Question 1

Explain the concept of interest and compare it to rate of interest.

Accepted Answer

The answer of Explain the concept of interest and compare...

Question 2

When a loan is amortized over a five year term, the

Accepted Answer

A) rate of interest is reduced each year 
B) amount of interest paid is reduced each year 
C) payment is reduced each year 
D) balance is paid as a balloon payment in the fifth year

Question 3

The present value of a(n) is determined by dividing the annual cash flow by the interest rate.

Accepted Answer

A) annuity 
B) annuity due 
C) perpetuity 
D) lease

Question 4

If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded annually, determine how much the CD will be worth at the end of 4 years.

Accepted Answer

A) $13,600 
B) $45,730 
C) $14,640 
D) $15,958

Question 5

What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded monthly for five years?

Accepted Answer

A) $17,623.42 
B) $18,170 
C) $16,105.10 
D) $16,122.26

Question 6

California Life has just offered you a single premium annuity for $5,000 that will pay $5,144.12 per year for 20 years, the first payment being received exactly 31 years from today.What is the implied rate of return on this annuity?

Accepted Answer

A) 7% 
B) 8% 
C) 9% 
D) 6.5%

Question 7

The difference between an ordinary annuity and an annuity due is:

Accepted Answer

A) the interest rate 
B) the timing of the payments 
C) the amount of the payments 
D) the number of periods

Question 8

Explain the sinking fund problem.

Accepted Answer

The answer of Explain the sinking fund problem....

Question 9

Jane wants to have $200,000 in an account in 20 years.If her account earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000?

Accepted Answer

A) $25,116 
B) $3,115 
C) $10,000 
D) $3,492

Question 10

1st Bank offers you a car loan at an annual interest rate of 10% compounded monthly.What effective annual interest rate is the bank charging you?

Accepted Answer

A) 10.38% 
B) 10.42% 
C) 10.45% 
D) 10.47%

Question 11

Why does an annuity due have a greater future value than a regular annuity - all things being equal?

Accepted Answer

The answer of Why does an annuity due have a...

Question 12

What is the most you should pay to receive the following cash flows if your required rate of return is 12 percent?
$\begin{array}{ll}
\text { Year } 1 & \$ 5,000 \
\text { Year } 2 & \$ 8,000 \
\text { Year } 3 & \$ 12,000 \
\text { Year 4-10 } & \$ 15,000
\end{array}$

Accepted Answer

A) $58,580 
B) $104,135 
C) $68,105 
D) $40,000

Question 13

Your grandparents put $1,000 into a savings account for you when you were born 20 years ago.This account has been earning interest at a compound rate of 7 percent.What is its value today?

Accepted Answer

A) $3,870 
B) $1,967 
C) $3,026 
D) $3,583

Question 14

A bank has agreed to loan you $10,000 at 11% for 5 years.You are required to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance.Determine the amount of these annual payments (to the nearest dollar).

Accepted Answer

A) $2,000 
B) $3,100 
C) $2,706 
D) $1,100

Question 15

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000.What will happen to the present value of your winnings if the interest rate increases during the next 20 years?

Accepted Answer

A) it will be worth less 
B) it will be worth more 
C) it will not change 
D) it will increase during the first ten years

Question 16

The present value of an ordinary annuity is the

Accepted Answer

A) sum of the present value of a series of equal periodic payments 
B) future value of an equal series of payments 
C) receipt of equal cash flows for a specified amount of time 
D) sum of the future value of an equal series of payments

Question 17

Idlewild Bank has granted you a seven year loan for $50,000.If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging?

Accepted Answer

A) 14% 
B) 23% 
C) 12.6% 
D) 11%

Question 18

When you purchased a car, you borrowed $20,000 from the bank and agreed to make monthly payments of $423.17 for 5 years.What rate of interest is the bank charging you?

Accepted Answer

A) 9.82% 
B) 5.00% 
C) 25.39% 
D) 10.00%

Question 19

The annual effective rate of interest (ieff ) is a function of:

Accepted Answer

A) the annual nominal rate of interest (inom) 
B) the number of compounding intervals per year (m) 
C) the number of years (n) 
D) both the nominal rate of interest and the number of compounding periods per year.

Question 20

What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded monthly?

Accepted Answer

A) 9.92% 
B) 9.74% 
C) 10.02% 
D) 9.86%

Exam 5: The Time Value of Money