Question 1

You deposited $2,000 in a bank account paying 6% on January 1, 2004, and then you made $2,000 deposits on January 1 in 2005 and 2006. Which of the following expressions will calculate your bank balance just after the last payment was deposited?

Accepted Answer

A)   FV = $2,000[1.06]-1 + $2,000[1.06]-2 + $2,000[1.06]-3
B)   FV = $2,000[1.06]1 + $2,000[1.06]2 + $2,000[1.06]3
C)   FV = $2,000[1.06]0 + $2,000[1.06]1 + $2,000[1.06]2
D)   FV = $2,000[1.06]-0 + $2,000[1.06]-1 + $2,000[1.06]-2 + $1,000[1.06]-3 B

Question 2

What is the value on 1/1/16 of the following cash flows? Use a 10% discount rate, and round your answer to the nearest $1.00. Date Cash Received Amount of Cash
1/1/18 $100
1/1/19 $200
1/1/20 $300
1/1/21 $400
1/1/22 $500

Accepted Answer

A)   $1,500
B)   $880
C)   $968
D)   $1,065 C

Question 3

What is the present value of $300 received at the beginning of each year for five years? Assume that the first payment is not received until the beginning of the third year (thus the last payment is received at the beginning of the seventh year). Use a 10% discount rate, and round your answer to the nearest $1.00.

Accepted Answer

A)   $1,137
B)   $854
C)   $940
D)   $1,257 C

Question 4

A friend of yours would like you to lend him $5,000 today to be paid back in 5 annual payments. What would be the equal annual end-of-year payment on this loan if you charge your friend 7% interest?

Accepted Answer

A)   $869.45
B)   $1,000.00
C)   $1,219.51
D)   $1,350.00

Question 5

If your opportunity cost is 12%, how much will you pay for a bond that pays $100 per year forever?

Accepted Answer

The answer of If your opportunity cost is 12%, how...

Question 6

What is the present value of $250 received at the beginning of each year for 21 years? Assume that the first payment is received today. Use a discount rate of 12%, and round your answer to the nearest $10.

Accepted Answer

A)   $1,870
B)   $2,090
C)   $2,117
D)   $3,243

Question 7

A bond paying interest of $120 per year forever is an example of a perpetuity.

Accepted Answer

A) True 
 B)False

Question 8

What is a series of equal payments for an infinite period of time called?

Accepted Answer

A)   A perpetuity
B)   An axiom
C)   A cash cow
D)   An annuity

Question 9

What is a series of equal payments for a finite period of time called?

Accepted Answer

A)   A perpetuity
B)   An axiom
C)   A lump sum
D)   An annuity

Question 10

You believe WSU stock will pay dividends of $1.00, $1.25, and $1.50 at the end of each of the next 3 years. Immediately after receiving the third dividend, you will sell the stock for $28.50. If the appropriate discount rate is 12%, you should be willing to pay $20.75 for this stock.

Accepted Answer

A) True 
 B)False

Question 11

You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts? Year End of Year Deposit
1 $350
2 $500
3 $725
4 $400

Accepted Answer

A)   $1,622
B)   $2,207
C)   $2,384
D)   $2,687

Question 12

You are saving money to buy a house. You will need $7,473.50 to make the down payment. If you can deposit $500 per month in a savings account which pays 1% per month, how long will it take you to save the $7,473.50?

Accepted Answer

The answer of You are saving money to buy a...

Question 13

It is January 1st and Darwin Davis has just established an IRA (Individual Retirement Account). Darwin will put $1,000 into the account on December 31st of this year and at the end of each year for the following 39 years (40 years total). How much money will Darwin have in his account at the beginning of the 41st year? Assume that the account pays 12% interest compounded annually, and round to the nearest $1,000.

Accepted Answer

A)   $93,000
B)   $766,000
C)   $767,000
D)   $850,000

Question 14

What is the present value of $150 received at the beginning of each year for 16 years? The first payment is received today. Use a discount rate of 9%, and round your answer to the nearest $10.

Accepted Answer

A)   $1,360
B)   $1,480
C)   $1,250
D)   $1,210

Question 15

Horace and Myrtle want to buy a house. Their banker offered them a fully amortizing $95,000 loan at a 12% annual rate for 20 years. What will their monthly payment be if they make equal monthly installments over the next 20 years?

Accepted Answer

A)   $1,046
B)   $749
C)   $1,722
D)   $1,346

Question 16

You wish to borrow $2,000 to be repaid in 12 monthly installments of $170.30. The annual interest rate is

Accepted Answer

A)   24%.
B)   4%.
C)   .04%.
D)   22%.

Question 17

You buy a race horse, which has a winning streak for four years, bringing in $500,000 per year, and then it dies of a heart attack. If you paid $1,518,675 for the horse four years ago, what was your annual return over this four-year period?

Accepted Answer

A)   8%
B)   33%
C)   18%
D)   12%

Question 18

In order to send your oldest child to law school when the time comes, you want to accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how much would you have to deposit if:
a. you want to deposit an amount annually at the end of each year?
b. you want to deposit one large lump sum today?

Accepted Answer

The answer of In order to send your oldest child...

Question 19

As a part of your savings plan at work, you have been depositing $250 per quarter in a savings account earning 8% interest compounded quarterly for the last 10 years. You will retire in 15 years and want to increase your contribution each year from $1,000 to $2,000 per year, by increasing your contribution every four months from $250 to $500. Additionally, you have just inherited $10,000, which you plan to invest now to earn interest at 12% compounded annually for the next 15 years. How much money will you have in savings when you retire 15 years from now?

Accepted Answer

A)   $126,862
B)   $73,012
C)   $161,307
D)   $194,415

Question 20

If a loan of $10,000 is paid back in equal annual end-of-year payments of $2,570.69 during the next five years, what is the annual interest rate on the loan?

Accepted Answer

A)   2%
B)   5%
C)   9%
D)   12%

Exam 6: The Time Value of Money-Annuities and Other Topics