Question 1

Which of the following statements is NOT correct?

Accepted Answer

A) The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. 
B) If a loan has a nominal annual rate of 8%, then the effective rate can never be less than 8%. 
C) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be the same. 
D) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is less than 6%.

Question 2

How many years would it take $50 to triple if it were invested in a bank that pays 3.8% per year?

Accepted Answer

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

Question 3

You want to go to Europe 5 years from now,and you can save $3,100 per year,beginning immediately.You plan to deposit the funds in a mutual fund that you expect to return 8.5% per year.Under these conditions,how much will you have just after you make the fifth deposit,5 years from now?

Accepted Answer

A) $17,986.82 
B) $18,933.49 
C) $19,929.99 
D) $20,926.49

Question 4

Pace Co.borrowed $25,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Pace have to pay in a 30-day month?

Accepted Answer

A) $136.32 
B) $143.49 
C) $151.04 
D) $158.59

Question 5

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

Question 6

An investment costs $725 and is expected to produce cash flows of $75 at the end of Year 1,$100 at the end of Year 2,$85 at the end of Year 3,and $625 at the end of Year 4.What rate of return would you earn if you bought this investment?

Accepted Answer

A) 5.19% 
B) 5.46% 
C) 5.75% 
D) 6.05%

Question 7

As a result of compounding,the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 8

A $50,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is correct?

Accepted Answer

A) The annual payments would be larger if the interest rate were lower. 
B) If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. 
C) The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
D) The last payment would have a higher proportion of interest than the first payment.

Question 9

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding and a 360-day year.How much could you withdraw after 8 months,assuming each month has 30 days?

Accepted Answer

A) $5,178.09 
B) $5,436.99 
C) $5,708.84 
D) $5,994.28

Question 10

The greater the number of compounding periods within a year,then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 11

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A) $1,922.11 
B) $2,023.28 
C) $2,124.44 
D) $2,230.66

Question 12

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A) $8,956.56 
B) $9,427.96 
C) $9,924.17 
D) $10,446.50

Question 13

You anticipate that you will need $1,500,000 when you retire 30 years from now.You plan to make 30 deposits,beginning today,in a bank account that will pay 6% interest,compounded annually.You expect to receive annual raises of 4%,so you will increase the amount you deposit each year by 4%.(That is,your second deposit will be 4% greater than your first,the third will be 4% greater than the second,etc.) How much must your first deposit be if you are to meet your goal?

Accepted Answer

A) $10,216.60 
B) $10,754.31 
C) $11,320.33 
D) $11,886.35

Question 14

Which investment will have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same.

Accepted Answer

A) Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). 
B) Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C) Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D) Investment D pays $2,500 at the end of 10 years (a total of one payment).

Question 15

Which of the following statements regarding a 15-year (180-month) $125,000 fixed-rate mortgage is NOT correct? (Ignore all taxes and transaction costs.)

Accepted Answer

A) The remaining balance after 3 years will be $125,000 less the total amount of interest paid during the first 36 months. 
B) Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. 
C) The proportion of the monthly payment that goes toward repayment of principal will be higher 10 years from now than it will be the first year. 
D) The outstanding balance gets paid off at a faster rate in the later years of a loan's life.

Question 16

By law,credit card issuers must print the annual percentage rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF percentage?

Accepted Answer

A) 18.58% 
B) 19.56% 
C) 20.54% 
D) 21.57%

Question 17

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 18

Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years.How much interest would you have to pay in the first year?

Accepted Answer

A) $925.97 
B) $974.70 
C) $1,026.00 
D) $1,080.00

Question 19

What's the present value of $1,500 discounted back 5 years if the appropriate interest rate is 6%,compounded semiannually?

Accepted Answer

A) $956.95 
B) $1,007.32 
C) $1,060.33 
D) $1,116.14

Question 20

You own an oil well that will pay you $30,000 per year for 10 years,with the first payment being made today.If you think a fair return on the well is 8.5%,how much should you ask for if you decide to sell it?

Accepted Answer

A) $202,893 
B) $213,572 
C) $224,250 
D) $235,463

Exam 4: Time Value of Money

Which of the following statements is NOT correct?

How many years would it take $50 to triple if it were invested in a bank that pays 3.8% per year?

You want to go to Europe 5 years from now,and you can save $3,100 per year,beginning immediately.You plan to deposit the funds in a mutual fund that you expect to return 8.5% per year.Under these conditions,how much will you have just after you make the fifth deposit,5 years from now?

Pace Co.borrowed $25,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Pace have to pay in a 30-day month?

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?

An investment costs $725 and is expected to produce cash flows of $75 at the end of Year 1,$100 at the end of Year 2,$85 at the end of Year 3,and $625 at the end of Year 4.What rate of return would you earn if you bought this investment?

As a result of compounding,the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

A $50,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is correct?

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding and a 360-day year.How much could you withdraw after 8 months,assuming each month has 30 days?

The greater the number of compounding periods within a year,then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%,compounded monthly?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Which investment will have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same.

Which of the following statements regarding a 15-year (180-month) $125,000 fixed-rate mortgage is NOT correct? (Ignore all taxes and transaction costs.)

By law,credit card issuers must print the annual percentage rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF percentage?

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years.How much interest would you have to pay in the first year?

What's the present value of $1,500 discounted back 5 years if the appropriate interest rate is 6%,compounded semiannually?

You own an oil well that will pay you $30,000 per year for 10 years,with the first payment being made today.If you think a fair return on the well is 8.5%,how much should you ask for if you decide to sell it?