Question 1

You want to buy a new sports car 3 years from now,and you plan to save $4,200 per year,beginning immediately.You will make three deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

Accepted Answer

A) $13,956.42 
B) $14,654.24 
C) $15,386.95 
D) $16,156.30

Question 2

What is the present value of the following cash flow stream at an interest rate of 12.0% per year: $0 at Time 0; $1,500 at the end of Year 1; $3,000 at the end of Year 2; $4,500 at the end of Year 3; and $6,000 at the end of Year 4?

Accepted Answer

A) $10,209.64 
B) $10,746.99 
C) $11,284.34 
D) $11,848.55

Question 3

You have a chance to buy an annuity that pays $1,200 at the end 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) $2,775.77 
B) $2,921.86 
C) $3,075.64 
D) $3,237.52

Question 4

Which of the following statements is correct regarding time value of money?

Accepted Answer

A) The present value of a series of fixed payments will be less than its expected future value. 
B) The present value of a series of fixed payments will be greater than its expected future value. 
C) The future value of a series of fixed payments will be less than its expected future value. 
D) The future value of an annuity will be equal to its present value.

Question 5

Your child's orthodontist offers you two alternative payment plans.The first plan requires a $4,000 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?

Accepted Answer

A) 12.31% 
B) 12.96% 
C) 13.64% 
D) 14.36%

Question 6

Suppose you inherited $275,000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?

Accepted Answer

A) $22,598.63 
B) $23,788.03 
C) $25,040.03 
D) $26,357.92

Question 7

You want to go to Europe 5 years from now,and you can save $3,100 per year,beginning 1 year from today.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) $18,368.66 
B) $19,287.09 
C) $20,251.44 
D) $21,264.02

Question 8

Suppose a Government of Canada bond will pay $2,500 five years from now.If the going interest rate on 5-year treasury bonds is 4.25%,how much is the bond worth today?

Accepted Answer

A) $1,928.78 
B) $2,030.30 
C) $2,131.81 
D) $2,238.40

Question 9

What annual payment would you have to receive in order to earn a 7.5% rate of return on a perpetuity that has a cost of $1,250?

Accepted Answer

A) $89.06 
B) $93.75 
C) $98.44 
D) $103.36

Question 10

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.By how much would you reduce the amount you owe in the first year?

Accepted Answer

A) $2,492.82 
B) $2,624.02 
C) $2,755.23 
D) $2,892.99

Question 11

When inputting information into a financial calculator,one of the cash flow components must be negative since the calculator is set up to solve an equation equal to zero.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is true regarding a mortgage?

Accepted Answer

A) The payment is made up of principal and interest. 
B) Payments in the early years of the mortgage have more interest and less principal. 
C) Payments in the later years of the mortgage have more interest and less principal. 
D) Both A and B are correct.

Question 13

At a rate of 6.25%,what is the present value of the following cash flow stream: $0 at Time 0; $75 at the end of Year 1; $225 at the end of Year 2; $0 at the end of Year 3; and $300 at the end of Year 4?

Accepted Answer

A) $433.23 
B) $456.03 
C) $480.03 
D) $505.30

Question 14

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

Accepted Answer

A) 6.52% 
B) 7.25% 
C) 8.95% 
D) 9.84%

Question 15

Which of the following statements is correct?

Accepted Answer

A) If you have a series of cash flows, all of which are positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
B) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. 
C) If you solve for I and get a negative number, then you must have made a mistake. 
D) If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

Question 16

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is correct?

Accepted Answer

A) The monthly payments will decline over time. 
B) A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
C) The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. 
D) Exactly 10% of the first monthly payment represents interest.

Question 17

If a bank pays a 4.50% nominal rate,with monthly compounding on deposits,what effective annual rate (EFF%) does the bank pay?

Accepted Answer

A) 3.35% 
B) 3.72% 
C) 4.13% 
D) 4.59%

Question 18

What is the PV of an annuity due with 10 payments of $2,700 at an interest rate of 6.5%?

Accepted Answer

A) $20,671.48 
B) $21,705.06 
C) $22,790.31 
D) $23,929.82

Question 19

Suppose a bank offers to lend you $10,000 for one year at a nominal annual rate of 10.25%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A) 7.76% 
B) 8.63% 
C) 9.59% 
D) 10.65%

Question 20

Calculating present value and future value using simple interest will result in a smaller PV and FV than the same calculation using compound interest.

Accepted Answer