Question 1

If you start making $115 monthly contributions today and continue them for six years, what is their present value if the compounding rate is 12 percent APR? What is the present value of this annuity?

Accepted Answer

A) $5,512.90 
B) $5,633.10 
C) $5,882.30 
D) $5,941.12

Question 2

Joey realizes that he has charged too much on his credit card and has racked up $4,000 in debt. If he can pay $200 each month and the card charges 20 percent APR (compounded monthly), how long will it take him to pay off the debt?

Accepted Answer

A) 17.40 months 
B) 20.00 months 
C) 24.04 months 
D) 24.53 months

Question 3

When you get your credit card bill, if you make a payment larger than the minimum payment

Accepted Answer

A) you are wasting your current consumption and making TVM not work for you. 
B) you will reduce the payoff time. 
C) you will increase the payoff time. 
D) you will not affect the payoff time.

Question 4

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

Accepted Answer

A) The number of periods decreases. 
B) The interest rate decreases. 
C) The amortization schedule decreases. 
D) The effective rate is calculated over fewer years.

Question 5

A mortgage broker is offering a 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 5 percent APR interest rate. After the second year, the mortgage interest charged increases to 8 percent APR. What is the effective interest rate in the first two years? What is the effective interest rate after the second year?

Accepted Answer

A) 4.89 percent, 7.72 percent respectively 
B) 5.00 percent, 8.00 percent respectively 
C) 5.12 percent, 8.30 percent respectively 
D) 12.59 percent, 12.65 percent respectively

Question 6

People refinance their home mortgages

Accepted Answer

A) when rates fall. 
B) when rates rise. 
C) when rates fall and rise. 
D) whenever they need to, independent of rates.

Question 7

What is the present value, when interest rates are 6.5 percent, of a $100 payment made every year forever?

Accepted Answer

A) $6.50 
B) $650.00 
C) $1,000.00 
D) $1,538.46

Question 8

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 9

What annual interest rate would you need to earn if you wanted a $500 per month contribution to grow to $27,050 in four years?

Accepted Answer

A) 2.37 percent 
B) 5.77 percent 
C) 6.00 percent 
D) 13.53 percent

Question 10

After saving diligently your entire career, you and your spouse are ready to retire with a nest egg of $500,000. You need to invest this money in a mix of stocks and bonds that will allow you to earn $4,000 per month for 30 years. What annual interest rate (APR) do you need to earn?

Accepted Answer

A) 6.92 percent 
B) 7.45 percent 
C) 8.94 percent 
D) 9.17 percent

Question 11

Your current $115,000 mortgage calls for monthly payments over 30 years at an annual interest rate of 7 percent. If you pay an additional $50 each month beginning with the first payment, how much interest expense do you save by prepaying?

Accepted Answer

A) $32,764.43 
B) $30,718.29 
C) $29,503.14 
D) $22,008.73

Question 12

To compute the present or future value of an annuity due, one computes the value of an ordinary annuity and then

Accepted Answer

A)  multiplies it by (1 + i). 
B) divides it by (1 + i). 
C) multiplies it by (1 − i). 
D) divides it by (1 −i).

Question 13

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 14

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 15

What is the interest rate of a 6-year, annual $10,000 annuity with a present value of $40,000?

Accepted Answer

A) 11.94 percent 
B) 12.24 percent 
C) 12.98 percent 
D) 13.12 percent

Question 16

A perpetuity pays $250 per year and interest rates are 8.5 percent. How much would its value change if interest decreased to 5.5 percent? Did the value increase or decrease?

Accepted Answer

A) $1,604.27; increase 
B) $1,604.27; decrease 
C) $1,714.20; increase 
D) $1,714.20; decrease

Question 17

What annual interest rate would you need to earn if you wanted a $200 per month contribution to grow to $14,700 in five years?

Accepted Answer

A) 6.47 percent 
B) 7.76 percent 
C) 8.01 percent 
D) 14.70 percent

Question 18

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, $4,745.78

Question 19

A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $2,000 per month for the next three years and then $1,000 per month for the two years after that. If the bank is charging customers 8.5 percent APR, how much would it be willing to lend the business owner?

Accepted Answer

A) $80,419.29 
B) $6,494.66 
C) $21,780.74 
D) $96,000.00

Question 20

What is the interest rate of a 4-year, annual $1,000 annuity with present value of $3,500?

Accepted Answer

A) 3.85 percent 
B) 5.56 percent 
C) 8.84 percent 
D) 9.70 percent

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