Question 1

Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%,simple interest,with interest paid quarterly.Merchants Bank offers to lend you the $50,000,but it will charge 6.2%,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?

Accepted Answer

A)   1.33%
B)   1.09%
C)   0.91%
D)   1.11%
E)   0.83%F) A) and D)
G) A) and C)

Question 2

Suppose the U.S.Treasury offers to sell you a bond for $597.25.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 would you earn if you bought this bond at the offer price?

Accepted Answer

A)   9.01%
B)   9.56%
C)   11.08%
D)   11.94%
E)   10.86%F) A) and B)
G) C) and D)

Question 3

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 $156,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Accepted Answer

A)   3.31%
B)   2.77%
C)   2.42%
D)   2.72%
E)   2.15%F) B) and E)
G) None of the above

Question 4

You want to quit your job and go back to school for a law degree 4 years from now,and you plan to save $2,400 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?

Accepted Answer

A)   $9,501.47
B)   $11,711.12
C)   $11,490.15
D)   $11,048.22
E)   $9,390.99F) B) and D)
G) B) and E)

Question 5

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)   Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments) .F) A) and B)
G) B) and C)

Question 6

What is the present value of the following cash flow stream at a rate of 10.0%?  ​

Accepted Answer

A)   $11,888
B)   $13,473
C)   $9,850
D)   $11,322
E)   $13,586F) A) and E)
G) C) and D)

Question 7

Suppose you borrowed $27,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Accepted Answer

A)   $10,000.86
B)   $8,334.05
C)   $6,500.56
D)   $10,250.89
E)   $6,333.88F) A) and E)
G) None of the above

Question 8

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 6.2%,how much is the bond worth today?

Accepted Answer

A)   $537.68
B)   $704.54
C)   $618.02
D)   $673.64
E)   $741.63F) C) and D)
G) B) and E)

Question 9

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 E)
G) A) and B)

Question 10

Disregarding risk,if money has time value,it is impossible for the present value of a given sum to exceed its future value.

Accepted Answer

A) True 
 B)False

Question 11

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 $25,000?

Accepted Answer

A)   15.88
B)   17.61
C)   16.35
D)   15.73
E)   14.00F) A) and B)
G) B) and E)

Question 12

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 13

Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

Accepted Answer

A) True 
 B)False

Question 14

Starting to invest early for retirement reduces the benefits of compound interest.

Accepted Answer

A) True 
 B)False

Question 15

How much would $100,growing at 5% per year,be worth after 65 years?

Accepted Answer

A)   $1,787.99
B)   $2,717.75
C)   $2,383.99
D)   $2,574.71
E)   $2,860.79F) A) and E)
G) B) and E)

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

You plan to borrow $45,200 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)   $2,403.37
B)   $2,703.80
C)   $2,854.01
D)   $3,004.22
E)   $3,454.85F) A) and B)
G) A) and C)

Question 18

Suppose you borrowed $15,000 at a rate of 11.8% 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)   $1,362.90
B)   $1,557.60
C)   $1,716.90
D)   $1,770.00
E)   $1,893.90F) A) and D)
G) All of the above

Question 19

Your uncle has $415,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)   $29,783.94
B)   $45,420.51
C)   $40,952.92
D)   $37,229.93
E)   $45,048.21F) A) and D)
G) B) and C)

Question 20

A $150,000 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 higher if the interest rate were lower.
D)   The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
E)   The proportion of interest versus principal repayment would be the same for each of the 7 payments.F) A) and E)
G) A) and B)

Exam 5: Time Value of Money

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

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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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 $25,000?

Correct Answer
verified

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

Correct Answer
verified

A $150,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is CORRECT?

Correct Answer
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Correct Answer
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Suppose you borrowed $27,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Correct Answer
verified

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 6.2%,how much is the bond worth today?

Correct Answer
verified

Suppose the U.S.Treasury offers to sell you a bond for $597.25.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 would you earn if you bought this bond at the offer price?

Correct Answer
verified

Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

Correct Answer
verified

Suppose you borrowed $15,000 at a rate of 11.8% 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 Answer
verified

You plan to borrow $45,200 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

Disregarding risk,if money has time value,it is impossible for the present value of a given sum to exceed its future value.

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 $156,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Correct Answer
verified

Starting to invest early for retirement reduces the benefits of compound interest.

Correct Answer
verified

What is the present value of the following cash flow stream at a rate of 10.0%?

Correct Answer
verified

Your uncle has $415,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Correct Answer
verified

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 Answer
verified

You want to quit your job and go back to school for a law degree 4 years from now,and you plan to save $2,400 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?

Correct Answer
verified

How much would $100,growing at 5% per year,be worth after 65 years?

Correct Answer
verified

Exam 5: Time Value of Money

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

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

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 $25,000?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A $150,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose you borrowed $27,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Correct AnswerverifiedShow Answer

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 6.2%,how much is the bond worth today?

Correct AnswerverifiedShow Answer

Suppose the U.S.Treasury offers to sell you a bond for $597.25.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 would you earn if you bought this bond at the offer price?

Correct AnswerverifiedShow Answer

Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

Correct AnswerverifiedShow Answer

Suppose you borrowed $15,000 at a rate of 11.8% 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

You plan to borrow $45,200 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

Disregarding risk,if money has time value,it is impossible for the present value of a given sum to exceed its future value.

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 $156,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Correct AnswerverifiedShow Answer

Starting to invest early for retirement reduces the benefits of compound interest.

Correct AnswerverifiedShow Answer

What is the present value of the following cash flow stream at a rate of 10.0%? ​

Correct AnswerverifiedShow Answer

Your uncle has $415,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

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

You want to quit your job and go back to school for a law degree 4 years from now,and you plan to save $2,400 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?

Correct AnswerverifiedShow Answer

How much would $100,growing at 5% per year,be worth after 65 years?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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What is the present value of the following cash flow stream at a rate of 10.0%?

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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