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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?


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

F) A) and B)
G) A) and C)

Correct Answer

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What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?


A) $1,537.69
B) $1,618.62
C) $1,699.55
D) $1,784.53
E) $1,873.76

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

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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?


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

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

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Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly.An offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, simple interest, with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?


A) 1.56%
B) 1.30%
C) 1.09%
D) 0.91%
E) 0.72%

F) A) and B)
G) A) and C)

Correct Answer

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Your girlfriend just won the Florida lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today.What rate of return is built into the annuity?


A) 3.44%
B) 3.79%
C) 4.17%
D) 4.58%
E) 5.04%

F) A) and B)
G) A) and E)

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A time line is meaningful even if all cash flows do not occur annually.

A) True
B) False

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Suppose a Google.com bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?


A) $2,819.52
B) $2,967.92
C) $3,116.31
D) $3,272.13
E) $3,435.74

F) A) and B)
G) B) and D)

Correct Answer

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Which of the following statements is CORRECT?


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.

F) A) and B)
G) B) and E)

Correct Answer

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


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

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

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Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?


A) $585.43
B) $614.70
C) $645.44
D) $677.71
E) $711.59

F) A) and B)
G) A) and C)

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A perpetuity pays $85 per year and costs $950.What is the rate of return?


A) 8.95%
B) 9.39%
C) 9.86%
D) 10.36%
E) 10.88%

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

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A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments.Which of these statements is CORRECT?


A) The proportion of interest versus principal repayment would be the same for each of the 8 payments.
B) The annual payments would be larger if the interest rate were lower.
C) If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan.
D) The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.
E) The last payment would have a higher proportion of interest than the first payment.

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

Correct Answer

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

A) True
B) False

Correct Answer

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You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions, how much will you have 4 years from today?


A) $16,112
B) $16,918
C) $17,763
D) $18,652
E) $19,584

F) A) and D)
G) C) and D)

Correct Answer

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What is the present value of the following cash flow stream at a rate of 12.0%? ​ What is the present value of the following cash flow stream at a rate of 12.0%? ​ A) $9,699 B) $10,210 C) $10,747 D) $11,284 E) $11,849


A) $9,699
B) $10,210
C) $10,747
D) $11,284
E) $11,849

F) B) and D)
G) A) and C)

Correct Answer

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Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

A) True
B) False

Correct Answer

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


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

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

Correct Answer

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You would like to travel in South America 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?


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

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

Correct Answer

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You were left $100,000 in a trust fund set up by your grandfather.The fund pays 6.5% interest.You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately.How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?


A) $24,736
B) $26,038
C) $27,409
D) $28,779
E) $30,218

F) A) and E)
G) A) and B)

Correct Answer

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You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly.If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?


A) 39.60
B) 44.00
C) 48.40
D) 53.24
E) 58.57

F) A) and E)
G) A) and B)

Correct Answer

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