Question 1

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

Accepted Answer

A)   8.46%
B)   8.90%
C)   9.37%
D)   9.86%
E)   10.38%F) A) and C)
G) D) and E)

Question 2

S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Accepted Answer

A)   The periodic interest rate is greater than 3%.
B)   The periodic rate is less than 3%.
C)   The present value would be greater if the lump sum were discounted back for more periods.
D)   The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.
E)   The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.F) C) and E)
G) A) and B)

Question 3

You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

Accepted Answer

A)   $15,260
B)   $16,063
C)   $16,908
D)   $17,754
E)   $18,642F) B) and C)
G) C) and D)

Question 4

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 5

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?

Accepted Answer

A)   $5,178.09
B)   $5,436.99
C)   $5,708.84
D)   $5,994.28
E)   $6,294.00F) B) and E)
G) A) and E)

Question 6

What is the present value of the following cash flow stream at a rate of 12.0%?

Accepted Answer

A)   $9,699
B)   $10,210
C)   $10,747
D)   $11,284
E)   $11,849F) A) and E)
G) None of the above

Question 7

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)   Investment A pays $250 at the end of eyear for the next 10 years (a total of 10 payments) .
B)   Investment B pays $125 at the end of e6-month period for the next 10 years (a total of 20 payments) .
C)   Investment C pays $125 at the beginning of e6-month period for the next 10 years (a total of 20 payments) .
D)   Investment D pays $2,500 at the end of 10 years (just one payment) .
E)   Investment E pays $250 at the beginning of eyear for the next 10 years (a total of 10 payments) .F) B) and D)
G) A) and E)

Question 8

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

Accepted Answer

A)   $16,112
B)   $16,918
C)   $17,763
D)   $18,652
E)   $19,584F) B) and E)
G) A) and E)

Question 9

If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

Accepted Answer

A) True 
 B)False

Question 10

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

Accepted Answer

A)   $18,369
B)   $19,287
C)   $20,251
D)   $21,264
E)   $22,327F) A) and E)
G) All of the above

Question 11

Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)   $585.43
B)   $614.70
C)   $645.44
D)   $677.71
E)   $711.59F) A) and D)
G) A) and C)

Question 12

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD)  that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

A)   $1,781.53
B)   $1,870.61
C)   $1,964.14
D)   $2,062.34
E)   $2,165.46F) A) and B)
G) A) and C)

Question 13

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

A)   The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
B)   A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
C)   A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.
D)   If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
E)   Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.F) A) and D)
G) D) and E)

Question 14

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

Accepted Answer

A)   8.95%
B)   9.39%
C)   9.86%
D)   10.36%
E)   10.88%F) A) and C)
G) All of the above

Question 15

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?

Accepted Answer

A)   39.60
B)   44.00
C)   48.40
D)   53.24
E)   58.57F) A) and B)
G) A) and C)

Question 16

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

Accepted Answer

A)   15.27%
B)   16.08%
C)   16.88%
D)   17.72%
E)   18.61%F) B) and C)
G) None of the above

Question 17

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Accepted Answer

A)   $16,576
B)   $17,449
C)   $18,367
D)   $19,334
E)   $20,352F) B) and D)
G) C) and D)

Question 18

You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Accepted Answer

A)   $5,987
B)   $6,286
C)   $6,600
D)   $6,930
E)   $7,277F) All of the above
G) C) and D)

Question 19

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Accepted Answer

A)   The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
B)   The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
C)   The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
D)   The periodic rate of interest is 3% and the effective rate of interest is 6%.
E)   The periodic rate of interest is 6% and the effective rate of interest is also 6%.F) B) and D)
G) A) and E)

Question 20

If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

Accepted Answer

A) True 
 B)False

Exam 5: Time Value of Money

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

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What is the present value of the following cash flow stream at a rate of 12.0%?

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If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

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If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

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Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

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You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?

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S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

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Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

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Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

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Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?

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The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

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Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

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You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

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Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Correct AnswerverifiedShow Answer

You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Correct AnswerverifiedShow Answer

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

Correct AnswerverifiedShow Answer

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

Correct AnswerverifiedShow Answer

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

Correct AnswerverifiedShow Answer

Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Correct AnswerverifiedShow Answer

You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

Correct AnswerverifiedShow Answer

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