Question 1

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Accepted Answer

A)   $3,089
B)   $3,251
C)   $3,422
D)   $3,602
E)   $3,782F) C) and D)
G) B) and E)

Question 2

You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?

Accepted Answer

A)   12.37
B)   13.74
C)   15.27
D)   16.97
E)   18.85F) B) and C)
G) All of the above E

Question 3

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Accepted Answer

A)   $1,200.33
B)   $1,263.50
C)   $1,330.00
D)   $1,400.00
E)   $1,470.00F) A) and E)
G) C) and D)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
B)   If a loan has a nominal annual rate of 8%, then the effective rate will never be less 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%.F) C) and E)
G) B) and E) B

Question 5

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)   $651.60
B)   $684.18
C)   $718.39
D)   $754.31
E)   $792.02F) A) and B)
G) A) and C)

Question 6

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) .F) A) and D)
G) B) and E)

Question 7

Which of the following investments would have the highest future value at the end of 10 years? 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 beginning 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) B) and C)
F) All of the above

Question 8

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

Accepted Answer

A)   $28,532
B)   $29,959
C)   $31,457
D)   $33,030
E)   $34,681F) None of the above
G) All of the above

Question 9

On January 1, 2009, your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2009?

Accepted Answer

A)   $17,419.55
B)   $17,593.75
C)   $17,769.68
D)   $17,947.38
E)   $18,126.85F) A) and D)
G) C) and E)

Question 10

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 11

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 B)
G) B) and E)

Question 12

Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%)  does the bank pay?

Accepted Answer

A)   3.72%
B)   4.13%
C)   4.59%
D)   5.05%
E)   5.56%F) A) and C)
G) All of the above

Question 13

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Accepted Answer

A) True 
 B)False

Question 14

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Accepted Answer

A)   7.62%
B)   8.00%
C)   8.40%
D)   8.82%
E)   9.26%F) A) and B)
G) C) and D)

Question 15

What is the present value of the following cash flow stream at a rate of 8.0%?

Accepted Answer

A)   $7,917
B)   $8,333
C)   $8,772
D)   $9,233
E)   $9,695F) None of the above
G) A) and C)

Question 16

Which of the following bank accounts has the lowest 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.F) B) and D)
G) B) and C) D

Question 17

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)   $969
B)   $1,020
C)   $1,074
D)   $1,131
E)   $1,187F) B) and C)
G) A) and B)

Question 18

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) D) and E)
G) B) and E)

Question 19

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Accepted Answer

A)   Bank 1; 6.1% with annual compounding.
B)   Bank 2; 6.0% with monthly compounding.
C)   Bank 3; 6.0% with annual compounding.
D)   Bank 4; 6.0% with quarterly compounding.
E)   Bank 5; 6.0% with daily (365-day)  compounding.F) A) and C)
G) B) and D)

Question 20

Jose now has $500. it invested at 5.5% How much would he have after 6 years if he leaves with annual compounding?

Accepted Answer

A)   $591.09
B)   $622.20
C)   $654.95
D)   $689.42
E)   $723.89F) B) and E)
G) C) and E)

Exam 4: Time Value of Money

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Correct AnswerverifiedShow Answer

You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?

Correct AnswerverifiedE

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedB

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct AnswerverifiedShow Answer

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

Correct AnswerverifiedShow Answer

On January 1, 2009, your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2009?

Correct AnswerverifiedShow Answer

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

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

Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay?

Correct AnswerverifiedShow Answer

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Correct AnswerverifiedShow Answer

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Correct AnswerverifiedShow Answer

What is the present value of the following cash flow stream at a rate of 8.0%?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedD

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Correct AnswerverifiedShow Answer

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

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Correct AnswerverifiedShow Answer

Jose now has $500. it invested at 5.5% How much would he have after 6 years if he leaves with annual compounding?

Correct AnswerverifiedShow Answer

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D

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