Question 1

If the future value of an ordinary, 7-year annuity is $10,000 and interest rates are 4 percent, what is the future value of the same annuity due?

Accepted Answer

A)   $9,615.38
B)   $10,000.00
C)   $10,400.00
D)   $10,700.00 C

Question 2

If the future value of an ordinary, 11-year annuity is $5,575 and interest rates are 5.5 percent, what is the future value of the same annuity due?

Accepted Answer

A)   $5,619.52
B)   $5,769.06
C)   $5,881.63
D)   $5,947.88 C

Question 3

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)   1091.82 percent
D)   110.50 percent C

Question 4

Given a 6 percent interest rate, compute the present value of deposits made in years 1, 2, 3, and 4 of $1,200, $1,400, $1,400, and $1,500.

Accepted Answer

A)   $4,356.52
B)   $4,741.68
C)   $5,188.68
D)   $5,506.00

Question 5

You wish to buy a $20,000 car. The dealer offers you a 5-year loan with an 8 percent APR. What are the monthly payments?

Accepted Answer

A)   $272.19
B)   $333.33
C)   $405.53
D)   $4,080.35

Question 6

Payday loans are very short-term loans that charge very high interest rates. You can borrow $600 today and repay $675 in two weeks. What is the compound annual rate implied by this 12.5 percent rate charged for only two weeks?

Accepted Answer

A)   12.89 percent
B)   13.28 percent
C)   2037.79 percent
D)   113.28 percent

Question 7

When you get your credit card bill, it will offer a minimum payment, which

Accepted Answer

A)   usually only pays the accrued interest and a small amount of principal.
B)   usually only pays the principal and a small amount of accrued interest.
C)   usually only pays the principal and no accrued interest.
D)   usually only pays the accrued interest and no principal.

Question 8

A loan is offered with monthly payments and a 14.5 percent APR. What is the loan's effective annual rate (EAR)?

Accepted Answer

A)   14.97 percent
B)   15.50 percent
C)   15.13 percent
D)   15.63 percent

Question 9

Which of the following will decrease the present value of an annuity?

Accepted Answer

A)   The discount rate increases.
B)   The discount rate decreases.
C)   The number of periods the annuity is received increases.
D)   The final payment increases.

Question 10

If you start making $100 monthly contributions today and continue them for five years, what is their future value if the compounding rate is 10 percent APR? What is the present value of this annuity?

Accepted Answer

A)   $508.14, $487.74
B)   $512.64, $491.80
C)   $7,743.71, $4,706.53
D)   $7,808.24, $4,745.76

Question 11

You wish to buy a $15,000 car. The dealer offers you a 4-year loan with a 9 percent APR. What are the monthly payments?

Accepted Answer

A)   $260.78
B)   $312.50
C)   $373.28
D)   $3,820.56

Question 12

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

Accepted Answer

A)   the time line
B)   interest rate for compounding
C)   the present value
D)   the future value

Question 13

In order to discount multiple cash flows to the present, one would use

Accepted Answer

A)   the appropriate compound rate.
B)   the appropriate discount rate.
C)   the appropriate simple rate.
D)   the appropriate tax rate.

Question 14

Which of the following statements about compound frequency is not true?

Accepted Answer

A)   Compounding frequency can only be annual, semi-annual or quarterly.
B)   The higher the compound frequency, the higher the future value will be.
C)   The relative increase in value from increasing compounding frequency seems to diminish with increasing frequencies.
D)   None of the above are untrue statements.

Question 15

A furniture company is offering a choice of deals. You can receive $100 cash back on the purchase, or a 2 percent APR, 2-year loan. The price of the dining room set is $3,750 and you could obtain a 2-year loan from your credit union at 6 percent APR. What is the cost per month of each deal?

Accepted Answer

A)   Cash back: $161.77, 2 percent APR: $159.53
B)   Cash back: $171.29, 2 percent APR: $179.02
C)   Cash back: $153.96, 2 percent APR: $181.09
D)   Cash back: $180.03, 2 percent APR: $166.17

Question 16

The present value of annuity payments made far into the future is

Accepted Answer

A)   worth very little today.
B)   worth much more today.
C)   valued as having no time value of money.
D)   valued as worthless as their value is not determinable.

Question 17

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

Question 18

You deposit $1,000 today and want to save $100 each month beginning one month from today. Your account earns a 5 percent annual interest rate. How long will it take you to accumulate $5,000?

Accepted Answer

A)   29.3 months
B)   35.7 months
C)   42.6 months
D)   52.1 months

Question 19

The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a

Accepted Answer

A)   less accurate measure of the interest rate paid for monthly compounding.
B)   more accurate measure of the interest rate paid for monthly compounding.
C)   concept that is only used because the law requires it, and is of no use to a borrower.
D)   measure that only applies to mortgages.

Question 20

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

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