Question 1

An investment pays $1,000 per year for the first four years and $2,000 per year for six years following.If the required rate of return is 8 percent compounded annually,how much is this investment worth?

Accepted Answer

A)   $12,557.89
B)   $10,108.04
C)   $9,604.64
D)   $9,138.52 B

Question 2

Your credit card has a quoted rate of 17% compounded weekly.What is the effective annual rate?

Accepted Answer

A)   884%
B)   18.50%
C)   32.69%
D)   17.00% B

Question 3

Your investment account has an interest rate of 10% compounded semi-annually.This is the equivalent of an effective annual interest rate of

Accepted Answer

A)   1.1025%.
B)   5%.
C)   10%.
D)   10.25%. D

Question 4

In 30 years,you plan to set up a fellowship fund for your university that pays out $100,000/year in perpetuity with an annually compounded discount rate of 5%.In order to set up the fund in 30 years,how much do you need to save each year (starting this year)assuming you can get a semi-annually compounded return of 10% on your savings for the next 30 years?

Accepted Answer

A)   $66,666.67
B)   $11,595.56
C)   $21,215.49
D)   $30,744.90
E)   $30,000.00

Question 5

Your credit card has a quoted rate of 18.5 percent compounded daily.What is the effective annual rate? (Assume 360 days a year.)

Accepted Answer

A)   66.60%
B)   20.32%
C)   51.39%
D)   18.50%

Question 6

Montreal Financial Services Company offers a perpetuity of $5,000 per year with the first payment immediately.If your opportunity cost is 8% compounded annually,the present value of the perpetuity today is

Accepted Answer

A)   $57,500.
B)   $62,500.
C)   $67,500.
D)   $125,000.

Question 7

Montreal Financial Services Company offers a perpetuity of $50,000 per year with the first payment on January 1 next year.If your opportunity costs are constant over time,the price you are willing to pay for this perpetuity ______ over time.

Accepted Answer

A)   increases
B)   decreases
C)   stays the same
D)   can't determine without the opportunity cost

Question 8

How much should a monthly compounded account with an EAR of 18% earn semi-annually?

Accepted Answer

A)   2.80%
B)   3.00%
C)   2.77%
D)   8.63%

Question 9

Eloise has deposited $2,000 in an investment account that pays 5% compounded continuously.How much will she have in her account in two years?

Accepted Answer

A)   $2,205.00
B)   $2,210.34
C)   $2,105.54
D)   $1,809.67

Question 10

Your bank offers two options: Account A compounds semi-annually while account B compounds monthly.If both accounts have the same effective annual rate of interest,you should choose

Accepted Answer

A)   account A as it offers a higher APR.
B)   account B as it offers a higher APR.
C)   account B because it is compounded more often.
D)   account A because it is compounded less often.
E)   either since you would be indifferent between the two.

Question 11

For a given quoted rate,the effective annual rate ______ as the compounding frequency increases.

Accepted Answer

A)   does not change
B)   increases
C)   decreases
D)   There is no connection between the effective annual rate and the quoted rate.

Question 12

Wilma borrows $10,000 from "Jaw Breaker Joe" and promises to repay Joe a total of $10,500 in one month.What is the effective annual interest rate charged by Joe?

Accepted Answer

A)   5.00%
B)   60.00%
C)   79.59%
D)   179.59%

Question 13

The R&M Bank has offered you the choice between two investment accounts:
#1 pays interest at a rate of 12% compounded semi-annually.
#2 pays interest at a rate of 11% compounded monthly.
Which investment account do you prefer and why?

Accepted Answer

A)   #1, 12% is greater than 11%
B)   #2, greater compounding frequency
C)   #1, higher effective rate
D)   #2, higher effective rate

Question 14

As the term of a mortgage increases,holding interest rates constant,the monthly payments will

Accepted Answer

A)   stay about the same.
B)   increase.
C)   decrease.
D)   There is no connection between the term and the size of the payments.

Question 15

Eduardo bought a house for $120,000 five years ago.He has just sold it for $180,000.What annual rate of return did he earn on this investment?

Accepted Answer

A)   10%
B)   8.45%
C)   1.08%
D)   3.13%

Question 16

Kangaroo Motors has a used car for sale at $4,300,which you want to buy for driving to school.Your parents are willing to lend you the money and charge only 3.60 % APR compounded monthly.They want the loan repaid equally in 48 months,with the first payment due at the end of the month in which you buy the car.You estimate that the monthly cost of operating the car,including gas,insurance,maintenance,and licence fees,will be $160 and payable at the start of each month.The cost of a monthly bus pass is $95.You expect that the car will be totally worn out in four years,with zero resale value,when you are finished school.Your discount rate is 5 percent EAR,compounded annually.
A) What is the monthly interest rate on the parents' car loan?
B) What is the monthly car repayment?
C) What is the monthly opportunity cost of funds?
D) What is the present value of the car costs?
E) If you have three roommates who also need transportation to and from school, how much do you and your roommates each need to pay a month in order to cover all your costs?

Accepted Answer

The answer of Kangaroo Motors has a used car for...

Question 17

Franklin needs to have $1,000 in 8 years.If his investment earns 5 percent compounded annually,how much must he invest today? (Round your answer to two decimals.)

Accepted Answer

A)   $676.84
B)   $680.58
C)   $1,477.46
D)   $1,469.33

Question 18

Amir has obtained a $250,000 mortgage.The mortgage is amortized over 25 years and the term of the mortgage is five years.The mortgage interest rate is 9% compounded semi-annually.Amir will begin making monthly payments at the end of the month.The monthly payment is closest to

Accepted Answer

A)   $2,069.94.
B)   $2,097.99.
C)   $5,169.68.
D)   $5,189.59.

Question 19

If Frank is indifferent between receiving $1,000 today and $1,100 in one year,his opportunity cost must be close to

Accepted Answer

A)   1.10%.
B)   10%.
C)   110%.
D)   100%.

Question 20

Elvira is considering buying a 20-year annuity due to provide her retirement income.The annuity will make annual payments of $25,000.If her opportunity cost is 7%,what is the present value of the annuity?

Accepted Answer

A)   $1,096,629.42
B)   $1,024,887.31
C)   $283,389.88
D)   $264,850.36

Exam 5: Time Value of Money