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Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months,assuming each month has 30 days?


A) $5,178.09
B) $5,436.99
C) $5,708.84
D) $5,994.28
E) $6,294.00

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

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

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Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?


A) $2,404.91
B) $2,531.49
C) $2,658.06
D) $2,790.96
E) $2,930.51

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

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Billy Thornton borrowed $20,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Billy have to pay in a 30-day month?


A) $120.83
B) $126.88
C) $133.22
D) $139.88
E) $146.87

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

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Suppose you just won the state lottery,and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.


A) 7.12%
B) 7.49%
C) 7.87%
D) 8.26%
E) 8.67%

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

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Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?


A) $10,155.68
B) $10,690.19
C) $11,252.83
D) $11,845.09
E) $12,468.51

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

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

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If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

A) True
B) False

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Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?


A) 15.27%
B) 16.08%
C) 16.88%
D) 17.72%
E) 18.61%

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

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

A) True
B) False

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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.

A) True
B) False

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Which of the following statements is CORRECT?


A) Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
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 can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
E) Time lines can only be constructed for annuities where the payments occur at the end of the periods,i.e. ,for ordinary annuities.

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

Correct Answer

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Your older brother turned 35 today,and he is planning to save $7,000 per year for retirement,with the first deposit to be made one year from today.He will invest in a mutual fund that's expected to provide a return of 7.5% per year.He plans to retire 30 years from today,when he turns 65,and he expects to live for 25 years after retirement,to age 90.Under these assumptions,how much can he spend each year after he retires? His first withdrawal will be made at the end of his first retirement year.


A) $58,601
B) $61,686
C) $64,932
D) $68,179
E) $71,588

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

Correct Answer

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

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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

Correct Answer

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Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?


A) Exactly 8% of the first monthly payment represents interest.
B) The monthly payments will decline over time.
C) A smaller proportion of the last monthly payment will be interest,and a larger proportion will be principal,than for the first monthly payment.
D) The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
E) The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.

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

Correct Answer

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On January 1,2016,your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%,with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for 2016?


A) $17,419.55
B) $17,593.75
C) $17,769.68
D) $17,947.38
E) $18,126.85

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

Correct Answer

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Suppose Sally Smith plans to invest $1,000.She can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be more than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually. )

A) True
B) False

Correct Answer

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Which of the following statements regarding a 15-year (180-month) $225,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )


A) The outstanding balance declines at a faster rate in the later years of the loan's life.
B) The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
C) Because the outstanding balance declines over time,the monthly payments will also decline over time.
D) Interest payments on the mortgage will increase steadily over time,but the total amount of each payment will remain constant.
E) The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

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

Correct Answer

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