Question 1

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate,compounded quarterly.If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now,how much will be in the account three years (12 quarters) from now?

Accepted Answer

A)  $15,234.08
B)  $16,035.88
C)  $16,837.67
D)  $17,679.55
E)  $18,563.53F) A) and C)
G) B) and E)

Question 2

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

Question 3

Your Aunt Elsa 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$40,000 at the beginning of each year,starting immediately.What is the maximum number of whole payments that can be withdrawn before the account is exhausted,i.e.,before the account balance would become negative? (Hint: Round down to the nearest whole number.)

Accepted Answer

A)  18
B)  19
C)  20
D)  21
E)  22F) A) and E)
G) A) and D) E

Question 4

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

Accepted Answer

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

Question 5

Suppose a State of New Mexico 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) C) and E)
G) C) and D)

Question 6

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

Accepted Answer

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

Question 7

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.How much would you still owe at the end of the first year,after you have made the first payment?

Accepted Answer

A)  $10,155.68
B)  $10,690.19
C)  $11,252.83
D)  $11,845.09
E)  $12,468.51F) A) and C)
G) A) and B)

Question 8

Your uncle just won the weekly lottery,receiving $375,000,which he invested at a 7.5% annual rate.He now has decided to retire,and he wants to withdraw $35,000 at the end of each year,starting at the end of this year.What is the maximum number of whole payments that can be withdrawn before the account is exhausted,i.e.,before the account balance would become negative? (Hint: Round down to the nearest whole number.)

Accepted Answer

A)  22
B)  23
C)  24
D)  25
E)  26F) C) and E)
G) D) and E)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
B)  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.
C)  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.
D)  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 PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
E)  If you solve for I and get a negative number, then you must have made a mistake.F) B) and E)
G) None of the above

Question 10

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) All of the above
G) A) and B)

Question 11

Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Accepted Answer

A)  Exactly 10% of the first monthly payment represents interest.
B)  The monthly payments will increase over time.
C)  A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment.
D)  The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity.
E)  The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.F) B) and D)
G) C) and D)

Question 12

Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she 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) A) and B)
G) None of the above D

Question 13

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1,$1,000 at the end of Year 2,$850 at the end of Year 3,and $6,250 at the end of Year 4.What rate of return would you earn if you bought this asset?

Accepted Answer

A)  4.93%
B)  5.19%
C)  5.46%
D)  5.75%
E)  6.05%F) B) and C)
G) A) and B)

Question 14

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

Question 15

Suppose you are buying your first home for $145,000,and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Accepted Answer

A)  $741.57
B)  $780.60
C)  $821.69
D)  $862.77
E)  $905.91F) B) and D)
G) B) and C) C

Question 16

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?

Accepted Answer

A)  18.58%
B)  19.56%
C)  20.54%
D)  21.57%
E)  22.65%F) B) and E)
G) A) and B)

Question 17

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Accepted Answer

A)  6.77%
B)  7.13%
C)  7.50%
D)  7.88%
E)  8.27%F) C) and D)
G) A) and B)

Question 18

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?

Accepted Answer

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

Question 19

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?

Accepted Answer

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

Question 20

You have just purchased a U.S.Treasury bond for $747.25.No payments will be made until the bond matures 5 years from now,at which time it will be redeemed for $1,000.What interest rate will you earn on this bond?

Accepted Answer

A)  4.37%
B)  4.86%
C)  5.40%
D)  6.00%
E)  6.60%F) A) and B)
G) A) and C)

Exam 28: Time Value of Money

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

Correct Answer
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Correct Answer
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E

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

Correct Answer
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Suppose a State of New Mexico 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 Answer
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How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5% with annual compounding?

Correct Answer
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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.How much would you still owe at the end of the first year,after you have made the first payment?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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 Answer
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Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Correct Answer
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Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

Correct Answer
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D

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1,$1,000 at the end of Year 2,$850 at the end of Year 3,and $6,250 at the end of Year 4.What rate of return would you earn if you bought this asset?

Correct Answer
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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
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Suppose you are buying your first home for $145,000,and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Correct Answer
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C

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?

Correct Answer
verified

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Correct Answer
verified

Correct Answer
verified

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?

Correct Answer
verified

You have just purchased a U.S.Treasury bond for $747.25.No payments will be made until the bond matures 5 years from now,at which time it will be redeemed for $1,000.What interest rate will you earn on this bond?

Correct Answer
verified

Exam 28: Time Value of Money

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

Correct AnswerverifiedE

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

Correct AnswerverifiedShow Answer

Suppose a State of New Mexico 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

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

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.How much would you still owe at the end of the first year,after you have made the first payment?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedD

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1,$1,000 at the end of Year 2,$850 at the end of Year 3,and $6,250 at the end of Year 4.What rate of return would you earn if you bought this asset?

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

Suppose you are buying your first home for $145,000,and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Correct AnswerverifiedC

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?

Correct AnswerverifiedShow Answer

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

You have just purchased a U.S.Treasury bond for $747.25.No payments will be made until the bond matures 5 years from now,at which time it will be redeemed for $1,000.What interest rate will you earn on this bond?

Correct AnswerverifiedShow Answer

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E

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D

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C

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