Question 1

The interest portion increases and the principal portion decreases over time under a typical loan amortization schedule.

Accepted Answer

A) True 
 B)False

Question 2

Level cash flow amounts that occur at the end of each period, beginning starting at the end of the first period, form are an annuity due.

Accepted Answer

A) True 
 B)False

Question 3

A loan that is repaid in equal payments over a specified time period is referred to as a (n):

Accepted Answer

A) discounted loan 
B) amortized loan 
C) simple interest-free loan 
D) inflation-indexed loan

Question 4

Christine has just purchased a used Mercedes for $18,995.She plans to make a $2,500 down payment on the new car.What is the amount of her monthly payment on the remaining loan if she must pay 12% annual interest on a 24-month car loan?

Accepted Answer

A) $759.53 
B) $776.48 
C) $894.16 
D) $899.87

Question 5

A hospital received a contribution to its endowment fund of $2 million.The hospital can never touch the principal, but it can use the earnings.At an assumed interest rate of 9.5 percent, how much can the hospital earn to help its operations each year?

Accepted Answer

A) $95,000 
B) $19,000. 
C) $190,000. 
D) $18,000.

Question 6

At very high interest rates the "Rule of 72" will result in a small estimation error for the estimate of the time for an investment to double.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is most correct?

Accepted Answer

A) There is an inverse relation between the present value interest factor of an annuity and the future value interest factor of an annuity, i.e., one is the reciprocal of the other. 
B) The future value of an ordinary annuity can be determined as the product of the annual payment and the appropriate future value interest factor for an ordinary annuity. 
C) If a bank uses daily compounding for a savings account, the nominal rate (or APR) will be greater than the effective annual rate. 
D) Each of the above statements is equally true.

Question 8

Carol Channing is planning for her son's college education to begin five years from today.She estimates the yearly tuition, books, and living expenses to be $5,000 per year for a four-year degree.How much must Carol deposit today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four years of college?

Accepted Answer

A) $20,000 
B) $13,620 
C) $39,520 
D) $11,277

Question 9

TWhen the amount earned on a deposit has becomes part of the principal at the end of a specified time period and can earn a return in future periods the concept is called

Accepted Answer

A) discount interest. 
B) compound interest. 
C) primary interest. 
D) future value.

Question 10

Suppose you were going to save $1,000 per year for three years at a 10% interest rate compounded annually, with the first investment occurring today.What would be the future value of this investment?

Accepted Answer

A) $2,124 
B) $2,310 
C) $3,641 
D) $3,812

Question 11

$100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3.If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is ________.

Accepted Answer

A) $1,536. 
B) $672. 
C) $727. 
D) $1,245.

Question 12

Compound interest is interest earned on interest in addition to interest earned on the principal.

Accepted Answer

A) True 
 B)False

Question 13

You have just won a lottery! You will receive $50,000 a year beginning one year from now for 20 years.If your required rate of return is 10%, what is the present value of your winning lottery ticket?

Accepted Answer

A) $418,250 
B) $425,700 
C) $444,640 
D) $453,850

Question 14

With compound interest, interest is earned only on the investment's principal.

Accepted Answer

A) True 
 B)False

Question 15

If the interest rate is zero, the future value interest factor equals ________.

Accepted Answer

A) -1.0 
B) 0.0 
C) 1.0 
D) 2.0

Question 16

A wealthy inventor has decided to endow her favorite art museum by establishing funds for an endowment which would provide $1,000,000 per year for researchforever.The scientistShe will fund the endowment upon her fiftieth birthday 10 years from today.She plans to accumulate the endowment by making annual end-of-year deposits into an account.The rate of interest is expected to be 6 percent in all future periods.How much must the scientist deposit each year to accumulate to the required amount?

Accepted Answer

A) $1,575,333 
B) $736,000 
C) $1,264,446 
D) $943,396

Question 17

Which of the following statements is false?

Accepted Answer

A) MFor a given APR, more frequent compounding results in additional return on the investment. 
B) An amortized loan is repaid in equal payments over a specified time period. 
C) The effective annual rate is determined by multiplying the interest rate charged per period by the number of periods in a year. 
D) Each of the above statements is true.

Question 18

Assume a lender offers you a $25,000, 10%, three-year loan that is to be fully amortized with three annual payments.The first payment will be due one year from the loan date.How much will you have to pay each year?

Accepted Answer

A) $8,042 
B) $9,026 
C) $10,053 
D) $11,120

Question 19

The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, is

Accepted Answer

A) $288 
B) $1,896. 
C) $1,750. 
D) $1,558.

Question 20

George Bush makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest rate of 13 percent.The original principal amount was

Accepted Answer

A) $24,462 
B) $15,000 
C) $3,092 
D) $20,175

Exam 9: Time Value of Money

The interest portion increases and the principal portion decreases over time under a typical loan amortization schedule.

Level cash flow amounts that occur at the end of each period, beginning starting at the end of the first period, form are an annuity due.

A loan that is repaid in equal payments over a specified time period is referred to as a (n) :

Christine has just purchased a used Mercedes for $18,995.She plans to make a $2,500 down payment on the new car.What is the amount of her monthly payment on the remaining loan if she must pay 12% annual interest on a 24-month car loan?

A hospital received a contribution to its endowment fund of $2 million.The hospital can never touch the principal, but it can use the earnings.At an assumed interest rate of 9.5 percent, how much can the hospital earn to help its operations each year?

At very high interest rates the "Rule of 72" will result in a small estimation error for the estimate of the time for an investment to double.

Which of the following statements is most correct?

TWhen the amount earned on a deposit has becomes part of the principal at the end of a specified time period and can earn a return in future periods the concept is called

Suppose you were going to save $1,000 per year for three years at a 10% interest rate compounded annually, with the first investment occurring today.What would be the future value of this investment?

$100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3.If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is ________.

Compound interest is interest earned on interest in addition to interest earned on the principal.

You have just won a lottery! You will receive $50,000 a year beginning one year from now for 20 years.If your required rate of return is 10%, what is the present value of your winning lottery ticket?

With compound interest, interest is earned only on the investment's principal.

If the interest rate is zero, the future value interest factor equals ________.

Which of the following statements is false?

Assume a lender offers you a $25,000, 10%, three-year loan that is to be fully amortized with three annual payments.The first payment will be due one year from the loan date.How much will you have to pay each year?

The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, is

George Bush makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest rate of 13 percent.The original principal amount was