Question 1

A stainless steel products manufacturer with an 8.5% cost of capital receives a $3,000,000 order,payable at the end of three years.What is the annual payment amount made at the end of each year with the equivalent present value?

Accepted Answer

A)  $660,864 
B)  $919,618 
C)  $949,473 
D)  $997,785

Question 2

If you deposit $9,000 at the end of each year in an account earning 8% interest,what will be the value of the account in 25 years?

Accepted Answer

A)  $600,882.83 
B)  $657,953.46 
C)  $710,589.74 
D)  $719,589.74

Question 3

Which of the following statements is TRUE?

Accepted Answer

A)  It is important to adjust for the differences in the timing of benefits and costs. 
B)  A dollar received today is worth more than a dollar received in the future,assuming a positive interest rate. 
C)  Many fund transfers occur over long periods of time and the time frame needs to be adjusted for. 
D)  All of the above statements are true. 
E)  Only (a)and (b)are true

Question 4

You have the choice between two investments that have the same maturity and the same nominal return.Investment A pays SIMPLE interest,investment B pays compounded interest.Which one should you pick?

Accepted Answer

A)  A,because it has a higher effective annual return. 
B)  A and B offer the same return,thus they are equally as good. 
C)  B,because it has higher effective annual return. 
D)  Not enough information.

Question 5

You set up a college fund in which you pay $2,000 each year at the BEGINNING of the year.How much money will you have accumulated in the fund after 18 years,if your fund earns 7% compounded annually?

Accepted Answer

A)  $72,757.93 
B)  $67,998.07 
C)  $20,118.17 
D)  $28,339.25

Question 6

If you invest $2,500 in a bank account that pays 6% interest compounded monthly,how much will you have in five years?

Accepted Answer

A)  $1,853.43 
B)  $3,345.56 
C)  $2,505.20 
D)  $3,372.13

Question 7

A $200 investment in an account that pays 7% continuous interest would be worth how much in twenty years?

Accepted Answer

A)  $774 
B)  $792 
C)  $811 
D)  $819

Question 8

As a young graduate,you have plans on buying your dream car in three years.You believe the car will cost $50,000.You have two sources of money to reach your goal of $50,000.First,you will save money for the next three years in a money market fund that will return 8% annually.You plan on making $5,000 annual payments to this fund.You will make yearly investments at the BEGINNING of the year.The second source of money will be a car loan that you will take out on the day you buy the car.You anticipate the car dealer to offer you a 6% APR loan with monthly compounding for a term of 60 months.To buy your dream car,what monthly car payment will you anticipate?

Accepted Answer

A)  $483.99 
B)  $540.15 
C)  $627.73 
D)  $652.83

Question 9

A financial advisor recommends saving $1,000,000 for a comfortable retirement.With investment returns of 8%,what is the annual year-end cash flow generated by the $1 million for 25 years,assuming you spend all of the principal and interest?

Accepted Answer

A)  $80,000 
B)  $86,740 
C)  $93,679 
D)  $94,978

Question 10

You are comparing four different investments,as described below: Investment A: Pays 12%,compounded annually
Investment B: Pays 12%,compounded quarterly
Investment C: Pays 12%,compounded semi-annually
Investment D: Pays 12%,compounded continuously
Which of the above investments would result in the highest future value?

Accepted Answer

A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  Investment D 
E)  All of the investments would have the same future value since the stated interest rate is the same.

Question 11

Last national bank offers a CD paying 7% interest (compounded annually).If you invest $1,000 how much will you have at the end of year 5.

Accepted Answer

A)  $712.99 
B)  $1,402.55 
C)  $1,350.00 
D)  $1,000

Question 12

If you invested $2,000 in an account that pays 12% interest,compounded continuously,how much would be in the account in 5 years?

Accepted Answer

A)  $3,524.68 
B)  $3,644.24 
C)  $3,581.70 
D)  $3,200.00

Question 13

When you retire you expect to live for another 30 years.During those 30 years you want to be able to withdraw $45,000 at the BEGINNING of each year for living expenses.How much money do you have to have in your retirement account to make this happen.Assume that you can earn 8% on your investments.

Accepted Answer

A)  $1,350,000.00 
B)  $506,600.25 
C)  $547,128.27 
D)  $723,745.49

Question 14

If you need $35,000 for a down payment on a house in six years,how much money must you invest today at 7% interest compounded annually to achieve your goal?

Accepted Answer

A)  $14,700.00 
B)  $20,300.00 
C)  $23,321.98 
D)  $24,954.52

Question 15

You want to buy your dream car,but you are $5,000 short.If you could invest your entire savings of $2,350 at an annual interest of 12%,how long would you have to wait until you have accumulated enough money to buy the car?

Accepted Answer

A)  9.40 years 
B)  3.48 years 
C)  7.24 years 
D)  6.66 years

Question 16

Roxy is buying a house and the mortgage terms are 30 years,monthly payments.If the interest rate is 7% (APR),the loan is $300,000 loan,what is the amount of the interest in the fifth payment?

Accepted Answer

A)  $1995.90 
B)  $1425.64 
C)  $1744.21 
D)  $ 139.65

Question 17

Emma is buying a house and the mortgage terms are 30 years,monthly payments.If the interest rate is 6% (APR),the loan is $200,000 loan,but Emma will make $300 a month in addition to the required payment,what will the life of the loan be?

Accepted Answer

A)  220 months 
B)  360 months 
C)  290 months 
D)  185 months

Question 18

For a positive r,

Accepted Answer

A)  future value will always exceed present value. 
B)  future and present will always be the same. 
C)  present value will always exceed future value. 
D)  None of the above is true.

Question 19

Which of the following investments would have the highest future value (in year 5)if the discount rate is 12%?

Accepted Answer

A)  A five year ordinary annuity of $100 per year. 
B)  A five year annuity due of $100 per year. 
C)  $700 to be received at year 5 
D)  $500 to be received TODAY (year 0)

Question 20

If the rate of interest that investors can earn on a 2-year investment is zero then

Accepted Answer

A)  you will repay the same amount of money at the conclusion of a loan that you borrowed at the beginning of the 2 year loan. 
B)  the "cost" of using money for 2 years is zero. 
C)  you will receive the same amount of money at maturity that you invested at the beginning of a 2 year investment. 
D)  all of the above.

Exam 3: The Time Value of Money