Question 1

You want to buy a new sports car for $55,000.The contract is in the form of a 60-month annuity due at a 6 percent APR,compounded monthly.What will your monthly payment be?

Accepted Answer

A) $1,047.90 
B) $1,053.87 
C) $1,058.01 
D) $1,063.30 
E) $1,072.11

Question 2

Today,you are retiring.You have a total of $411,016 in your retirement savings and have the funds invested such that you expect to earn an average of 7.10 percent,compounded monthly,on this money throughout your retirement years.You want to withdraw $2,500 at the beginning of every month,starting today.How long will it be until you run out of money?

Accepted Answer

A) 31.97 years 
B) 34.56 years 
C) 42.03 year 
D) 48.19 years 
E) You will never run out of money.

Question 3

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 4

Kristie owns a perpetuity which pays $12,000 at the end of each year.She comes to you and offers to sell you all of the payments to be received after the 10^th year.Explain how you can determine the value of this offer.

Accepted Answer

The answer of Kristie owns a perpetuity which pays $12,000...

Question 5

This morning,you borrowed $9,500 at 8.9 percent annual interest.You are to repay the loan principal plus all of the loan interest in one lump sum four years from today.How much will you have to repay?

Accepted Answer

A) $13,360.88 
B) $13,808.13 
C) $13,911.89 
D) $14,006.08 
E) $14,441.20

Question 6

You grandfather won a lottery years ago.The value of his winnings at the time was $50,000.He invested this money such that it will provide annual payments of $2,400 a year to his heirs forever.What is the rate of return?

Accepted Answer

A) 4.75 percent 
B) 4.80 percent 
C) 5.00 percent 
D) 5.10 percent 
E) 5.15 percent

Question 7

What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume annual compounding.

Accepted Answer

A) $301,115 
B) $306,492 
C) $310,868 
D) $342,908 
E) $347,267

Question 8

Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent.How much will she have in her account at the end of 45 years?

Accepted Answer

A) $1,806,429 
B) $1,838,369 
C) $2,211,407 
D) $2,333,572 
E) $2,508,316

Question 9

Why might a borrower select an interest-only loan instead of an amortized loan,which would be cheaper?

Accepted Answer

The answer of Why might a borrower select an interest-only...

Question 10

The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods.The money will be set aside in a separate savings account which pays 4.5 percent interest compounded monthly.The first deposit will be made today.What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years?

Accepted Answer

A) $80,459.07 
B) $80,760.79 
C) $81,068.18 
D) $81,333.33 
E) $81,548.20

Question 11

On the day you entered college,you borrowed $18,000 on an interest-only,four-year loan at 5.25 percent from your local bank.Payments are to be paid annually.What is the amount of your loan payment in year 2?

Accepted Answer

A) $945 
B) $1,890 
C) $3,600 
D) $5,106 
E) $6,250

Question 12

You need some money today and the only friend you have that has any is your miserly friend.He agrees to loan you the money you need,if you make payments of $30 a month for the next six months.In keeping with his reputation,he requires that the first payment be paid today.He also charges you 2 percent interest per month.How much money are you borrowing?

Accepted Answer

A) $164.09 
B) $168.22 
C) $169.50 
D) $170.68 
E) $171.40

Question 13

First Century Bank wants to earn an effective annual return on its consumer loans of 10 percent per year.The bank uses daily compounding on its loans.By law,what interest rate is the bank required to report to potential borrowers?

Accepted Answer

A) 9.23 percent 
B) 9.38 percent 
C) 9.53 percent 
D) 9.72 percent 
E) 10.00 percent

Question 14

How is the principal amount of an interest-only loan repaid?

Accepted Answer

A) The principal is forgiven over the loan period so does not have to be repaid. 
B) The principal is repaid in equal increments and included in each loan payment. 
C) The principal is repaid in a lump sum at the end of the loan period. 
D) The principal is repaid in equal annual payments. 
E) The principal is repaid in increasing increments through regular monthly payments.

Question 15

One year ago,Deltona Motor Parts deposited $16,500 in an investment account for the purpose of buying new equipment three years from today.Today,it is adding another $12,000 to this account.The company plans on making a final deposit of $20,000 to the account one year from today.How much will be available when it is ready to buy the equipment,assuming the account pays 5.5 interest?

Accepted Answer

A) $53,408 
B) $53,919 
C) $56,211 
D) $56,792 
E) $58,021

Question 16

You need a 30-year,fixed-rate mortgage to buy a new home for $240,000.Your mortgage bank will lend you the money at a 7.5 percent APR for this 360-month loan,with interest compounded monthly.However,you can only afford monthly payments of $850,so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.What will be the amount of the balloon payment if you are to keep your monthly payments at $850?

Accepted Answer

A) $1,112,464 
B) $1,113,316 
C) $1,114,480 
D) $1,115,840 
E) $1,116,315

Question 17

You are buying a previously owned car today at a price of $3,500.You are paying $300 down in cash and financing the balance for 36 months at 8.5 percent.What is the amount of each loan payment?

Accepted Answer

A) $101.02 
B) $112.23 
C) $118.47 
D) $121.60 
E) $124.40

Question 18

Your insurance agent is trying to sell you an annuity that costs $230,000 today.By buying this annuity,your agent promises that you will receive payments of $1,225 a month for the next 30 years.What is the rate of return on this investment?

Accepted Answer

A) 3.75 percent 
B) 4.47 percent 
C) 4.93 percent 
D) 5.45 percent 
E) 5.67 percent

Question 19

You are going to loan a friend $550 for one year at a 6 percent rate of interest,compounded annually.How much additional interest could you have earned if you had compounded the rate continuously rather than annually?

Accepted Answer

A) $0.84 
B) $1.01 
C) $1.10 
D) $1.23 
E) $1.28

Question 20

You want to borrow $47,170 from your local bank to buy a new sailboat.You can afford to make monthly payments of $1,160,but no more.Assume monthly compounding.What is the highest rate you can afford on a 48-month APR loan?

Accepted Answer

A) 8.38 percent 
B) 8.67 percent 
C) 8.82 percent 
D) 9.01 percent 
E) 9.18 percent

Exam 6: Discounted Cash Flow Valuation