Question 1

Which of the following investments has the highest effective annual return (EAR)? (Assume that all CDs are of equal risk.)

Accepted Answer

A)  a bank CD that pays 7.00 percent interest compounded daily 
B)  a bank CD that pays 7.10 percent compounded monthly 
C)  a bank CD that pays 7.30 percent annually 
D)  a bank CD that pays 7.25 percent compounded semiannually

Question 2

Bill wants to buy a new boat in 7 years.He expects the new boat will cost $28,000.Bill has $18,000 in an investment account today.What rate of return must Bill earn on his investments to be able to buy the boat on time?

Accepted Answer

The answer of Bill wants to buy a new boat...

Question 3

An example of an annuity is the interest received from bonds.

Accepted Answer

A) True 
 B)False

Question 4

How much money must be put into a bank account yielding 6.42% (compounded annually)in order to have $1,671 at the end of 11 years (round to nearest $1)?

Accepted Answer

A)  $921 
B)  $886 
C)  $843 
D)  $798

Question 5

In order to send your first child to Law School when the time comes,you want to accumulate $40,000 at the end of 18 years.Assuming that your savings account will pay 6% compounded annually,how much would you have to deposit if:
a.you want to deposit an equal amount at the end of each year?
b.you want to deposit one large lump sum today?

Accepted Answer

The answer of In order to send your first child...

Question 6

A bond matures in 20 years,at which time it pays the owner $1,000.It also pays $70 at the end of each of the next 20 years.If similar bonds are currently yielding 7%,what is the market value of the bond?

Accepted Answer

A)  over $1,000 
B)  under $1,000 
C)  exactly $1,000 
D)  cannot be determined from the information given

Question 7

Your grandparents deposit $2,000 each year on your birthday,starting the day you are born,in an account that pays 7% interest compounded annually.How much will you have in the account on your 21st birthday,just after your grandparents make their deposit?

Accepted Answer

A)  $101,802 
B)  $98,016 
C)  $86,058 
D)  $79,640

Question 8

You are going to pay $800 into an account at the beginning of each of 20 years.The account will then be left to compound for an additional 20 years until the end of year 40,when it will turn into a perpetuity.You will receive the first payment from the perpetuity at the end of the 41st year.If the account pays 14%,how much will you receive from the perpetuity each year (rounded to nearest $1,000)?

Accepted Answer

A)  $140,000 
B)  $150,000 
C)  $160,000 
D)  $170,000

Question 9

What is the present value of an annuity of $120 received at the end of each year for 11 years? Assume a discount rate of 7%.The first payment will be received one year from today (round to nearest $1).

Accepted Answer

A)  $250 
B)  $400 
C)  $570 
D)  $900

Question 10

You charged $1,000 on your credit card for Christmas presents.Your credit card company charges you 26% annual interest,compounded monthly.If you make the minimum payments of $25 per month,how long will it take (to the nearest month)to pay off your balance?

Accepted Answer

A)  94 months 
B)  79 months 
C)  54 months 
D)  40 months

Question 11

How much would you be willing to pay (rounded to the nearest dollar)for a 20-year annuity due if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?

Accepted Answer

A)  $84,500 
B)  $63,445 
C)  $56,734 
D)  $53,777

Question 12

You inherit $300,000 from your parents and want to use the money to supplement your retirement.You receive the money on your 65th birthday,the day you retire.You want to withdraw equal amounts at the end of each of the next 20 years.What constant amount can you withdraw each month and have nothing remaining at the end of 20 years if you are earning 7% interest compounded monthly?

Accepted Answer

A)  $1,200 
B)  $1,829 
C)  $2,326 
D)  $2,943

Question 13

It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year.

Accepted Answer

A) True 
 B)False

Question 14

Your daughter is born today and you want her to be a millionaire by the time she is 35 years old.You open an investment account that promises to pay 12% per year.How much money must you deposit each year,starting on her 1st birthday and ending on her 35th birthday,so your daughter will have $1,000,000 by her 35th birthday?

Accepted Answer

A)  $2,317 
B)  $3,455 
C)  $5,777 
D)  $9,450

Question 15

If you put $10 in a savings account at the beginning of each month for 15 years,how much money will be in the account at the end of the 10th year? Assume that the account earns 12% compounded monthly and round to the nearest $1.

Accepted Answer

A)  $1,200 
B)  $2,323 
C)  $5,046 
D)  $3,485

Question 16

If you want to have $3,575 in 29 months,how much money must you put in a savings account today? Assume that the savings account pays 12% and it is compounded monthly; round to nearest $1.

Accepted Answer

A)  $3,147 
B)  $3,008 
C)  $2,679 
D)  $2,438

Question 17

Leigh Delight Candy,Inc.is choosing between two bonds in which to invest their cash.One is being offered from Hershey's and will mature in 10 years and pay $30 each quarter.The other alternative is a Mars' bond that will mature in 20 years and pay $30 each quarter.What would be the present value of each bond if the discount rate is 10% compounded quarterly,and each bond pays $1,000 at maturity?

Accepted Answer

The answer of Leigh Delight Candy,Inc.is choosing between two bonds...

Question 18

You sell valuable artifacts from your household estate for $200,000 and want to use the money to supplement your retirement.You receive the money on your 60th birthday,the day you retire.You want to withdraw equal amounts at the end of each of the next 25 years.What constant amount can you withdraw each year and have nothing remaining at the end of 20 years if you are earning 7% interest per year?

Accepted Answer

A)  $17,162 
B)  $28,318 
C)  $37,574 
D)  $49,113

Question 19

You have just purchased a share of preferred stock for $50.00.The preferred stock pays an annual dividend of $5.50 per share forever.What is the rate of return on your investment?

Accepted Answer

A)  0.055 
B)  0.010 
C)  0.110 
D)  0.220

Question 20

If the interest rate is positive,then the future value of an annuity due will be greater than the future value of an ordinary annuity.

Accepted Answer

A) True 
 B)False

Exam 5: The Time Value of Money

Which of the following investments has the highest effective annual return (EAR) ? (Assume that all CDs are of equal risk.)

Bill wants to buy a new boat in 7 years.He expects the new boat will cost $28,000.Bill has $18,000 in an investment account today.What rate of return must Bill earn on his investments to be able to buy the boat on time?

An example of an annuity is the interest received from bonds.

How much money must be put into a bank account yielding 6.42% (compounded annually) in order to have $1,671 at the end of 11 years (round to nearest $1) ?

A bond matures in 20 years,at which time it pays the owner $1,000.It also pays $70 at the end of each of the next 20 years.If similar bonds are currently yielding 7%,what is the market value of the bond?

Your grandparents deposit $2,000 each year on your birthday,starting the day you are born,in an account that pays 7% interest compounded annually.How much will you have in the account on your 21st birthday,just after your grandparents make their deposit?

What is the present value of an annuity of $120 received at the end of each year for 11 years? Assume a discount rate of 7%.The first payment will be received one year from today (round to nearest $1) .

You charged $1,000 on your credit card for Christmas presents.Your credit card company charges you 26% annual interest,compounded monthly.If you make the minimum payments of $25 per month,how long will it take (to the nearest month) to pay off your balance?

How much would you be willing to pay (rounded to the nearest dollar) for a 20-year annuity due if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?

It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year.

If you put $10 in a savings account at the beginning of each month for 15 years,how much money will be in the account at the end of the 10th year? Assume that the account earns 12% compounded monthly and round to the nearest $1.

If you want to have $3,575 in 29 months,how much money must you put in a savings account today? Assume that the savings account pays 12% and it is compounded monthly; round to nearest $1.

You have just purchased a share of preferred stock for $50.00.The preferred stock pays an annual dividend of $5.50 per share forever.What is the rate of return on your investment?

If the interest rate is positive,then the future value of an annuity due will be greater than the future value of an ordinary annuity.