Question 1

You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?

Accepted Answer

A) a 10 percent rate with monthly compounding 
B) a 10 percent rate with annual compounding 
C) a 10.5 percent rate with annual compounding 
D) a 10 percent rate with quarterly compounding 
A) a 10 percent rate with monthly compounding 
B) a 10 percent rate with annual compounding 
C) a 10.5 percent rate with annual compounding 
D) a 10 percent rate with quarterly compounding

Question 2

Jasmine has decided that she wants to build enough retirement wealth that, if invested at 6 percent per year, will provide her with $3,000 of monthly income for 30 years. To date, she has saved nothing but she still has 25 years until she retires. Jasmine believes that she can earn 9 percent on her investments until she retires. How much money does she need to contribute per month to reach her goal?

Accepted Answer

A) $446.32 
B) $521.84 
C) $667.13 
D) $722.05 
A) $446.32 
B) $521.84 
C) $667.13 
D) $722.05

Question 3

What is the interest rate of a 6-year, annual $3,000 annuity with present value of $14,000?

Accepted Answer

A) 5.64 percent 
B) 7.69 percent 
C) 10.17 percent 
D) 11.32 percent 
A) 5.64 percent 
B) 7.69 percent 
C) 10.17 percent 
D) 11.32 percent

Question 4

Hank purchased a $20,000 car two years ago using an 8 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What is the minimum price Hank would need to receive for his car?

Accepted Answer

A) $8,000.00 
B) $12,079.65 
C) $12,941.12 
D) $15,133.64 
A) $8,000.00 
B) $12,079.65 
C) $12,941.12 
D) $15,133.64

Question 5

Phoebe realizes that she has charged too much on her credit card and has racked up $7,000 in debt. If she can pay $200 each month and the card charges 17 percent APR (compounded monthly), how long will it take her to pay off the debt?

Accepted Answer

A) 28.63 months 
B) 35.00 months 
C) 47.71 months 
D) 48.68 months 
A) 28.63 months 
B) 35.00 months 
C) 47.71 months 
D) 48.68 months

Question 6

Given a 10 percent interest rate, compute the year 9 future value if deposits of $10,000 and $20,000 are made in years 1 and 5 respectively, and a withdrawal of $5,000 is made in year 7.

Accepted Answer

A) $44,667.89 
B) $45,103.47 
C) $46,585.66 
D) $47,002.89 
A) $44,667.89 
B) $45,103.47 
C) $46,585.66 
D) $47,002.89

Question 7

Sally saves $500 per month in her retirement plan. She plans on making monthly contributions for 35 years. If her account earns a 12 percent annual interest rate, how much will she have at the end of 35 years and what percent of the total are her out-of-pocket contributions?

Accepted Answer

A) $1,113,879.14; 43.72 percent 
B) $2,452,905.33; 12.07 percent 
C) $3,215,479.74; 6.53 percent 
D) $3,691,003.27; 8.28 percent 
A) $1,113,879.14; 43.72 percent 
B) $2,452,905.33; 12.07 percent 
C) $3,215,479.74; 6.53 percent 
D) $3,691,003.27; 8.28 percent

Question 8

You just bought a new home and have a 30-year mortgage with monthly payments. Which statement regarding your mortgage is correct?

Accepted Answer

A) Your monthly payments will decrease over time. 
B) The dollar amount of interest expense you pay each year will remain the same each year. 
C) The dollar amount of principal paid increases each month. 
D) All of these choices are correct. 
A) Your monthly payments will decrease over time. 
B) The dollar amount of interest expense you pay each year will remain the same each year. 
C) The dollar amount of principal paid increases each month. 
D) All of these choices are correct.

Question 9

Bank A charges a 7.75 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 7 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?

Accepted Answer

A) Bank A: 7.75 percent, Bank B: 7.23 percent 
B) Bank A: 7.85 percent, Bank B: 7.23 percent 
C) Bank A: 7.25 percent, Bank B: 7.5 percent 
D) Bank A: 7.85 percent, Bank B: 8.15 percent 
A) Bank A: 7.75 percent, Bank B: 7.23 percent 
B) Bank A: 7.85 percent, Bank B: 7.23 percent 
C) Bank A: 7.25 percent, Bank B: 7.5 percent 
D) Bank A: 7.85 percent, Bank B: 8.15 percent

Question 10

Jane has been saving $450 in her retirement account each month for the last 20 years and plans to continue contributing $450 each month for the next 20 years. Her account has been earning a 9 percent annual interest rate and she expects to earn the same rate for the next 20 years. Her twin brother, Hal, has not saved anything for the last 20 years. Due to sibling rivalry, he wants to have as much as Jane is expected to have at the end of 20 years. If Hal expects to earn the same annual interest rate as Jane, how much must Hal save each month to achieve his goal?

Accepted Answer

A) $1,791.34 
B) $2,109.28 
C) $2,872.91 
D) $3,154.12 
A) $1,791.34 
B) $2,109.28 
C) $2,872.91 
D) $3,154.12

Question 11

Due to poor spending habits, Ricky has accumulated $5,000 in credit card debt. He has missed several payments and now the annual interest rate on the card is 16.75 percent! If he pays $200 per month on the card, in total, how much interest expense does Ricky pay to the credit card company?

Accepted Answer

A) $847.50 
B) $1,192.00 
C) $2,118.75 
D) $6,192.00 
A) $847.50 
B) $1,192.00 
C) $2,118.75 
D) $6,192.00

Question 12

Given a 7 percent interest rate, compute the year 6 future value if deposits of $2,500 and $1,500 are made in years 2 and 3, respectively, and a withdrawal of $900 is made in year 4.

Accepted Answer

A) $2,721.44 
B) $4,084.15 
C) $4,491.60 
D) $7,059.04 
A) $2,721.44 
B) $4,084.15 
C) $4,491.60 
D) $7,059.04

Question 13

What is the present value of a $1,100 payment made every year forever when interest rates are 4.5 percent?

Accepted Answer

A) $11,100 
B) $21,089.37 
C) $22,963.14 
D) $24,444.44 
A) $11,100 
B) $21,089.37 
C) $22,963.14 
D) $24,444.44

Question 14

A perpetuity pays $100 per year and interest rates are 6.5 percent. How much would its value change if interest rates increased to 9 percent?

Accepted Answer

A) $250.00 increase 
B) $250.00 decrease 
C) $427.35 increase 
D) $427.35 decrease 
A) $250.00 increase 
B) $250.00 decrease 
C) $427.35 increase 
D) $427.35 decrease

Question 15

What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?

Accepted Answer

A) $204.17 
B) $440.80 
C) $1,197.81 
D) $1,938.96 
A) $204.17 
B) $440.80 
C) $1,197.81 
D) $1,938.96

Question 16

Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $550 in two weeks. What is the compound annual rate implied by this 10 percent rate charged for only two weeks?

Accepted Answer

A) 10.50 percent 
B) 12.00 percent 
C) 1091.78 percent 
D) 110.50 percent 
A) 10.50 percent 
B) 12.00 percent 
C) 1091.78 percent 
D) 110.50 percent

Question 17

A car company is offering a choice of deals. You can receive $4,000 cash back on the purchase, or a 0 percent APR, 4-year loan. The price of the car is $40,000 and you could obtain a 4-year loan from your credit union, at 6 percent APR. Which deal is cheaper?

Accepted Answer

A) The car company's 0 percent 4-year loan. 
B) The rebate with the credit union's 6 percent 4-year loan. 
C) There is not enough information given to determine which deal is cheaper.Car Company: PV = 40000, I = 0, FV = 0, N = 4 × 12 = 48, PMT = −833.33 
A) The car company's 0 percent 4-year loan. 
B) The rebate with the credit union's 6 percent 4-year loan. 
C) There is not enough information given to determine which deal is cheaper.Car Company: PV = 40000, I = 0, FV = 0, N = 4 × 12 = 48, PMT = −833.33

Question 18

What is the present value of a $600 annuity payment over 4 years if interest rates are 6 percent?

Accepted Answer

A) $475.26 
B) $757.49 
C) $2,079.06 
D) $3,145.28 
A) $475.26 
B) $757.49 
C) $2,079.06 
D) $3,145.28

Question 19

If the future value of an ordinary, 5-year annuity is $100,000 and interest rates are 5 percent, what is the future value of the same annuity due?

Accepted Answer

A) $95,238.10 
B) $100,000.00 
C) $105,000.00 
D) $107,000.00 
A) $95,238.10 
B) $100,000.00 
C) $105,000.00 
D) $107,000.00

Question 20

Given an 8 percent interest rate, compute the year 7 future value if deposits of $1,500 and $2,500 are made in years 2 and 3, respectively, and a withdrawal of $2,000 is made in year 5.

Accepted Answer

A) $1,909.42 
B) $3,272.41 
C) $3,433.60 
D) $5,656.34 
A) $1,909.42 
B) $3,272.41 
C) $3,433.60 
D) $5,656.34

You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?

What is the interest rate of a 6-year, annual $3,000 annuity with present value of $14,000?

Hank purchased a $20,000 car two years ago using an 8 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What is the minimum price Hank would need to receive for his car?

Phoebe realizes that she has charged too much on her credit card and has racked up $7,000 in debt. If she can pay $200 each month and the card charges 17 percent APR (compounded monthly), how long will it take her to pay off the debt?

Given a 10 percent interest rate, compute the year 9 future value if deposits of $10,000 and $20,000 are made in years 1 and 5 respectively, and a withdrawal of $5,000 is made in year 7.

Sally saves $500 per month in her retirement plan. She plans on making monthly contributions for 35 years. If her account earns a 12 percent annual interest rate, how much will she have at the end of 35 years and what percent of the total are her out-of-pocket contributions?

You just bought a new home and have a 30-year mortgage with monthly payments. Which statement regarding your mortgage is correct?

Bank A charges a 7.75 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 7 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?

Due to poor spending habits, Ricky has accumulated $5,000 in credit card debt. He has missed several payments and now the annual interest rate on the card is 16.75 percent! If he pays $200 per month on the card, in total, how much interest expense does Ricky pay to the credit card company?

Given a 7 percent interest rate, compute the year 6 future value if deposits of $2,500 and $1,500 are made in years 2 and 3, respectively, and a withdrawal of $900 is made in year 4.

What is the present value of a $1,100 payment made every year forever when interest rates are 4.5 percent?

A perpetuity pays $100 per year and interest rates are 6.5 percent. How much would its value change if interest rates increased to 9 percent?

What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?

Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $550 in two weeks. What is the compound annual rate implied by this 10 percent rate charged for only two weeks?

A car company is offering a choice of deals. You can receive $4,000 cash back on the purchase, or a 0 percent APR, 4-year loan. The price of the car is $40,000 and you could obtain a 4-year loan from your credit union, at 6 percent APR. Which deal is cheaper?

What is the present value of a $600 annuity payment over 4 years if interest rates are 6 percent?

If the future value of an ordinary, 5-year annuity is $100,000 and interest rates are 5 percent, what is the future value of the same annuity due?

Given an 8 percent interest rate, compute the year 7 future value if deposits of $1,500 and $2,500 are made in years 2 and 3, respectively, and a withdrawal of $2,000 is made in year 5.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 5: Time Value of Money 2: Analyzing Annuity Cash Flows

You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?

What is the interest rate of a 6-year, annual $3,000 annuity with present value of $14,000?

Hank purchased a $20,000 car two years ago using an 8 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What is the minimum price Hank would need to receive for his car?

Phoebe realizes that she has charged too much on her credit card and has racked up $7,000 in debt. If she can pay $200 each month and the card charges 17 percent APR (compounded monthly), how long will it take her to pay off the debt?

Given a 10 percent interest rate, compute the year 9 future value if deposits of $10,000 and $20,000 are made in years 1 and 5 respectively, and a withdrawal of $5,000 is made in year 7.

Sally saves $500 per month in her retirement plan. She plans on making monthly contributions for 35 years. If her account earns a 12 percent annual interest rate, how much will she have at the end of 35 years and what percent of the total are her out-of-pocket contributions?

You just bought a new home and have a 30-year mortgage with monthly payments. Which statement regarding your mortgage is correct?

Bank A charges a 7.75 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 7 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?

Due to poor spending habits, Ricky has accumulated $5,000 in credit card debt. He has missed several payments and now the annual interest rate on the card is 16.75 percent! If he pays $200 per month on the card, in total, how much interest expense does Ricky pay to the credit card company?

Given a 7 percent interest rate, compute the year 6 future value if deposits of $2,500 and $1,500 are made in years 2 and 3, respectively, and a withdrawal of $900 is made in year 4.

What is the present value of a $1,100 payment made every year forever when interest rates are 4.5 percent?

A perpetuity pays $100 per year and interest rates are 6.5 percent. How much would its value change if interest rates increased to 9 percent?

What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?

Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $550 in two weeks. What is the compound annual rate implied by this 10 percent rate charged for only two weeks?

A car company is offering a choice of deals. You can receive $4,000 cash back on the purchase, or a 0 percent APR, 4-year loan. The price of the car is $40,000 and you could obtain a 4-year loan from your credit union, at 6 percent APR. Which deal is cheaper?

What is the present value of a $600 annuity payment over 4 years if interest rates are 6 percent?

If the future value of an ordinary, 5-year annuity is $100,000 and interest rates are 5 percent, what is the future value of the same annuity due?

Given an 8 percent interest rate, compute the year 7 future value if deposits of $1,500 and $2,500 are made in years 2 and 3, respectively, and a withdrawal of $2,000 is made in year 5.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters