Question 1

Your subscription to Investing Wisely Weekly is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $740,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A)  10.48 
B)  10.72 
C)  11.65 
D)  9.32 
E)  11.42

Question 2

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)  Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). 
B)  Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C)  Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D)  Investment D pays $2,500 at the end of 10 years (just one payment). 
E)  Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  The cash flows for an ordinary (or deferred)annuity all occur at the beginning of the periods. 
B)  If a series of unequal cash flows occurs at regular intervals,such as once a year,then the series is by definition an annuity. 
C)  The cash flows for an annuity due must all occur at the ends of the periods. 
D)  The cash flows for an annuity must all be equal,and they must occur at regular intervals,such as once a year or once a month. 
E)  If some cash flows occur at the beginning of the periods while others occur at the ends,then we have what the textbook defines as a variable annuity.

Question 4

What is the PV of an ordinary annuity with 10 payments of $4,100 if the appropriate interest rate is 5.5%?

Accepted Answer

A)  $31,213.31 
B)  $32,449.48 
C)  $32,140.44 
D)  $37,085.12 
E)  $30,904.27

Question 5

Suppose your credit card issuer states that it charges a 19.50% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Accepted Answer

A)  24.12% 
B)  19.21% 
C)  21.34% 
D)  19.85% 
E)  19.42%

Question 6

At a rate of 5.5%,what is the future value of the following cash flow stream?  ​

Accepted Answer

A)  $773 
B)  $581 
C)  $638 
D)  $709 
E)  $766

Question 7

What's the present value of $1,700 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A)  $1,298.14 
B)  $1,260.33 
C)  $1,335.95 
D)  $1,411.57 
E)  $1,398.97

Question 8

How much would $1,growing at 12.1% per year,be worth after 75 years?

Accepted Answer

A)  $6,041.14 
B)  $5,253.16 
C)  $6,408.86 
D)  $4,465.19 
E)  $5,095.57

Question 9

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the smaller the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 10

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.5% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

Accepted Answer

A)  90.94% 
B)  72.03% 
C)  73.83% 
D)  90.04% 
E)  96.34%

Question 11

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 12

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Accepted Answer

A) True 
 B)False

Question 13

What's the future value of $3,300 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Accepted Answer

A)  $4,080.13 
B)  $4,434.92 
C)  $3,547.94 
D)  $4,701.02 
E)  $3,370.54

Question 14

Suppose you borrowed $30,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

Accepted Answer

A)  $19,118.33 
B)  $22,112.76 
C)  $22,343.11 
D)  $23,034.13 
E)  $20,961.06

Question 15

Your Aunt Ruth has $520,000 invested at 6.5%,and she plans to retire.She wants to withdraw $40,000 at the beginning of each year,starting immediately.How many years will it take to exhaust her funds,i.e. ,run the account down to zero?

Accepted Answer

A)  23.29 
B)  25.79 
C)  29.55 
D)  24.79 
E)  25.04

Question 16

What's the present value of a perpetuity that pays $3,000 per year if the appropriate interest rate is 5%?

Accepted Answer

A)  $60,000.00 
B)  $47,400.00 
C)  $71,400.00 
D)  $63,000.00 
E)  $55,200.00

Question 17

Which of the following statements regarding a 15-year (180-month)$125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

Accepted Answer

A)  The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. 
B)  Because the outstanding balance declines over time,the monthly payments will also decline over time. 
C)  Interest payments on the mortgage will increase steadily over time,but the total amount of each payment will remain constant. 
D)  The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. 
E)  The outstanding balance declines at a faster rate in the later years of the loan's life.

Question 18

Last year Rocco Corporation's sales were $175 million.If sales grow at 6% per year,how large (in millions)will they be 5 years later?

Accepted Answer

A)  $290.39 
B)  $281.03 
C)  $271.66 
D)  $196.72 
E)  $234.19

Question 19

You want to quit your job and return to school for an MBA degree 3 years from now,and you plan to save $2,800 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

Accepted Answer

A)  $9,304.28 
B)  $7,908.64 
C)  $9,025.15 
D)  $10,420.79 
E)  $7,722.55

Question 20

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,600?

Accepted Answer

A)  $118.56 
B)  $85.28 
C)  $79.04 
D)  $89.44 
E)  $104.00

Exam 5: Time Value of Money

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Which of the following statements is CORRECT?

What is the PV of an ordinary annuity with 10 payments of $4,100 if the appropriate interest rate is 5.5%?

Suppose your credit card issuer states that it charges a 19.50% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

At a rate of 5.5%,what is the future value of the following cash flow stream?

What's the present value of $1,700 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

How much would $1,growing at 12.1% per year,be worth after 75 years?

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the smaller the percentage of the payment that will be a repayment of principal.

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.5% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

What's the future value of $3,300 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Suppose you borrowed $30,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

Your Aunt Ruth has $520,000 invested at 6.5%,and she plans to retire.She wants to withdraw $40,000 at the beginning of each year,starting immediately.How many years will it take to exhaust her funds,i.e. ,run the account down to zero?

What's the present value of a perpetuity that pays $3,000 per year if the appropriate interest rate is 5%?

Which of the following statements regarding a 15-year (180-month) $125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

Last year Rocco Corporation's sales were $175 million.If sales grow at 6% per year,how large (in millions) will they be 5 years later?

You want to quit your job and return to school for an MBA degree 3 years from now,and you plan to save $2,800 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,600?

Exam 5: Time Value of Money

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Which of the following statements is CORRECT?

What is the PV of an ordinary annuity with 10 payments of $4,100 if the appropriate interest rate is 5.5%?

Suppose your credit card issuer states that it charges a 19.50% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

At a rate of 5.5%,what is the future value of the following cash flow stream? ​

What's the present value of $1,700 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

How much would $1,growing at 12.1% per year,be worth after 75 years?

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the smaller the percentage of the payment that will be a repayment of principal.

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.5% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

What's the future value of $3,300 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Suppose you borrowed $30,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

Your Aunt Ruth has $520,000 invested at 6.5%,and she plans to retire.She wants to withdraw $40,000 at the beginning of each year,starting immediately.How many years will it take to exhaust her funds,i.e. ,run the account down to zero?

What's the present value of a perpetuity that pays $3,000 per year if the appropriate interest rate is 5%?

Which of the following statements regarding a 15-year (180-month) $125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

Last year Rocco Corporation's sales were $175 million.If sales grow at 6% per year,how large (in millions) will they be 5 years later?

You want to quit your job and return to school for an MBA degree 3 years from now,and you plan to save $2,800 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,600?

At a rate of 5.5%,what is the future value of the following cash flow stream?