FINC ch 9

c. present value of annuity (annuity ? series of equal payments (receipts) that occur over a number of time periods)

1. A famous athlete is awarded a contract that stipulates equal payments to be mad monthly over a period of five years. To determine the value of the contract today, you would need to use:
a. present value of a single lump sum
b. future value of a single

a. present value of a single lump sum

2. You need to have $35,000 on hand to buy a new Lexus five years from today. To achieve that goal, you want to know how much you must invest today in a certificate of deposit guaranteed to return you 3% per year. To help determine how much to investment

b. the same dollar amount of interest is paid with each payment

3. Which of the following characteristics is not descriptive of an amortization schedule?
a. Each payment is the same.
b. The same dollar amount of interest is paid with each payment.
c. Payment on principal increases with each total payment.
d. Balance o

c. payment at beginning of year

4. Which of the following terms best describes an annuity due?
a. decreasing payments
b. increasing payments
c. payment at beginning of year
d. payment at the end of the year

d. for a given APR, the present value of a future sum decreases as the number of discounting periods per year decreases

5. Which of the following statements is false?
a. The present value of a future sum decreases as the discount rate increases.
b. If the present value of a sum is equal to its future value, the interest rate must be zero.
c. If the discount (or interest) r

b. the annuity due

6. Suppose you have a choice of two equally risky annuities, each paying $1,000 per year for 20 years. One is an annuity due, while the other is an ordinary annuity. Which annuity should you choose?
a. the ordinary annuity
b. the annuity due
c. either one

c. The effective annual rate is determined by multiplying the interest rate charged per period by the number of periods in a year.

7. Which of the following statements is false?
a. For a given APR, more frequent compounding results in additional return on the investment.
b. An amortized loan is repaid in equal payments over a specified time period.
c. The effective annual rate is det

a. present

8. The ___ value of a savings or investment is its amount or value at the current time.
a. present
b. future
c. book
d. none of the above

b. six

9. If the stated or nominal interest rate is 10 percent and the inflation rate is 4 percent, the net or differential compounding rate would be ________ percent
a. ten
b. six
c. four
d. fourteen

c. amortized loan

10. A loan that is repaid in equal payments over a specified time period is called a (n)
a. discount loan
b. balloon loan
c. amortized loan
d. none of the above

b. amortized loan

11. A loan that is repaid in equal payments over a specified time period is referred to as a (n):
a. discounted loan
b. amortized loan
c. simple interest-free loan
d. inflation-indexed loan

c. annual percentage rate (APR)

12. The method of calculating interest on a loan that is set by law is called the:
a. negotiated legal rate (NLR)
b. effective annual rate (EAR)
c. annual percentage rate (APR)
d. none of the above

a. 8%

13. Your college has agreed to give you a $10,000 tuition loan. As part of the agreement, you must repay $12,600 at the end of the three-year period. What interest rate is the college charging?
a. 8%
b. 9%
c. 11%
d. 6%

b. 8.24% (EAR = [1 + r]m - 1 = 1.02 * 4 - 1 = 8.24%)

14. Larry deposited $5,000 in a savings account that paid 8% interest compounded quarterly. What is the effective rate of interest?
a. 8.00%
b. 8.24%
c. 8.33%
d. 8.46%

c. $81,517.10

15. Taylor has just accepted a job as a stockbroker. He estimates his gross pay each year for the next three years is $35,000 in year 1, $21,000 in year 2, and $32,000 in year 3. His gross pay is received at the end of each year. Calculate the present val

b. $776.48 (END mode PV 16,495 N 24 I/Y 1 FV 0 ? PMT = $776.48)

16. Kristen has just purchased a used Mercedes for $18,995. She plans to make a $2,500 down payment on the new car. What is the amount of her monthly payment on the remaining loan if she must pay 12% annual interest on a 24-month car loan? Pick the closes

d. $50,258 (END mode PMT -2,000 N 15 I/Y 7 PV 0 ? FV = $50,258.04)

17. Lance deposits $2,000 per year at the end of the year for the next 15 years into an IRA account that currently pays 7%. How much will Lance have on deposit at the end of the 15 years? Pick the closest answer.
a. $39,981
b. $46,753
c. $49,002
d. $50,25

a. 10%

18. Claire bought 100 shares of Minnesota Mining and Manufacturing in June, 1987 for $38 a share for a total investment of $3,800. She sold the shares in June, 1996 for $8,960. What is Cecilia's annual rate of return on her investment? Pick the closest an

c. $3,898

19. You borrow $10,000 to pay for your college tuition. The loan is amortized over a three-year period with an interest rate of 18%. The payments are made at the end of each year. What is your remaining balance at the end of Year Two? Pick the closest ans

b. $1,220.20 (4% compounded quarterly ? 4% � 4 = 1% per quarter
quarterly compounding over 5 years ? 5�4 = 20 quarters
PV -1,000 N 20 I/Y 1 ? FV = $1,220.19)

20. Megan puts $1,000 in a savings passbook that pays 4% compounded quarterly. How much will she have in her account after five years? Pick the closest answer.
a. $1,200.50
b. $1,220.20
c. $1,174.80
d. $1,217.50

b. 7%

21. In 1983, the average tuition for one year in the MBA program at a university was $3,600. Thirty years later, in 2013, the average tuition was $27,400. What is the compound annual growth rate in tuition (rounded to the nearest whole percentage) over th

b. $9,080.20 (END mode PV 0 FV 97,435.86 N 7 I/Y 14 ? PMT = $9,080.28)

22. You want to buy a Volvo in seven years. The car is currently selling for $50,000, and the price will increase at a compound rate of 10% per year. You can presently invest in high-yield bonds earning a compound annual rate 14% per year. How much must y

b. $73,572 (END mode PV 0 N 20 I/Y 6 PMT -2,000 ? FV = $73, 571.18)

23. Taylor deposits $2,000 per year at the end of the year for the next 20 years into an IRA account that pays 6%. How much will Taylor have on deposit at the end of 20 years? Pick the closest answer.
a. $67,520
b. $73,572
c. $81,990
d. $75,686

a. 33 years (BGN mode PV 400 FV 0 PMT -24 I/Y 5 ? N = 32.3 ? 33 years
Check: FV 0 PMT -24 I/Y 5 N 33 ? PV = $403.26
FV 0 PMT -24 I/Y 5 N 32 ? PV = $398.23)

24. Your subscription to Consumer Reports is about to expire. You may renew it for $24 a year or, instead, you may get a lifetime subscription to the magazine for a onetime payment of $400 today. Payments for the regular subscription are made at the begin

b. Harris Bank

25. Your current bank is paying 6.25% simple interest rate. You can move your savings account to Harris Bank that pays 6.25% compounded annually or to First Chicago bank paying 6% compounded semi-annually. To maximize your return you would choose:
A. your

C. $2,972 (PV 2,000 N 20 I/Y 2 ? FV = $2,971.89)

26. You put $2,000 in an IRA account at Northern Trust. This account pays a fixed interest rate of 8% compounded quarterly. How much money do you have in five years? Pick the closest answer.
a. $2,914
b. $2,939
c. $2,972
d. $2,999

b. $6,581.62 (FV 8,000 N 4 I/Y 5 ? PV = $6,581.62)

27. You need $8,000 four years from now for a down payment on your future house. How much money must you deposit today if your credit union pays 5% interest compounded annually? Pick the closest answer.
a. $6,269.59
b. $6,581.62
c. $6,394.12
d. $6,189.83

b. 6.07% (PV 5,100 FV -16,600 N 20 ? I/Y = 6.07%)

28. In 1976, the average price of a domestic car was $5,100. Twenty years later, in 1996, the average price was $16,600. What was the annual growth rate in the car price over the 20-year period? Pick the closest answer.
a. 5.89%
b. 6.07%
c. 7.12%
d. 8.23%

c. 13 years (PV -1,000 FV 3,000 I/Y 8.81 ? N = 13.01)

29. You deposit $1,000 in a long-term certificate of deposit with an interest rate of 8.81%. How many years will it take for you to triple your deposit? Pick the closest answer.
a. 11 years
b. 12 years
c. 13 years
d. 14 years

a. 18,926.12

30. Suppose you receive $3,000 a year in Years One through Four, $4,000 a year in Years Five through Nine, and $2,000 in Year 10, with all the money to be received at the end of the year. If your discount rate is 12%, what is the present value of these ca

b. $425,700 (END mode PMT 50,000 N 20 I/Y 10 FV 0 ? PV = $425,678.19)

31. You have just won a lottery! You will receive $50,000 a year beginning one year from now for 20 years. If your required rate of return is 10%, what is the present value of your winning lottery ticket? Pick the closest answer.
a. $418,250
b. $425,700
c

c. 9% (PV 60,000 PMT -13.375 N 6 FV 0 I/Y=9%)

32. Consolidated Freightways is financing a new truck with a loan of $60,000 to be repaid in six annual end-ofyear installments of $13,375. What annual interest rate is Consolidated Freightways paying? Pick the closest answer.
a. 7%
b. 8%
c. 9%
d. 10%

a. $6,720 (PV 5,000 I/Y 3 N 10 ? FV = $6,719.58)

33. Tracey deposits $5,000 in a five-year certificate of deposit paying 6% compounded semi-annually. How much will Tracey have at the end of the five-year period? Pick the closest answer.
a. $6,720
b. $6,690
c. $6,596
d. $6,910

b. $258 (PV 1,000 N 20 I/Y 7 ? PV = $258.42)

34. An investment will mature in 20 years. Its maturity value is $1,000. If the discount rate is 7%, what is the present value of the investment? Pick the closest answer.
a. $178
b. $258
c. $276
d. $362

a. $1,503 (FV 2,000 N 3 I/Y 10 ? PV = $1,502.63)

35. Assume that a borrower is willing to pay you $2,000 at the end of three years in return for a sum of money now. To receive a return of 10%, what is the most you should be willing to lend now? Pick the closest answer.
a. $1,503
b. $1,786
c. $1,802
d. $

c. $10,053 (END mode PV 25,000 FV 0 N 3 I/Y 10 ? PMT = $10,052.87)

36. Assume a lender offers you a $25,000, 10%, three-year loan that is to be fully amortized with three annual payments. The first payment will be due one year from the loan date. How much will you have to pay each year? Pick the closest answer.
a. $8,042

b. $240 (END mode PMT 100 FV 0 N 3 I/Y 12 ? PV = $240.18)

37. If we will receive $100 per year beginning one year from now for a period of three years with a 12% discount rate, what would be the value of our investment today? Pick the closest answer.
a. $230
b. $240
c. $250
d. $260

a. $1,254 (PV 1,000 N 2 I/Y 12 ? FV = $1,254.40)

38. If $1,000 were invested now at a 12% interest rate compounded annually, what would be the value of the investment in two years? Pick the closest answer.
a. $1,254
b. $1,210
c. $1,188
d. $1,160

c. $3,641 (BGN mode PMT -1,000 N 3 I/Y 10 PV 0 ? FV = $3,641)

39. Suppose you were going to save $1,000 per year for three years at a 10% interest rate compounded annually, with the first investment occurring today. What would be the future value of this investment? Pick the closest answer.
a. $2,124
b. $2,310
c. $3

d. $1,216 (PV 1,000 N 4 I/Y 5 ? FV = $1,215.51)

40. What would be the future value of a CD of $1,000 for two years if the bank offered a 10% interest rate compounded semiannually? Pick the closest answer.
a. $1,720
b. $1,960
c. $1,200
d. $1,216

d. inflation rate (I)

41. The basic future and present value equations contain four variables. Which one of the following is not included?
a. present value (PV)
b. future value (FV)
c. interest rate (r)
d. inflation rate (I)
e. number of periods (n)

b. $2,382 (PV -2,000 N 3 I/Y 6 ? FV = $2,382.03)

42. $2,000 invested today at 6% in 3 years would result in a future value of: Pick the closest answer.
a. $2,000
b. $2,382
c. $6,362
d. $3,145

c. $29,333 (END mode PMT -5,000 PV 0 N 5 I/Y 8 ? FV = $29,333.00)

43. An ordinary annuity of $5,000 invested at 8% in 5 years would result in a future value of (Pick the closest answer.):
a. $25,000
b. $7,345
c. $29,333
d. $31,680

a. $26,211 (END mode PMT +5,000 FV 0 N 6 I/Y 4? PV = -$26,210.68)

44. The present value of an annuity of $5,000 to be received at the end of each of the 6 years at a discount rate of 4% would be: (Pick the closest answer.)
a. $26,211
b. $33,165
c. $3,950
d. $27,259

b. $27,259 (BGN mode PMT 5,000 N 6 I/Y 4 FV 0 ? PV = -$27,259.11)

45. The present value of an annuity of $5,000 to be received at the beginning of each of the 6 years at a discount rate of 4% would be: Pick the closest answer.
a. $26,210
b. $27,259
c. $17,326
d. $18,365

b. 23.3% (EAR = [1 + 0.05375]4 - 1 = 1.23296 -1 = 23.3%)

46. If you have an account with a 21.5% annual percentage rate where interest is compounded quarterly, what is the effective annual rate of interest? Pick the closest answer.
a. 23.75%
b. 23.3%
c. 21.5%
d. 5.375%

a. simple interest

47. Interest earned only on an investment's principal or original amount is referred to as:
a. simple interest
b. compound interest
c. discount interest
d. annuity interest

c. 1 divided by the sum of 1 plus the interest rate

48. When solving for the future value of an amount deposited now, which one of the following factors would not be part of the calculation?
a. present value amount
b. 1 plus the interest rate
c. 1 divided by the sum of 1 plus the interest rate
d. number of

c. an annuity due

49. A series of equal payments or receipts that occur at the beginning of each of a number of time periods is referred to as:
a. an ordinary annuity
b. a deferred annuity
c. an annuity due
d. an extraordinary annuity

d. effective annual rate

50. When compounding more than once a year, the true opportunity costs measure of the interest rate is indicated by the:
a. annual percentage rate
b. contract rate
c. stated rate
d. effective annual rate

d. effective annual rate

51. The interest rate that measures the true interest rate when compounding occurs more frequently than once a year is called the:
a. annual percentage rate
b. compound rate of interest
c. stated rate of interest
d. effective annual rate

a. annual percentage rate

52. The interest rate determined by multiplying the interest rate charged per period by the number of periods in a year is called the:
a. annual percentage rate
b. compound rate of interest
c. stated rate of interest
d. effective annual rate

b. 10.00% (APR = 2.5% � 4 = 10%)

53. If the quarterly rate of interest is 2.5% and interest is compounded quarterly, then the APR is: Pick the closest answer.
a. 10.38%
b. 10.00%
c. 2.50%
d. 39.06%

a. 10.38% (EAR = <1 + 2.5%>4 -1 = 1.1038 - 1 = 10.38%)

54. If the quarterly rate of interest is 2.5% and interest is compounded quarterly, then the EAR is: Pick the closest answer.
a. 10.38%
b. 10.00%
c. 2.50%
d. 39.06%

c. 12.68%

55. If the APR is 12% and interest is compounded monthly, then the EAR is: Pick the closest answer.
a. 12.00%
b. 1.00%
c. 12.68%
d. none of the above

a. at the end of a time period.

56. In future value or present value problems, unless stated otherwise, cash flows are assumed to be
a. at the end of a time period.
b. at the beginning of a time period.
c. in the middle of a time period.
d. spread out evenly over a time period.

b. compound interest.

57. When the amount earned on a deposit becomes part of the principal at the end of a period and can earn a return in future periods, this is called
a. discount interest.
b. compound interest.
c. primary interest.
d. future value.

a. $126.25 (PV -100 N 4 I/Y 6 ? FV = $126.25)

58. The future value of $100 received today and deposited at 6 percent for four years is: Pick the closest answer.
a. $126.25
b. $126.53
c. $141.85
d. $116.99

b. $251.94 (PV -200 N 3 I/Y 8 ? FV = $251.94)

59. The future value of $200 received today and deposited at 8 percent for three years is: Pick the closest answer.
a. $248.00
b. $251.94
c. $370.19
d. $218.55