Question 1

Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today.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)  $5,493.71 
B)  $5,782.85 
C)  $6,087.21 
D)  $6,407.59 
E)  $6,744.83

Question 2

All other things held constant,the present value of a given annual annuity increases as the number of periods per year increases.

Accepted Answer

A) True 
 B)False

Question 3

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

A)  $16,806 
B)  $17,690 
C)  $18,621 
D)  $19,601 
E)  $20,633

Question 4

What is the present value of the following cash flow stream at a rate of 12.0%?

Accepted Answer

A)  $9,699 
B)  $10,210 
C)  $10,747 
D)  $11,284 
E)  $11,849

Question 5

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD)that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

Accepted Answer

A)  $1,781.53 
B)  $1,870.61 
C)  $1,964.14 
D)  $2,062.34 
E)  $2,165.46

Question 6

A new investment opportunity for you is 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 
E)  $1,725.94

Question 7

Your Green Investment Tips subscription is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $850,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33

Question 8

You would like to travel in South America 5 years from now,and you can save $3,100 per year,beginning one year from today.You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.Under these conditions,how much would you have just after you make the 5th deposit,5 years from now?

Accepted Answer

A)  $18,369 
B)  $19,287 
C)  $20,251 
D)  $21,264 
E)  $22,327

Question 9

A time line is not meaningful unless all cash flows occur annually.

Accepted Answer

A) True 
 B)False

Question 10

Suppose People's 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 11

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Accepted Answer

A)  The discount rate decreases. 
B)  The cash flows are in the form of a deferred annuity,and they total to $100,000.You learn that the annuity lasts for only 5 rather than 10 years,hence that each payment is for $20,000 rather than for $10,000. 
C)  The discount rate increases. 
D)  The riskiness of the investment's cash flows decreases. 
E)  The total amount of cash flows remains the same,but more of the cash flows are received in the earlier years and less are received in the later years.

Question 12

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Accepted Answer

A)  $4,750 
B)  $5,000 
C)  $5,250 
D)  $5,513 
E)  $5,788

Question 13

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Accepted Answer

A)  $16,576 
B)  $17,449 
C)  $18,367 
D)  $19,334 
E)  $20,352

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  If some cash flows occur at the beginning of the periods while others occur at the ends,then we have what the textbook defines as a variable annuity. 
B)  The cash flows for an ordinary (or deferred)annuity all occur at the beginning of the periods. 
C)  If a series of unequal cash flows occurs at regular intervals,such as once a year,then the series is by definition an annuity. 
D)  The cash flows for an annuity due must all occur at the ends of the periods. 
E)  The cash flows for an annuity must all be equal,and they must occur at regular intervals,such as once a year or once a month.

Question 15

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A)  $1,537.69 
B)  $1,618.62 
C)  $1,699.55 
D)  $1,784.53 
E)  $1,873.76

Question 16

You are considering two equally risky annuities,each of which pays $15,000 per year for 20 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)  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. 
B)  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. 
C)  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. 
D)  The present value of ORD exceeds the present value of DUE,and the future value of ORD also exceeds the future value of DUE. 
E)  The present value of DUE exceeds the present value of ORD,and the future value of DUE also exceeds the future value of ORD.

Question 17

At the end of 10 years,which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

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 (just one payment). 
E)  Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).

Question 18

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 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  If some cash flows occur at the beginning of the periods while others occur at the ends,then we have what the textbook defines as a variable annuity. 
B)  The cash flows for an ordinary (or deferred)annuity all occur at the beginning of the periods. 
C)  If a series of unequal cash flows occurs at regular intervals,such as once a year,then the series is by definition an annuity. 
D)  The cash flows for an annuity due must all occur at the beginning of the periods. 
E)  The cash flows for an annuity may vary from period to period,but they must occur at regular intervals,such as once a year or once a month.

Exam 4: Time Value of Money

Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

All other things held constant,the present value of a given annual annuity increases as the number of periods per year increases.

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

What is the present value of the following cash flow stream at a rate of 12.0%?

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

A new investment opportunity for you is 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?

A time line is not meaningful unless all cash flows occur annually.

Suppose People's 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 plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Which of the following statements is CORRECT?

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%,compounded monthly?

You are considering two equally risky annuities,each of which pays $15,000 per year for 20 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

At the end of 10 years,which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

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

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

Which of the following statements is CORRECT?