Question 1

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A)   7.12%
B)   7.49%
C)   7.87%
D)   8.26%
E)   8.67%F) None of the above
G) A) and C)

Question 2

S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Accepted Answer

A)   The periodic interest rate is greater than 3%.
B)   The periodic rate is less than 3%.
C)   The present value would be greater if the lump sum were discounted back for more periods.
D)   The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.
E)   The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.F) A) and B)
G) A) and E) E

Question 3

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

A)   $16,806
B)   $17,690
C)   $18,621
D)   $19,601
E)   $20,633F) A) and D)
G) C) and D)

Question 4

Your Aunt Ruth has $500,000 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)   18.62
B)   19.60
C)   20.63
D)   21.71
E)   22.86F) B) and C)
G) A) and E)

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
B)   If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
C)   To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.
D)   If you solve for I and get a negative number, then you must have made a mistake.
E)   If CF0 is positive and all the other CFs are negative, then you can still solve for I.F) None of the above
G) A) and D)

Question 6

Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Accepted Answer

A)   14.39
B)   15.15
C)   15.95
D)   16.79
E)   17.67F) A) and B)
G) A) and C)

Question 7

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

Accepted Answer

A)   $18,369
B)   $19,287
C)   $20,251
D)   $21,264
E)   $22,327F) A) and E)
G) C) and E)

Question 8

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)   $1,994.49
B)   $2,099.46
C)   $2,209.96
D)   $2,326.27
E)   $2,442.59F) D) and E)
G) C) and D)

Question 9

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

Accepted Answer

A)   $1,928.78
B)   $2,030.30
C)   $2,131.81
D)   $2,238.40
E)   $2,350.32F) A) and B)
G) C) and D)

Question 10

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.F) C) and D)
G) B) and D)

Question 11

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Accepted Answer

A)   $1,819
B)   $1,915
C)   $2,016
D)   $2,117
E)   $2,223F) C) and E)
G) A) and D)

Question 12

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A)   $ 8,509
B)   $ 8,957
C)   $ 9,428
D)   $ 9,924
E)   $10,446F) All of the above
G) C) and D)

Question 13

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 14

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)   $7,531
B)   $7,927
C)   $8,323
D)   $8,740
E)   $9,177F) C) and E)
G) B) and D) B

Question 15

Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Accepted Answer

A)   $205.83
B)   $216.67
C)   $228.07
D)   $240.08
E)   $252.08F) A) and E)
G) C) and D) D

Question 16

Last year Dania Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions)  will they be 8 years later?

Accepted Answer

A)   $ 845.03
B)   $ 889.51
C)   $ 936.33
D)   $ 983.14
E)   $1,032.30F) B) and E)
G) A) and B)

Question 17

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Accepted Answer

A)   8.24%
B)   8.45%
C)   8.66%
D)   8.88%
E)   9.10%F) None of the above
G) B) and D)

Question 18

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)   $28,843.38
B)   $30,361.46
C)   $31,959.43
D)   $33,641.50
E)   $35,323.58F) None of the above
G) C) and E)

Question 19

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 20

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 $850, 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)   7.48
B)   8.80
C)   10.35
D)   12.18
E)   14.33F) B) and C)
G) D) and E)

Exam 5: Time Value of Money

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Correct Answer
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S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Correct Answer
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E

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Correct Answer
verified

Your Aunt Ruth has $500,000 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?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Correct Answer
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You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

Correct Answer
verified

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Correct Answer
verified

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Correct Answer
verified

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Correct Answer
verified

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

Correct Answer
verified

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

Correct Answer
verified
B

Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Correct Answer
verified
D

Last year Dania Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Correct Answer
verified

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Correct Answer
verified

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Correct Answer
verified

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Correct Answer
verified

Correct Answer
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Exam 5: Time Value of Money

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Correct AnswerverifiedShow Answer

S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Correct AnswerverifiedE

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Correct AnswerverifiedShow Answer

Your Aunt Ruth has $500,000 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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Correct AnswerverifiedShow Answer

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

Correct AnswerverifiedShow Answer

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Correct AnswerverifiedShow Answer

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Correct AnswerverifiedShow Answer

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Correct AnswerverifiedShow Answer

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

Correct AnswerverifiedShow Answer

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

Correct AnswerverifiedB

Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Correct AnswerverifiedD

Last year Dania Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Correct AnswerverifiedShow Answer

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Correct AnswerverifiedShow Answer

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Correct AnswerverifiedShow Answer

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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E

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B

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D

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