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Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?


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

F) A) and D)
G) A) and E)

Correct Answer

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The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

A) True
B) False

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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) None of the above
G) C) and D)

Correct Answer

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Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?


A) $574,924
B) $605,183
C) $635,442
D) $667,214
E) $700,575

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

Correct Answer

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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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What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?


A) $ 969
B) $1,020
C) $1,074
D) $1,131
E) $1,187

F) None of the above
G) A) and B)

Correct Answer

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How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?


A) $1,067.95
B) $1,124.16
C) $1,183.33
D) $1,245.61
E) $1,311.17

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

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Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?


A) $225,367
B) $237,229
C) $249,090
D) $261,545
E) $274,622

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

Correct Answer

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Master Card 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%?


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

F) None of the above
G) C) and E)

Correct Answer

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Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?


A) 15.54%
B) 16.36%
C) 17.18%
D) 18.04%
E) 18.94%

F) A) and B)
G) None of the above

Correct Answer

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

A) True
B) False

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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.

A) True
B) False

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You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?


A) 5.14
B) 5.71
C) 6.35
D) 7.05
E) 7.84

F) D) and E)
G) A) and D)

Correct Answer

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You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account 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) C) and E)
G) A) and E)

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?


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

F) A) and B)
G) None of the above

Correct Answer

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How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?


A) $438.03
B) $461.08
C) $485.35
D) $510.89
E) $537.78

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

Correct Answer

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Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?


A) $22,598.63
B) $23,788.03
C) $25,040.03
D) $26,357.92
E) $27,675.82

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

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 D)
G) B) and D)

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

Correct Answer

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Your child's orthodontist 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) C) and E)
G) A) and D)

Correct Answer

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