Question 1

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A)   3.82%
B)   4.25%
C)   4.72%
D)   5.24%
E)   5.77%F) A) and B)
G) A) and C)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Jose now has $500. How much would he have after 6 years if he 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) D) and E)
G) A) and B)

Question 4

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

Accepted Answer

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

Question 5

A $50,000 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 lower if the interest rate were lower.
D)   The last payment would have a higher proportion of interest than the first payment.
E)   The proportion of interest versus principal repayment would be the same for each of the 7 payments.F) A) and B)
G) A) and E)

Question 6

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

Accepted Answer

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

Question 7

A time line is not meaningful unless all cash flows occur annually.

Accepted Answer

A) True 
 B)False

Question 8

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Accepted Answer

A)   $284,595
B)   $299,574
C)   $314,553
D)   $330,281
E)   $346,795F) B) and C)
G) A) and B)

Question 9

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Accepted Answer

A) True 
 B)False

Question 10

You plan to borrow $35,000 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)   $1,994.49
B)   $2,099.46
C)   $2,209.96
D)   $2,326.27
E)   $2,442.59F) A) and D)
G) A) and C)

Question 11

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

Question 12

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 greater the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 13

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 $30,000?

Accepted Answer

A)   12.37
B)   13.74
C)   15.27
D)   16.97
E)   18.85F) A) and B)
G) C) and D)

Question 14

After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6)  and $15,000 annually for the following 6 years (t = 7 through t = 12) . The first deposit will be made a year from today. In addition, your grandfather just gave you a $25,000 graduation gift which you will deposit immediately (t = 0) . If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

Accepted Answer

A)   $238,176
B)   $250,712
C)   $263,907
D)   $277,797
E)   $291,687F) A) and B)
G) B) and C)

Question 15

You want to buy a new sports car 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?

Accepted Answer

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

Question 16

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?

Accepted Answer

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

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   The cash flows for an ordinary (or deferred)  annuity all occur at the beginning of the periods.
B)   If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
C)   The cash flows for an annuity due must all occur at the beginning of the periods.
D)   The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
E)   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.F) B) and C)
G) A) and B)

Question 18

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

A)   The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
B)   A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20- year mortgage.
C)   A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.
D)   If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
E)   Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.F) C) and D)
G) A) and B)

Question 19

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

A)   3.44%
B)   3.79%
C)   4.17%
D)   4.58%
E)   5.04%F) All of the above
G) B) and D)

Exam 5: The Value of Money

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct Answer
verified

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Correct Answer
verified

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?

Correct Answer
verified

You want to buy a new sports car 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?

Correct Answer
verified

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
verified

Correct Answer
verified

A time line is not meaningful unless all cash flows occur annually.

Correct Answer
verified

You plan to borrow $35,000 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

Which of the following statements is CORRECT?

Correct Answer
verified

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 greater the percentage of the payment that will be a repayment of principal.

Correct Answer
verified

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

Correct Answer
verified

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Correct Answer
verified

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 $30,000?

Correct Answer
verified

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

Correct Answer
verified

Exam 5: The Value of Money

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct AnswerverifiedShow Answer

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

You want to buy a new sports car 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?

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

Correct AnswerverifiedShow Answer

A time line is not meaningful unless all cash flows occur annually.

Correct AnswerverifiedShow Answer

You plan to borrow $35,000 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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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 greater the percentage of the payment that will be a repayment of principal.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

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 $30,000?

Correct AnswerverifiedShow Answer

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified