Question 1

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 2

Your uncle has $375,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Accepted Answer

A) $28,843.38 
B) $30,361.46 
C) $31,959.43 
D) $33,641.50 
E) $35,323.58

Question 3

Last year Thomson Inc's earnings per share were $3.50,and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained,how many years would it take for Thomson's EPS to triple?

Accepted Answer

A) 9.29 
B) 10.33 
C) 11.47 
D) 12.75 
E) 14.02

Question 4

You just inherited some money,and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Accepted Answer

A) $50,753 
B) $53,424 
C) $56,236 
D) $59,195 
E) $62,311

Question 5

Your bank account pays a 6% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

A) The periodic rate of interest is 1.5% and the effective rate of interest is 3%. 
B) The periodic rate of interest is 6% and the effective rate of interest is greater than 6%. 
C) The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. 
D) The periodic rate of interest is 3% and the effective rate of interest is 6%. 
E) The periodic rate of interest is 6% and the effective rate of interest is also 6%.

Question 6

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred)annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Accepted Answer

A) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. 
B) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
C) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
D) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. 
E) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

Question 7

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

Accepted Answer

A) True 
 B)False

Question 8

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1,$1,000 at the end of Year 2,$850 at the end of Year 3,and $6,250 at the end of Year 4.What rate of return would you earn if you bought this asset?

Accepted Answer

A) 4.93% 
B) 5.19% 
C) 5.46% 
D) 5.75% 
E) 6.05%

Question 9

You deposit $1,000 today in a savings account that pays 3.5% interest,compounded annually.How much will your account be worth at the end of 25 years?

Accepted Answer

A) $2,245.08 
B) $2,363.24 
C) $2,481.41 
D) $2,605.48 
E) $2,735.75

Question 10

Pace Co.borrowed $20,000 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) $120.83 
B) $126.88 
C) $133.22 
D) $139.88 
E) $146.87

Question 11

Your uncle has $300,000 invested at 7.5%,and he now wants to retire.He wants to withdraw $35,000 at the end of each year,starting at the end of this year.He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account.For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?

Accepted Answer

A) 14.21 
B) 14.96 
C) 15.71 
D) 16.49 
E) 17.32

Question 12

Your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%,with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for Year 1?

Accepted Answer

A) $17,419.55 
B) $17,593.75 
C) $17,769.68 
D) $17,947.38 
E) $18,126.85

Question 13

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Accepted Answer

A) $3,704.02 
B) $3,889.23 
C) $4,083.69 
D) $4,287.87 
E) $4,502.26

Question 14

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A) 8.46% 
B) 8.90% 
C) 9.37% 
D) 9.86% 
E) 10.38%

Question 15

Your father's employer was just acquired,and he was given a severance payment of $375,000,which he invested at a 7.5% annual rate.He now plans to retire,and he wants to withdraw $35,000 at the end of each year,starting at the end of this year.How many years will it take to exhaust his funds,i.e.,run the account down to zero?

Accepted Answer

A) 22.50 
B) 23.63 
C) 24.81 
D) 26.05 
E) 27.35

Question 16

You want to buy a new ski boat 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?

Accepted Answer

A) $15,260 
B) $16,063 
C) $16,908 
D) $17,754 
E) $18,642

Question 17

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Accepted Answer

A) $77.19 
B) $81.25 
C) $85.31 
D) $89.58 
E) $94.06

Question 18

You are considering investing in a bank account that pays a nominal annual rate of 7%,compounded monthly.If you invest $3,000 at the end of each month,how many months will it take for your account to grow to $150,000?

Accepted Answer

A) 39.60 
B) 44.00 
C) 48.40 
D) 53.24 
E) 58.57

Question 19

Jose now has $500.How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

Accepted Answer

A) $591.09 
B) $622.20 
C) $654.95 
D) $689.42 
E) $723.89

Question 20

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred)annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Accepted Answer

A) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. 
B) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
C) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
D) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD. 
E) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

Exam 5: Time Value of Money

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Your uncle has $375,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Last year Thomson Inc's earnings per share were $3.50,and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained,how many years would it take for Thomson's EPS to triple?

You just inherited some money,and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Your bank account pays a 6% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1,$1,000 at the end of Year 2,$850 at the end of Year 3,and $6,250 at the end of Year 4.What rate of return would you earn if you bought this asset?

You deposit $1,000 today in a savings account that pays 3.5% interest,compounded annually.How much will your account be worth at the end of 25 years?

Pace Co.borrowed $20,000 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?

Your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%,with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for Year 1?

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

You want to buy a new ski boat 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

You are considering investing in a bank account that pays a nominal annual rate of 7%,compounded monthly.If you invest $3,000 at the end of each month,how many months will it take for your account to grow to $150,000?

Jose now has $500.How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?