Question 1

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

What's the future value of $1, 200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)   $1, 537.69
B)   $1, 618.62
C)   $1, 699.55
D)   $1, 784.53
E)   $1, 873.76

Question 4

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75, 000 of income a year for 20 years, with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost her to buy the annuity today?

Accepted Answer

A)   $825, 835
B)   $869, 300
C)   $915, 052
D)   $963, 213
E)   $1, 011, 374

Question 5

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 6

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?

Accepted Answer

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

Question 7

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

Accepted Answer

A)   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.
B)   The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
C)   A 30-year, $150, 000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
D)   A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
E)   If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

Question 8

You are considering two equally risky annuities, each of which pays $15, 000 per year for 20 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Accepted Answer

A)   If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
B)   The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
C)   The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
D)   The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
E)   The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

Question 9

What's the present value of $4, 500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Accepted Answer

A)   $3, 089
B)   $3, 251
C)   $3, 422
D)   $3, 602
E)   $3, 782

Question 10

You have just purchased a U.S.Treasury bond for $747.25.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 will you earn on this bond?

Accepted Answer

A)   4.37%
B)   4.86%
C)   5.40%
D)   6.00%
E)   6.60%

Question 11

Your bank offers a savings account that pays 3.5% interest, compounded annually.How much will $500 invested today be worth at the end of 25 years?

Accepted Answer

A)   $1, 122.54
B)   $1, 181.62
C)   $1, 240.70
D)   $1, 302.74
E)   $1, 367.88

Question 12

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 13

On January 1, 2012, 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 2012?

Accepted Answer

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

Question 14

Which of the following statements is CORRECT?

Accepted Answer

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

Question 15

How much would $1, growing at 3.5% per year, be worth after 75 years?

Accepted Answer

A)   $12.54
B)   $13.20
C)   $13.86
D)   $14.55
E)   $15.28

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

You are considering two equally risky annuities, each of which pays $25, 000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Accepted Answer

A)   If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
B)   A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
C)   The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
D)   The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
E)   The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.

Question 18

You plan to work for Strickland Corporation for 12 years after graduation and after that want to 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 grandmother just gave you a $25, 000 graduation gift that 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, 687

Question 19

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.

Accepted Answer

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

Question 20

Your investment account pays 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?

Accepted Answer

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

Exam 4: Time value of money

How much would $1, growing at 3.5% per year, be worth after 75 years?

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

Your bank offers a savings account that pays 3.5% interest, compounded annually.How much will $500 invested today be worth at the end of 25 years?

Correct Answer
verified

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?

Correct Answer
verified

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

Correct Answer
verified

You are considering two equally risky annuities, each of which pays $25, 000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Correct Answer
verified

Your investment account pays 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?

Correct Answer
verified

What's the present value of $4, 500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75, 000 of income a year for 20 years, with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost her to buy the annuity today?

Correct Answer
verified

On January 1, 2012, 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 2012?

Correct Answer
verified

You are considering two equally risky annuities, each of which pays $15, 000 per year for 20 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

You have just purchased a U.S.Treasury bond for $747.25.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 will you earn on this bond?

Correct Answer
verified

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Correct Answer
verified

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Correct Answer
verified

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.

Correct Answer
verified

What's the future value of $1, 200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Correct Answer
verified

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

Correct Answer
verified

Exam 4: Time value of money

How much would $1, growing at 3.5% per year, be worth after 75 years?

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

Your bank offers a savings account that pays 3.5% interest, compounded annually.How much will $500 invested today be worth at the end of 25 years?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You are considering two equally risky annuities, each of which pays $25, 000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Your investment account pays 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?

Correct AnswerverifiedShow Answer

What's the present value of $4, 500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75, 000 of income a year for 20 years, with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost her to buy the annuity today?

Correct AnswerverifiedShow Answer

On January 1, 2012, 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 2012?

Correct AnswerverifiedShow Answer

You are considering two equally risky annuities, each of which pays $15, 000 per year for 20 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You have just purchased a U.S.Treasury bond for $747.25.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 will you earn on this bond?

Correct AnswerverifiedShow Answer

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Correct AnswerverifiedShow Answer

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

What's the future value of $1, 200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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