $1,090,095.56

Question 20

You just took out a $12,000 loan for your small business. The loan has a four year term and repayment is in the form of four equal end-of-year payments. The interest rate on the loan is 11.5%. Consider the final loan payment. How much interest do you pay in the final payment?

Accepted Answer

A) $1,380.00 
B) $1,089.13 
C) $764.81 
D) $403.20 
E) $350.61

Exam 4: Time Value of Money - Streams and Valuations