Question 1

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 2

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 3

When using a present value of an annuity table(e.g.,Table IV at the back of the book),

Accepted Answer

A)  payments are assumed to be made at the beginning of each period 
B)  PVIFA factors decrease with an increase in the interest rate 
C)  PVIFA factors increase with an increase in the number of periods 
D)  b and c only

Question 4

Explain a perpetuity and list some investment vehicles that can be perpetuities.

Accepted Answer

The answer of Explain a perpetuity and list some investment...

Question 5

John borrowed $20,000 to finance his college education. If the finance charge on the loan is 6 percent, and he will pay off the loan in 10 equal, annual, end of year payments, how much total interest will he pay?

Accepted Answer

A)  $7,173.90 
B)  $2,717.39 
C)  $12,000.00 
D)  $25,924.23

Question 6

Sherry Smart is buying a $350,000 home and will pay the mortgage monthly for 30 years. She has a good credit score and has qualified for a 5.125% loan interest. How much will she be paying monthly for the home?

Accepted Answer

A)  $2,013.67 
B)  $1,572.72 
C)  $1,318.69 
D)  $975.88

Question 7

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 8

Your firm, New Sunrise, has just leased a $28,000 BMW for you. The lease requires six beginning of the year payments that will fully amortize the cost of the car. What is the amount of the payments if the interest rate is 12 percent?

Accepted Answer

A)  $6,810.99 
B)  $7,766.99 
C)  $6,423.74 
D)  $6,081.25

Question 9

You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was your rate of return on your investment?

Accepted Answer

A)  12% 
B)  11% 
C)  10% 
D)  9%

Question 10

Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the

Accepted Answer

A)  future value of an annuity 
B)  present value of an annuity 
C)  future value of an annuity due 
D)  present value of an annuity due

Question 11

Al Corbin is 25 years old today and he wishes to accumulate enough money over the next 35 years to provide for a 20 year retirement annuity of $100,000 at the beginning of each year, starting with his 60th birthday. He can save $2,000 at the end of each of the next 10 years and $3,000 each year for the following 10 years. How much must he save each year at the end of years 21 through 35 to obtain his goal? Assume that the average rate of return over the entire period will be 10%.

Accepted Answer

A)  $9,642 
B)  $26,969 
C)  $12,321 
D)  $24,289

Question 12

A zero coupon bond with a $1,000 par value is selling for $356 and matures in 12 years. What is the implied discount rate (yield to maturity)?

Accepted Answer

A)  9% 
B)  9.36% 
C)  9.12% 
D)  9.4%

Question 13

Determine (to the nearest dollar) the amount you would be willing to pay for a $1,000 par value bond paying $80 interest each year and maturing in 12 years, assuming you wanted to earn a 9 percent rate of return.

Accepted Answer

A)  $929 
B)  $573 
C)  $1,316 
D)  $1,960

Question 14

When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for 3 years. What is your monthly payment?

Accepted Answer

A)  $153.33 
B)  $637.86 
C)  $584.12 
D)  $559.78

Question 15

The Summer Breeze Hotel borrowed $100,000 from the Meadowlands Bank to pay for a new air conditioning system. The loan is for a period of 5 years at an interest rate of 10% and requires 5 equal end-of-year payments that include both principal and interest on the outstanding balance. What will be the outstanding balance after the third payment?

Accepted Answer

A)  $60,000 
B)  $20,865 
C)  $45,788 
D)  $50,866

Question 16

The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years. What is the future value of this lottery if you plan to put each payment in an account earning 9 percent?

Accepted Answer

A)  $2.28 million 
B)  $12.79 million 
C)  $14.32 million 
D)  $ 5.00 million

Question 17

What is the present value of the following net cash flows if the discount rate is 12%:

Accepted Answer

A)  $151,400 
B)  $ 86,462 
C)  $144,037 
D)  $ 79,252

Question 18

An annuity that begins more than 1 year in the future is referred to as a(n) ____.

Accepted Answer

A)  perpetuity 
B)  annuity due 
C)  uneven annuity 
D)  deferred annuity

Question 19

Bill Swill decides to try his luck at Powerball where the projected winnings are $12,000,000. If he wins, he can choose the annuity option (to be paid over 20 years) or a lump sum settlement that he can invest at 8% interest. How much must the lump sum option be to make the lump sum option equal to the annuity option (rounded)?

Accepted Answer

A)  $2,574,578 
B)  $1,743,620 
C)  $1,130,668 
D)  $1,200,000

Question 20

Designs Now is opening a showcase office to display and sell it's computer designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11 percent as its discount rate, what is the present value of the cash flows?

Accepted Answer

A)  $429,720 
B)  $457,620 
C)  $456,000 
D)  $424,820

Exam 5: The Time Value of Money