Question 1

Your mother has just retired.The balance in her investment account is $600,000 and she wants to receive monthly payments of $5,000.If she receives the payments at the end of the month,and the current interest rate is 7 percent,compounded quarterly,how many months will her investment account last for?

Accepted Answer

A)  98 months 
B)  120 months 
C)  170 months 
D)  206 months

Question 2

Earl has invested $12,000 in a security that pays 2% annual simple interest.How much interest does he earn in the 3rd year?

Accepted Answer

A)  $160 
B)  $240 
C)  $720 
D)  $12,735

Question 3

Josh Ackerman,having saved up a nest egg of $1.5 million,retires this year and looks forward to a 30-year retirement.If his nest egg is expected to earn 9% APR and is compounded monthly,what will be his monthly income during retirement?

Accepted Answer

A)  $50,000.00 
B)  $17,205.12 
C)  $14,600.45 
D)  $12,069.34

Question 4

If I invest $1,000 in a financial instrument paying 10% simple interest payable at the end of each year,I will

Accepted Answer

A)  not receive any interest for the first year. 
B)  receive the same amount of interest each year. 
C)  receive interest only for the first year. 
D)  receive less interest in year ten than in year two. 
E)  receive interest on both the principal and first year's interest in year two.

Question 5

Lucy has just obtained a five-year fixed-rate mortgage to buy her first home.The mortgage is amortized over 30 years.Which of the following statements is most correct?

Accepted Answer

A)  Lucy's payments won't change for the next 30 years. 
B)  Lucy's payments won't change for the next 5 years. 
C)  Lucy's payments will increase as the term of the mortgage increases. 
D)  Lucy's payments will decrease as the term of the mortgage increases.

Question 6

Rosie wants to retire in 30 years.At retirement she wants to be able to withdraw $100,000 at the end of each year forever (she plans on establishing a scholarship fund at her local university after her death).Assuming that her investments can earn 10% compounded semi-annually prior to her retirement and only 5% compounded annually after her retirement (retired people and universities are very conservative investors),how much must Rosie invest each year for the next 30 years? Assume her first deposit will occur in one year.

Accepted Answer

The answer of Rosie wants to retire in 30 years.At...

Question 7

You borrow $50,000 on a line of credit to finance your startup company,to be repaid in three equal,annual payments with 10% interest.Approximately how much of the principal is paid off on the first payment?

Accepted Answer

A)  $5000.00 
B)  $16,666.67 
C)  $15,105.74 
D)  $20,105.74

Question 8

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

Accepted Answer

A)  stay the same. 
B)  increase. 
C)  decrease. 
D)  There is no connection between the amortization period and the size of the payment.

Question 9

You invested $2,000 at 5 percent compounded annually.Determine the value of the investment in five years.(Round your answer to two decimals.)

Accepted Answer

A)  $500.00 
B)  $552.56 
C)  $2,500.00 
D)  $2,552.56

Question 10

Which of the following is the most appropriate timeline for the cash flows of a three-year annuity due with annual cash flows of $5,000?

Accepted Answer

A) .. 
B) . 
C)  
D)

Question 11

Carmen's grandfather died five years ago and left Carmen a perpetuity paying $50,000 a year.Carmen's cost of capital is 4%.After receiving the fifth payment,Carmen received an offer of $1.4 million from The Bizet Hedge Fund for the remainder of the perpetuity.Should Carmen accept the offer?

Accepted Answer

The answer of Carmen's grandfather died five years ago and...

Question 12

An equal-payment mortgage is calculated using the interest on the remaining balance of the capital every month,whereas interest paid on a line of credit is deducted from your account every month.So,mortgage payments are calculated using ______ where line of credit interest is calculated using ______.

Accepted Answer

A)  simple interest, compound interest 
B)  compound interest, simple interest 
C)  simple interest, simple interest 
D)  compound interest, compound interest

Question 13

You invested $2,000 at 5 percent compounded annually.Determine how much interest was earned in the fifth year.(Round your answer to two decimals.)

Accepted Answer

A)  $100.00 
B)  $121.55 
C)  $500.00 
D)  $552.56

Question 14

Marie is considering investing a part of her future income in an investment account that offers 0.5 percent a month.She will start work in 6 months and her contract extends for 2 years.If the investment amount is $300 a month,what is the present value of this investment?

Accepted Answer

A)  $6,768.86 
B)  $8,338.22 
C)  $6,569.30 
D)  $8,903.62

Question 15

As interest rates fall,present values

Accepted Answer

A)  increase. 
B)  decrease. 
C)  stay the same. 
D)  cannot be determined; need compounding frequency.

Question 16

As interest rates rise,future values

Accepted Answer

A)  increase. 
B)  decrease. 
C)  stay the same. 
D)  cannot be determined, need compounding frequency.

Question 17

An annuity due pays out

Accepted Answer

A)  equal payments at the beginning of each time period and continues forever. 
B)  unequal payments at the beginning of each time period for a fixed number of periods. 
C)  equal payments at the beginning of each time period for a fixed number of periods. 
D)  unequal payments at the end of each time period for a fixed number of periods. 
E)  equal payments at the end of each time period and continues forever.

Question 18

On January 1,2016 your bank approved your mortgage and you bought your first home.The mortgage value is $ 180,000,with interest compounded annually at a rate of 10%.In Excel,generate two mortgage amortization schedules for the 25-year mortgage: one showing the monthly payments for the first 12 months and the other showing the annual payments from the next year until the mortgage matures.

Accepted Answer

The answer of On January 1,2016 your bank approved your...

Question 19

Elvira is considering buying a 20-year ordinary annuity to provide her with retirement income.The annuity will make annual payments of $25,000.If her opportunity cost is 7%,what is the maximum she should pay for the annuity?

Accepted Answer

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

Question 20

How much should a monthly compounded account with an EAR of 10% earn semi-annually?

Accepted Answer

A)  4.88% 
B)  5.00% 
C)  4.76% 
D)  5.11%

Exam 5: Time Value of Money

Earl has invested $12,000 in a security that pays 2% annual simple interest.How much interest does he earn in the 3^rd year?