Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  A time line is not meaningful unless all cash flows occur annually. 
B)  Time lines are not useful for visualizing complex problems prior to doing actual calculations. 
C)  Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods,i.e. ,for ordinary annuities. 
E)  Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

Question 2

You have a chance to buy an annuity that pays $12,400 at the end 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)  $38,137.99 
B)  $39,141.62 
C)  $36,799.81 
D)  $35,127.09 
E)  $33,454.37

Question 3

Bob has $2,500 invested in a bank that pays 6.8% annually.How long will it take for his funds to double?

Accepted Answer

A)  10.64 years 
B)  9.06 years 
C)  10.54 years 
D)  10.96 years 
E)  8.64 years

Question 4

What's the future value of $1,950 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A)  $3,051.10 
B)  $2,630.26 
C)  $3,208.91 
D)  $2,498.74 
E)  $2,130.51

Question 5

Your aunt is about to retire,and she wants to sell some of her stock and buy an annuity that will provide her with income of $53,000 per year for 30 years,beginning a year from today.The going rate on such annuities is 7.25%.How much would it cost her to buy such an annuity today?

Accepted Answer

A)  $519,610.24 
B)  $493,950.47 
C)  $756,963.06 
D)  $641,494.12 
E)  $647,909.06

Question 6

If the discount (or interest)rate is positive,the present value of an expected series of payments will always exceed the future value of the same series.

Accepted Answer

A) True 
 B)False

Question 7

You deposit $1,125 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 25 years?

Accepted Answer

A)  $5,842.31 
B)  $4,876.64 
C)  $5,456.04 
D)  $4,828.35 
E)  $3,669.55

Question 8

Five years ago,Weed Go Inc.earned $2.30 per share.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS)over the 5-year period?

Accepted Answer

A)  6.83% 
B)  7.58% 
C)  6.55% 
D)  6.35% 
E)  7.72%

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  The present value of a 3-year,$150 annuity due will exceed the present value of a 3-year,$150 ordinary annuity. 
B)  If a loan has a nominal annual rate of 8%,then the effective rate can never be greater than 8%. 
C)  If a loan or investment has annual payments,then the effective,periodic,and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

Question 10

Your aunt has $680,000 invested at 5.5%,and she now wants to retire.She wants to withdraw $45,000 at the beginning of each year,beginning immediately.She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account.For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?

Accepted Answer

A)  23.40 
B)  24.90 
C)  30.00 
D)  36.61 
E)  29.40

Question 11

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,800 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A)  $11,881.98 
B)  $11,104.66 
C)  $12,881.40 
D)  $9,327.91 
E)  $12,215.12

Question 12

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Suppose Randy Jones plans to invest $1,000.He can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be somewhat less than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually. )

Accepted Answer

A) True 
 B)False

Question 15

Which of the following bank accounts has the highest effective annual return?

Accepted Answer

A)  An account that pays 8% nominal interest with monthly compounding. 
B)  An account that pays 8% nominal interest with annual compounding. 
C)  An account that pays 7% nominal interest with daily (365-day)compounding. 
D)  An account that pays 7% nominal interest with monthly compounding. 
E)  An account that pays 8% nominal interest with daily (365-day)compounding.

Question 16

If the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.

Accepted Answer

A) True 
 B)False

Question 17

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 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)  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. 
B)  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. 
C)  The present value of ORD exceeds the present value of DUE,and the future value of ORD also exceeds the future value of DUE. 
D)  The present value of DUE exceeds the present value of ORD,and the future value of DUE also exceeds the future value of ORD. 
E)  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.

Question 18

Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%,compounded monthly.The loan (principal plus interest)must be repaid at the end of the year.Midwest Bank also offers to lend you the $50,000,but it will charge an annual rate of 6.2%,with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?

Accepted Answer

A)  -0.54% 
B)  -0.40% 
C)  -0.50% 
D)  -0.46% 
E)  -0.52%

Question 19

How much would $30,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)  $838.94 
B)  $959.94 
C)  $621.14 
D)  $806.67 
E)  $613.07

Question 20

A $50,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is CORRECT?

Accepted Answer

A)  The annual payments would be larger if the interest rate were lower. 
B)  If the loan were amortized over 10 years rather than 7 years,and if the interest rate were the same in either case,the first payment would include more dollars of interest under the 7-year amortization plan. 
C)  The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
D)  The last payment would have a higher proportion of interest than the first payment. 
E)  The proportion of interest versus principal repayment would be the same for each of the 7 payments.

Exam 5: Time Value of Money

Which of the following statements is CORRECT?

You have a chance to buy an annuity that pays $12,400 at the end 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?

Bob has $2,500 invested in a bank that pays 6.8% annually.How long will it take for his funds to double?

What's the future value of $1,950 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Your aunt is about to retire,and she wants to sell some of her stock and buy an annuity that will provide her with income of $53,000 per year for 30 years,beginning a year from today.The going rate on such annuities is 7.25%.How much would it cost her to buy such an annuity today?

If the discount (or interest)rate is positive,the present value of an expected series of payments will always exceed the future value of the same series.

You deposit $1,125 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 25 years?

Five years ago,Weed Go Inc.earned $2.30 per share.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS) over the 5-year period?

Which of the following statements is CORRECT?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,800 at the end of Year 4 if the interest rate is 5%?

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

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

Which of the following bank accounts has the highest effective annual return?

If the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

How much would $30,000 due in 50 years be worth today if the discount rate were 7.5%?

A $50,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is CORRECT?