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A $150,000 loan is to be amortized over 6 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 7 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 6 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 6-year amortization plan.
D) The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.
E) The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

F) A) and C)
G) All of the above

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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.

A) True
B) False

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The store where you bought new home furnishings offers you two alternative payment plans.The first plan requires a $4,000 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?


A) 12.31%
B) 12.96%
C) 13.64%
D) 14.36%
E) 15.08%

F) None of the above
G) All of the above

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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) All of the above
G) D) and E)

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


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

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

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


A) $28,243.21
B) $29,729.70
C) $31,294.42
D) $32,859.14
E) $34,502.10

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

Correct Answer

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Which of the following statements is CORRECT?


A) 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.
B) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
C) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
D) The cash flows for an annuity due must all occur at the ends of the periods.
E) 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.

F) All of the above
G) None of the above

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The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the smaller the percentage of the payment that will be a repayment of principal.

A) True
B) False

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What is the present value of the following cash flow stream at a rate of 8.0%? What is the present value of the following cash flow stream at a rate of 8.0%? A) $7,917 B) $8,333 C) $8,772 D) $9,233 E) $9,695


A) $7,917
B) $8,333
C) $8,772
D) $9,233
E) $9,695

F) C) and E)
G) C) and D)

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Which of the following statements is CORRECT?


A) Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
B) A time line is not meaningful unless all cash flows occur annually.
C) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
D) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
E) Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

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

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

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Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest,compounded annually.If you invest $2,000 in the CD,how much will you have when it matures?


A) $3,754.27
B) $3,941.99
C) $4,139.09
D) $4,346.04
E) $4,563.34

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

Correct Answer

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When a loan is amortized,a relatively low percentage of the payment goes to reduce the outstanding principal in the early years,and the principal repayment's percentage increases in the loan's later years.

A) True
B) False

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Your bank offers a savings account that pays 3.5% interest,compounded annually.How much will $500 invested today be worth at the end of 25 years?


A) $1,122.54
B) $1,181.62
C) $1,240.70
D) $1,302.74
E) $1,367.88

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

Correct Answer

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The going rate of interest on a 5-year treasury bond is 4.25%.You have one that will pay $2,500 five years from now.How much is the bond worth today?


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

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

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You are hoping to buy a new boat 3 years from now,and you plan to save $4,200 per year,beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit,3 years from now?


A) $11,973
B) $12,603
C) $13,267
D) $13,930
E) $14,626

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

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

Correct Answer

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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?


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

F) C) and D)
G) C) and E)

Correct Answer

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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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All other things held constant,the present value of a given annual annuity decreases as the number of periods per year increases.

A) True
B) False

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