Question 1

A U.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) B) and E)
G) A) and B)

Question 2

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Accepted Answer

A)  6.85%
B)  7.21%
C)  7.59%
D)  7.99%
E)  8.41%F) B) and C)
G) All of the above

Question 3

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) A) and C)

Question 4

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Accepted Answer

A)  The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
B)  The discount rate increases.
C)  The riskiness of the investment's cash flows decreases.
D)  The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
E)  The discount rate decreases.F) C) and E)
G) B) and E)

Question 5

Your aunt has $500,000 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)  15.54
B)  16.36
C)  17.22
D)  18.08
E)  18.99F) A) and D)
G) A) and C)

Question 6

Your uncle is about to retire,and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years,with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost him to buy the annuity today?

Accepted Answer

A)  $ 825,835
B)  $ 869,300
C)  $ 915,052
D)  $ 963,213
E)  $1,011,374F) A) and E)
G) A) and D)

Question 7

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

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) None of the above
G) A) and D)

Question 9

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?

Accepted Answer

A)  The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
B)  The discount rate decreases.
C)  The riskiness of the investment's cash flows increases.
D)  The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.
E)  The discount rate increases.F) A) and C)
G) A) and B)

Question 10

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

Accepted Answer

A)  $2,404.91
B)  $2,531.49
C)  $2,658.06
D)  $2,790.96
E)  $2,930.51F) A) and B)
G) A) and E)

Question 11

The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

Accepted Answer

A) True 
 B)False

Question 12

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Accepted Answer

A)  $4,750
B)  $5,000
C)  $5,250
D)  $5,513
E)  $5,788F) C) and D)
G) A) and E)

Question 13

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Accepted Answer

A)  15.27%
B)  16.08%
C)  16.88%
D)  17.72%
E)  18.61%F) A) and E)
G) B) and C)

Question 14

How much would $100,growing at 5% per year,be worth after 75 years?

Accepted Answer

A)  $3,689.11
B)  $3,883.27
C)  $4,077.43
D)  $4,281.30
E)  $4,495.37F) A) and E)
G) B) and D)

Question 15

Sam was injured in an accident,and the insurance company has offered him the choice of $25,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave him as well off financially as with the annuity?

Accepted Answer

A)  $225,367
B)  $237,229
C)  $249,090
D)  $261,545
E)  $274,622F) B) and E)
G) A) and B)

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic rate of interest is 2% and the effective rate of interest is 4%.
B)  The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
C)  The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
D)  The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
E)  The periodic rate of interest is 8% and the effective rate of interest is also 8%.F) C) and D)
G) A) and B)

Question 18

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Accepted Answer

A)  The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
B)  A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
C)  A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
D)  If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
E)  Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.F) A) and E)
G) A) and D)

Question 19

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

Accepted Answer

A) True 
 B)False

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

Exam 5: Time Value of Money

A U.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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How much would $100,growing at 5% per year,be worth after 75 years?

Correct Answer
verified

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 Answer
verified

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Correct Answer
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The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

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

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

Correct Answer
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Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Correct Answer
verified

Sam was injured in an accident,and the insurance company has offered him the choice of $25,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave him as well off financially as with the annuity?

Correct Answer
verified

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Correct Answer
verified

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Correct Answer
verified

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

Correct Answer
verified

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Correct Answer
verified

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?

Correct Answer
verified

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Correct Answer
verified

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

Correct Answer
verified

Your uncle is about to retire,and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years,with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost him to buy the annuity today?

Correct Answer
verified

Exam 5: Time Value of Money

A U.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 AnswerverifiedShow Answer

How much would $100,growing at 5% per year,be worth after 75 years?

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

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Correct AnswerverifiedShow Answer

The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Correct AnswerverifiedShow Answer

Sam was injured in an accident,and the insurance company has offered him the choice of $25,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave him as well off financially as with the annuity?

Correct AnswerverifiedShow Answer

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Correct AnswerverifiedShow Answer

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Correct AnswerverifiedShow Answer

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?

Correct AnswerverifiedShow Answer

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Correct AnswerverifiedShow Answer

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

Correct AnswerverifiedShow Answer

Your uncle is about to retire,and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years,with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost him to buy the annuity today?

Correct AnswerverifiedShow Answer

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