Question 1

Ingrid Birdman can earn a nominal annual rate of return of 12%, compounded semiannually. If Ingrid made 40 consecutive semiannual deposits of $500 each, with the first deposit being made today, how much will she accumulate at the end of Year 20? Round off to the nearest $1.

Accepted Answer

A)  $52,821 
B)  $57,901 
C)  $82,024 
D)  $64,132

Question 2

Your rich great, great aunt just passed away at the age of 91. She liked you more than she let on and left you in her will. You will receive 100 British bonds that pay interest forever. The amount of annual interest payments that you will receive is $5,000. If you could invest your money at 4.25%, how much are these bonds worth today?

Accepted Answer

A)  $64,480 
B)  $197,250 
C)  $250,000 
D)  $117,647 
E)  $55,000

Question 3

Charlie Stone wants to retire in 30 years, and he wants to have an annuity of $1,000 a year for 20 years after retirement. Charlie wants to receive the first annuity payment at the end of the 30th year. Using an interest rate of 10%, how much must Charlie invest today in order to have his retirement annuity (round to the nearest $10)?

Accepted Answer

A)  $500 
B)  $490 
C)  $540 
D)  $570

Question 4

Suppose you are 40 years old and plan to retire in exactly 20 years. 21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments. You expect to live to the age of 85. How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund?

Accepted Answer

The answer of Suppose you are 40 years old and...

Question 5

Assume that two investments have a three-year life and generate the cash flows shown below. Which of the two would you prefer? Year Investment A Investment B
1 $5,000 $8,000
2 $5,000 $5,000
3 $5,000 $2,000

Accepted Answer

A)  Investment A, since it has the most even cash flows 
B)  Investment B, since it gives you the largest cash flows in earlier years 
C)  Neither, since they both have equal lives 
D)  Both investments are equally attractive

Question 6

You are considering the purchase of XYZ Company's common stock which will pay a $1.00 per share dividend one year from the date of purchase. The dividend is expected to grow at the rate of 4% per year. If the appropriate discount rate for this investment is 14%, what is the price of one share of this stock?

Accepted Answer

A)  $7.14 
B)  $10.00 
C)  $25.00 
D)  Cannot be determined without maturity date

Question 7

If you have $375,000 in an account earning 9% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 20 years?

Accepted Answer

A)  $7,500 
B)  $18,750 
C)  $66,912 
D)  $5,575 
E)  $41,080

Question 8

What is a series of equal payments to be received at the end of each period, for a finite period of time, called?

Accepted Answer

A)  A perpetuity 
B)  An annuity due 
C)  A cash cow 
D)  An ordinary annuity

Question 9

What is the present value of $27 received at the end of each year for five years? Assume a discount rate of 9%. The first payment will be received one year from today (round to the nearest $1).

Accepted Answer

A)  $42 
B)  $114 
C)  $88 
D)  $105

Question 10

If you put $510 in a savings account at the beginning of each year for 30 years, how much money will be in the account at the end of the 30th year? Assume that the account earns 5%, and round to the nearest $100.

Accepted Answer

A)  $33,300 
B)  $32,300 
C)  $33,900 
D)  None of the above

Question 11

What is a series of equal payments to be received at the beginning of each period, for a finite period of time, called?

Accepted Answer

A)  A perpetuity 
B)  An annuity due 
C)  A cash cow 
D)  A deferred annuity

Question 12

Michael Masury has an opportunity to buy a commercial property. Rents from the property will be $24,000 and he expects them to increase at a rate of 3% per year annually. His required rate of return on this investment is 12%. At what price would Michael be indifferent to buying or not buying the investment? Round off to the nearest $1.

Accepted Answer

A)  $171,429 
B)  $266,667 
C)  $800,000 
D)  $240,000

Question 13

What is the value today of an investment that pays $500 every year at year-end during the next 15 years if the annual interest rate is 9%?

Accepted Answer

A)  $4,030.50 
B)  $7,500.00 
C)  $3,500.00 
D)  $7,000.00

Question 14

What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments. Round to the nearest whole dollar. Year Cash Flow
1 $3,000
2 $4,000
3 $5,000

Accepted Answer

A)  $10,588 
B)  $11,461 
C)  $12,688 
D)  $13,591

Question 15

George and Laura will be retiring in four years and would like to buy a lake house. They estimate that they will need $550,000 at the end of four years to buy this house. They want to make four equal annual payments into an account at the end of each year. If they can earn 8% on their money, compounded annually, over the next four years, how much must they invest at the end of each year for the next four years to have accumulated $550,000 by retirement?

Accepted Answer

A)  $137,500 
B)  $122,056 
C)  $113,015 
D)  $131,821

Question 16

An amortized loan is a loan paid in unequal installments.

Accepted Answer

A) True 
 B)False

Question 17

What is the present value of an annuity of $27 received at the beginning of each year for the next six years? The first payment will be received today, and the discount rate is 10% (round to nearest $10).

Accepted Answer

A)  $120 
B)  $130 
C)  $100 
D)  $110

Question 18

a.) If Sparco, Inc. deposits $150 at the end of each year for the next eight years in an account that pays 5% interest, how much money will Sparco have at the end of eight years?
b.) Suppose Sparco decides that they need to have $5,300 at the end of the eight years. How much will they have to deposit at the end of each year?

Accepted Answer

The answer of a.) If Sparco, Inc. deposits $150 at...

Question 19

You have a credit card with a balance of $18,000. The annual interest rate on the card is 18% compounded monthly, and the minimum payment is $400 per month. If you pay only the minimum payment each month and do not make any new charges on the card, how many years will it take for you to pay off the $18,000 balance?

Accepted Answer

The answer of You have a credit card with a...

Question 20

You have just received an endowment of $32,976. You plan to put the entire amount in an account earning 8 percent compounded annually and to withdraw $4000 at the end of each year. How many years can you continue to make the withdrawals?

Accepted Answer

The answer of You have just received an endowment of...

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

Ingrid Birdman can earn a nominal annual rate of return of 12%, compounded semiannually. If Ingrid made 40 consecutive semiannual deposits of $500 each, with the first deposit being made today, how much will she accumulate at the end of Year 20? Round off to the nearest $1.

Assume that two investments have a three-year life and generate the cash flows shown below. Which of the two would you prefer? Year Investment A Investment B 1 $5,000 $8,000 2 $5,000 $5,000 3 $5,000 $2,000