Question 1

Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 2

You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Accepted Answer

A)  $1,412.84 
B)  $1,487.20 
C)  $1,565.48 
D)  $1,643.75 
E)  $1,725.94

Question 3

You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Accepted Answer

A)  $5,987 
B)  $6,286 
C)  $6,600 
D)  $6,930 
E)  $7,277

Question 4

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

Accepted Answer

A)  An account that pays 8% nominal interest with monthly compounding. 
B)  An account that pays 8% nominal interest with annual compounding. 
C)  An account that pays 7% nominal interest with daily (365-day) compounding. 
D)  An account that pays 7% nominal interest with monthly compounding. 
E)  An account that pays 8% nominal interest with daily (365-day) compounding.

Question 5

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Accepted Answer

A) True 
 B)False

Question 6

How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

Accepted Answer

A)  $1,067.95 
B)  $1,124.16 
C)  $1,183.33 
D)  $1,245.61 
E)  $1,311.17

Question 7

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

Accepted Answer

A)  An account that pays 8% nominal interest with monthly compounding. 
B)  An account that pays 8% nominal interest with annual compounding. 
C)  An account that pays 7% nominal interest with daily (365-day) compounding. 
D)  An account that pays 7% nominal interest with monthly compounding. 
E)  An account that pays 8% nominal interest with daily (365-day) compounding.

Question 8

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A)  3.82% 
B)  4.25% 
C)  4.72% 
D)  5.24% 
E)  5.77%

Question 9

Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

Accepted Answer

A)  $591.09 
B)  $622.20 
C)  $654.95 
D)  $689.42 
E)  $723.89

Question 10

All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  A time line is not meaningful unless all cash flows occur annually. 
B)  Time lines are useful for visualizing complex problems prior to doing actual calculations. 
C)  Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. 
E)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

Question 12

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic rate of interest is 2% and the effective rate of interest is 4%. 
B)  The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. 
C)  The periodic rate of interest is 4% and the effective rate of interest is less than 8%. 
D)  The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. 
E)  The periodic rate of interest is 8% and the effective rate of interest is also 8%.

Question 13

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)  $438.03 
B)  $461.08 
C)  $485.35 
D)  $510.89 
E)  $537.78

Question 14

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

A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96

Question 15

Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, starting at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?

Accepted Answer

A)  14.21 
B)  14.96 
C)  15.71 
D)  16.49 
E)  17.32

Question 16

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)  $28,243.21 
B)  $29,729.70 
C)  $31,294.42 
D)  $32,859.14 
E)  $34,502.10

Question 17

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Accepted Answer

A)  $77.19 
B)  $81.25 
C)  $85.31 
D)  $89.58 
E)  $94.06

Question 18

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?

Accepted Answer

A)  $2,404.91 
B)  $2,531.49 
C)  $2,658.06 
D)  $2,790.96 
E)  $2,930.51

Question 19

Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

Accepted Answer

A)  23.99 
B)  25.26 
C)  26.58 
D)  27.98 
E)  29.46

Question 20

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Accepted Answer

A) True 
 B)False

Exam 5: Time Value of Money

You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

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

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

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

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

Which of the following statements is CORRECT?

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

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?

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?

Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.