Question 1

Which one of the following statements related to annuities and perpetuities is correct?

Accepted Answer

A)  An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. 
B)  A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. 
C)  Most loans are a form of a perpetuity. 
D)  The present value of a perpetuity cannot be computed but the future value can. 
E)  Perpetuities are finite but annuities are not.

Question 2

A 1-year loan of $15,000 is quoted at 6.7 percent plus 3 points. This loan is to be repaid in one lump sum. What is the actual cost of this loan?

Accepted Answer

A)  11.86 percent 
B)  6.91 percent 
C)  12.55 percent 
D)  10.00 percent 
E)  9.70 percent

Question 3

Your parents have made you two offers. The first offer includes annual gifts of $5,000, $6,000, and $8,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 6.2 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

Accepted Answer

A)  $16,707.06 
B)  $16,407.78 
C)  $16,360.42 
D)  $17,709.48 
E)  $17,856.42

Question 4

You have been purchasing $12,000 worth of stock annually for the past eight years and now have a portfolio valued at $87,881. What is your annual rate of return?

Accepted Answer

A)  4.32 percent 
B)  2.54 percent 
C)  3.29 percent 
D)  − 4.32 percent 
E)  − 2.54 percent

Question 5

A charity plans to invest annual payments of $60,000, $70,000, $75,000, and $50,000, respectively, over the next four years. The first payment will be invested one year from today.  Assuming the investment earns 5.5 percent annually, how much will the charity have available four years from now?

Accepted Answer

A)  $263,025 
B)  $236,875 
C)  $277,491 
D)  $328,572 
E)  $285,737

Question 6

Sue just purchased an annuity that will pay $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent?

Accepted Answer

A)  $241,309 
B)  $245,621 
C)  $251,409 
D)  $258,319 
E)  $266,498

Question 7

A new sports coupe costs $41,750 and the finance office has quoted you an APR of 7.7 compounded monthly, for 36 months. What is the EAR?

Accepted Answer

A)  7.81 percent 
B)  8.02 percent 
C)  7.94 percent 
D)  8.13 percent 
E)  7.98 percent

Question 8

What is the EAR of 14.9 percent compounded continuously?

Accepted Answer

A)  15.59 percent 
B)  15.62 percent 
C)  15.69 percent 
D)  15.84 percent 
E)  16.07 percent

Question 9

Rosina plans on saving $2,000 a year and expects to earn an annual rate of 6.9 percent. How much will she have in her account at the end of 37 years?

Accepted Answer

A)  $406,429.10 
B)  $338,369.09 
C)  $297,407.17 
D)  $313,274.38 
E)  $308,316.67

Question 10

This morning, you borrowed $162,000 to buy a house. The mortgage rate is 4.35 percent. The loan is to be repaid in equal monthly payments over 20 years with the first payment due one month from today. Assume each month is equal to 1/12 of a year and all taxes and insurance premiums are paid separately. How much of the second payment applies to the principal balance?

Accepted Answer

A)  $568.84 
B)  $426.11 
C)  $424.57 
D)  $587.25 
E)  $585.71

Question 11

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?

Accepted Answer

A)  Annual 
B)  Semi-annual 
C)  Monthly 
D)  Daily 
E)  Continuous

Question 12

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ________ loan.

Accepted Answer

A)  amortized 
B)  modified 
C)  balloon 
D)  pure discount 
E)  interest-only

Question 13

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

Accepted Answer

A)  You should accept the $89,500 today because it has the higher net present value. 
B)  You should accept the $89,500 today because it has the lower future value. 
C)  You should accept the first offer as it is a lump sum payment. 
D)  You should accept the second offer because it has the larger net present value. 
E)  It does not matter which offer you accept as they are equally valuable.

Question 14

For the next 20 years, you plan to invest $600 a month in a stock account earning 7 percent and $400 a month in a bond account earning 4 percent. When you retire in 20 years, you will combine your money into an account with a return of 5 percent. How much can you withdraw each month during retirement assuming a 30-year withdrawal period?

Accepted Answer

A)  $2,636.19 
B)  $2,904.11 
C)  $3,008.21 
D)  $2,465.44 
E)  $3,206.97

Question 15

A proposed project has cash flows of $2,000, $?, $1,750, and $1,250 at the end of Years 1 to 4. The discount rate is 7.2 percent and the present value of the four cash flows is $6,669.25. What is the value of the Year 2 cash flow?

Accepted Answer

A)  $2,450 
B)  $2,750 
C)  $2,500 
D)  $2,250 
E)  $2,800

Question 16

An amortized loan:

Accepted Answer

A)  requires the principal amount to be repaid in even increments over the life of the loan. 
B)  may have equal or increasing amounts applied to the principal from each loan payment. 
C)  requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. 
D)  requires that all payments be equal in amount and include both principal and interest. 
E)  repays both the principal and the interest in one lump sum at the end of the loan term.

Question 17

The entire repayment of a(n) ________ loan is computed simply by computing one single future value.

Accepted Answer

A)  interest-only 
B)  balloon 
C)  amortized 
D)  pure discount 
E)  bullet

Question 18

This morning, you borrowed $12,700 at an APR of 6.9 percent. If you repay the loan in one lump sum three years from today, how much will you have to repay?

Accepted Answer

A)  $15,514.47 
B)  $15,808.13 
C)  $15,313.00 
D)  $15,324.60 
E)  $16,441.20

Question 19

You just won the grand prize in a national writing contest! As your prize, you will receive $500 a month for 50 months. If you can earn 7 percent on your money, what is this prize worth to you today?

Accepted Answer

A)  $21,629.93 
B)  $18,411.06 
C)  $21,338.40 
D)  $20,333.33 
E)  $19,450.25

Question 20

Sue plans to save $4,500, $0, and $5,500 at the end of Years 1 to 3, respectively. What will her investment account be worth at the end of the Year 3 if she earns an annual rate of 4.15 percent?

Accepted Answer

A)  $10,583.82 
B)  $10,381.25 
C)  $10,609.50 
D)  $11,526.50 
E)  $10,812.07

Exam 6: Discounted Cash Flow Valuation