# CHAPTER 5 TIME VALUE OF MONEY

1. Which of the following statements is CORRECT? a. b. c. A time line is not meaningful unless all cash flows occur annually. Time lines are useful for visualizing complex problems prior to doing actual calculations. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. d. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. Answer: b Which of the following statements is CORRECT? a. b. c. A time line is not meaningful unless all cash flows occur annually. Time lines are not useful for visualizing complex problems prior to doing actual calculations. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. Answer: d 3. Which of the following statements is CORRECT? a. b. c. A time line is not meaningful unless all cash flows occur annually. Time lines are not useful for visualizing complex problems prior to doing actual calculations. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. d. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. e. Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. Answer: c Which of the following statements is CORRECT? a. b. c. A time line is not meaningful unless all cash flows occur annually. Time lines are not useful for visualizing complex problems prior to doing actual calculations. Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. d. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. e. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. Answer: e 5. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

2.

4.

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The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. b. The discount rate increases. c. The riskiness of the investment¶s cash flows decreases. d. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. e. The discount rate decreases. Answer: b 6. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. b. The discount rate decreases. c. The riskiness of the investment¶s cash flows increases. d. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. e. The discount rate increases. Answer: b 7. Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? 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%. Answer: c 8. Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? a. The periodic rate of interest is 2% and the effective rate of interest is 4%. b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%. d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. e. The periodic rate of interest is 8% and the effective rate of interest is also 8%. Answer: d 9. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT? a. b. The annual payments would be larger if the interest rate were lower. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. d. The last payment would have a higher proportion of interest than the first payment. e. The proportion of interest versus principal repayment would be the same for each of the 7 payments. Answer: c

a.

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The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. b. Because the outstanding balance declines over time. c. and if the interest rate were the same in either case. b is also incorrect because interest in the first year would be Loan amount × interest rate regardless of the life of the loan. fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.) The remaining balance after three years will be $125. The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.000 less one third of the interest paid during the first three years. c. Thinking through the question. The remaining balance after three years will be $125. 10. The proportion of interest versus principal repayment would be the same for each of the 7 payments. statement c is the "most logical guess. but the total amount of each payment will remain constant. the monthly loan payments (which include both interest and principal payments) are constant.000. e. fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. 12. Which of these statements is CORRECT? a. A $150. and e can be ruled out as incorrect by simple reasoning. Interest payments on the mortgage will increase steadily over time.000 loan is to be amortized over 7 years. Which of the following statements regarding a 15-year (180-month) $125. d. Answer: b b is the correct answer. Think about the situation where r = 0%. That makes d the "most logical guess.000 less one third of the interest paid during the first three years.000. b. If the loan were amortized over 10 years rather than 7 years. One could also set up an amortization schedule to prove that only statement e is correct. and e are obviously incorrect. d. The outstanding balance declines at a faster rate in the later years of the loan¶s life. The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher. Because it is a fixed-rate mortgage. the monthly payments will also decline over time. with annual end-of-year payments. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. the other answers can all be eliminated." One could also set up an amortization schedule and change the numbers to confirm that only d is correct. the other answers can all be eliminated.) a. so the interest payment would be identical for the first payment. b. e." One could also set up an amortization schedule and change the numbers to confirm that only c is correct. Answer: d
a. e. 11. but the total amount of each payment will remain constant. c. a.a. One could also set up an amortization schedule to prove that only statement b is correct. Thinking through the question. d. the first payment would include more dollars of interest under the 7-year amortization plan. Answer: e e is the correct answer. b is also incorrect because interest in the first year would be Loan amount × interest rate regardless of the life of the loan. Interest payments on the mortgage will increase steadily over time. d. c. Which of the following statements regarding a 15-year (180-month) $125.
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. The annual payments would be larger if the interest rate were lower. The outstanding balance declines at a slower rate in the later years of the loan¶s life.

as are c and d. It is not obvious whether e is correct or not. Answer: b b is correct. The nominal interest rate is 6%.
Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT? The monthly payments will increase over time. The periodic rate is less than 3%. Treasury bond will pay a lump sum of $1.33 $7. Month 360 30 12 360 $833. a is clearly wrong.
Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT? The monthly payments will decline over time. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. but we could set up an example to see: Loan Rate Periodic rate 100000 10% 0. b. The present value would be greater if the lump sum were discounted back for more periods. b. but we could set up an example to see: Loan Rate Periodic rate Payment Interest as % of total payment: 100000 10% 0. semiannual compounding. c. Exactly 10% of the first monthly payment represents interest. c.33 a.32 a. as are c and d. d. The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. It is not obvious whether e is correct or not. and a larger proportion will be principal. b.57 Interest as % of total #360 payment: 1% Principal as % of total #360 payment 99% 14. e.25 $870. The present value of the $1. The periodic interest rate is greater than 3%. e.000 exactly 3 years from today.
Payment -$877.
A U.13. than for the last monthly payment. a is clearly wrong.000 would be smaller if interest were compounded monthly rather than semiannually.S. Exactly 10% of the first monthly payment represents interest.
-$877. A larger proportion of the first monthly payment will be interest.
15. c. which is much larger than 10%. Which of the following statements is CORRECT? a. Answer: b b is correct.008333333 Term Periods/Year Total periods Interest. A smaller proportion of the last monthly payment will be interest.57 Interest Month 1 95%. d. and a smaller proportion will be principal. d. Month 360 Principal.
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. than for the first monthly payment. Month 1 Interest. The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.00833333 Term Periods/Year Total periods 30 12 360 $833.

Which of the following statements is CORRECT? a. b.
A U. d. $333. semiannual compounding. then the effective. The present value of the $1. $150. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. Answer: d
16. and nominal rates of interest will all be different. e. Banks A and B offer the same nominal annual rate of interest.e. $333. The proportion of the payment that goes toward interest on a fully amortized loan increases over time. but A pays interest quarterly and B pays semiannually. A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. Banks A and B offer the same nominal annual rate of interest. $150. assuming positive interest rates and holding other things constant? a. If an investment pays 10% interest. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. $250 annuity due will be lower than the PV of a similar ordinary annuity.
Which of the following statements is CORRECT. assuming positive interest rates and holding other things constant? a.33 ordinary annuity.000 would be larger if interest were compounded monthly rather than semiannually.S. periodic. d. d.
Which of the following statements is CORRECT. b.000 lump sum has a higher present value than the PV of a 3-year. e. c. The PV of the $1. A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate. The present value of a 3-year. A 30-year. If a loan has a nominal annual rate of 8%. The present value of a 5-year. but A pays interest quarterly and B pays semiannually.000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. e. its effective annual rate will be greater than 10%. $150 annuity due will exceed the present value of a 3-year. c.
The PV of the $1. compounded quarterly. b. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
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. $250 annuity due will be lower than the PV of a similar ordinary annuity. $150 ordinary annuity. e.000 lump sum has a smaller present value than the PV of a 3-year. Answer: e
17. A 30-year. Treasury bond will pay a lump sum of $1. The periodic interest rate is greater than 3%. compounded annually. b. Answer: d
19.000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. Answer: c
18. its effective annual rate will be less than 10%.33 ordinary annuity. c. Which of the following statements is CORRECT? a.000 exactly 3 years from today. d. The present value would be greater if the lump sum were discounted back for more periods. The present value of a 5-year. then the effective rate can never be greater than 8%. The periodic rate is less than 3%. If a loan or investment has annual payments. c. The nominal interest rate is 6%. If an investment pays 10% interest.

and the future value of ORD also exceeds the future value of DUE. If a loan or investment has annual payments. while the future value of DUE is less than the future value of ORD. d. Investment ORD is an ordinary (or deferred) annuity. You are considering two equally risky annuities. while the future value of DUE exceeds the future value of ORD.412. c. What is the most you should pay for the annuity? a. then the effective. b.Answer: a 20. Which of the following statements is CORRECT? The present value of a 3-year. Answer: d 22. d. c. Answer: a 23. $150 annuity due. while Investment DUE is an annuity due. The present value of DUE exceeds the present value of ORD. Answer: b 21. e. d. $1. Which of the following statements is CORRECT? a. $1. Investment ORD is an ordinary (or deferred) annuity.000 per year for 10 years. The present value of ORD exceeds the present value of DUE. You are considering two equally risky annuities.94 Answer: c Page 6 of 23 a. $1. and nominal rates of interest will all be different. each of which pays $5.75 e. b. e. e. The present value of DUE exceeds the present value of ORD. You could earn 5. the difference between the present value of ORD and the present value of DUE would remain constant.84 b.000 per year for 10 years. $150 ordinary annuity will exceed the present value of a 3-year. The present value of ORD must exceed the present value of DUE. so their market prices should differ.20 c. then the effective rate will never be less than 8%. b.
. The proportion of the payment that goes toward interest on a fully amortized loan increases over time. A rational investor would be willing to pay more for DUE than for ORD. the difference between the present value of ORD and the present value of DUE would remain constant. If a loan has a nominal annual rate of 8%. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. If the going rate of interest decreases from 10% to 0%. You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. and the future value of ORD also exceeds the future value of DUE. each of which pays $5. The present value of DUE exceeds the present value of ORD. The present value of ORD exceeds the present value of DUE. If the going rate of interest decreases from 10% to 0%.487. The present value of ORD exceeds the present value of DUE.725. $1. but the future value of ORD may be less than the future value of DUE. and the future value of DUE also exceeds the future value of ORD.565. while Investment DUE is an annuity due.643. $1. periodic. c.48 d.5% on your money in other investments with equal risk. Which of the following statements is CORRECT? a. while the future value of DUE is less than the future value of ORD.

000 of income a year for 20 years. $1. $21.25% $75. and he wants to buy an annuity that will provide him with $85. $25.15%. How much would it cost him to buy the annuity today? a.000 of income a year for 25 years.835 b.960 e.00 $22.791 c.BEGIN Mode N I/YR PMT FV PV 24. and he wants to buy an annuity that will provide him with $75. $1. with the first payment coming immediately. You could earn 4. with the first payment coming immediately.240.303. $915.213 e.48
You have a chance to buy an annuity that pays $5.
3 5. $825.5% $5.
Your uncle is about to retire.25%.119.000 $0. The going rate on such annuities is 5.213
26. $1. $869.085 e.
Your father is about to retire.5% on your money in other investments with equal risk. $22. What is the most you should pay for the annuity? a 20.701 b.00 $1.374 Answer: d BEGIN Mode N I/YR PMT FV PV
20 5. How much would it cost him to buy the annuity today? a. $1.00 $963. $1.000 at the beginning of each year for 5 years.008 Answer: d BEGIN Mode N
25
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.000 $0.052 d.912 d. The going rate on such annuities is 5.5% $550 $0.063. $963.565.011.938
25. $1. $24.966 c.300 c.178.938 d.968 b.289 Answer: c BEGIN Mode N I/YR PMT FV PV
5 4.

250 $2.250 per year plus an additional $3. $274. $8.545 e. how large must the lump sum be to leave him as well off financially as with the annuity? a.000 per year for 15 years.553 d. with the first payment being made today.622 Answer: b BEGIN Mode N I/YR PMT FV PV
15 7.5% $25.367 b.250 $2. $10. $261.957 c.960
You inherited an oil well that will pay you $25.00 $299.574
28. $249.5% $25.250 3 $2.250 $2. $284.428 d.00 $1. or a lump sum. If you think a fair return on the well is 7.595 b.5%.I/YR PMT FV PV 27.090 d.
Sam was injured in an accident.924 e.281 e.250 2 $2. with the first payment being made today.5%. $299.250 4 $2. $330.15% $85. $237.000 $0.240.0% $2.000 $5.446 Answer: e N I/YR PMT FV 4 5. $346.000 $0.000 per year for 25 years. If a fair return is 7. $9.509 b.000 Alternative setup: 0 1 $2. and the insurance company has offered him the choice of $25. $225. how much should you ask for it if you decide to sell it? a.00 $237.229
29.
What¶s the present value of a 4-year ordinary annuity of $2.250 $3.250 $3. $8.574 c. $314.000 at the end of Year 4 if the interest rate is 5%? a.000 $0.
5.229 c. $9.795 Answer: b BEGIN Mode N I/YR PMT FV PV
25 7.250
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.

$34.25% $275.959 c.323.000 and invested it at 8.58 Answer: d N I/YR PV FV PMT 25 7.294.000 FV $0.38 b.21 b.294.641. He expects to live for another 25 years.000 and wants to retire. $29. $28.243.000 and wants to retire. and he also expects to earn 7.70 c.5% on his invested funds. $30.25% per year. $35.446
PV = $10.729. $29.50
32.50
Suppose you inherited $275.843.
Your uncle has $375. $34.10 Answer: c BEGIN Mode N 25 I/YR 7. He expects to live for another 25 years and to earn 7. $31.00 $28.
Your uncle has $375. $32.361.5% PV $375. How much could you withdraw at the end of each of the next 20 years? a.42
33.446. beginning
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. $33. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account? a. $31.000 $0.5% on his invested funds.681 Answer: a N I/YR PV FV PMT 20 8.PV 30. $28.43 d.50 e.
Your grandmother just died and left you $100.42 d. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account? a.532 b.959.859.46 c.502.030 e.
$10.00 PMT $31.000 $0.000 in a trust fund that pays 6.00 $33. $33. You must spend the money on your college education.5% interest.532
31. and you must withdraw the money in 4 equal installments. $31.457 d.5% $375.641. $28.14 e.

23. How much could you withdraw at the beginning of each of the next 20 years? a.409
Suppose you inherited $275.788. For how many years can he make the $35.03 d.736 b. run the account down to zero? a. and he now wants to retire.5%.63 b. 22. He also wants to have $25. 27. 26.000 invested at 7. He now plans to retire.00 22.immediately. $27.357.5% $375.000 $0.e. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account? a.25% per year.000 at the end of each year.
Your father's employer was just acquired.00 $27.357.000.00 PMT $26. $24.82 Answer: d BEGIN Mode N 20 I/YR 8.000 withdrawals and still have $25. $30..03 c. starting at the end of this year.000 $35.218 Answer: c BEGIN Mode N I/YR PV FV PMT 34.50 b.038 c.81 d. i.000 FV $0.25% PV $275.63 c.000 left in the end?
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. 24. and he was given a severance payment of $375.598.000 $0.000 left to give you when he ceases to withdraw funds from the account. starting at the end of this year.675. How many years will it take to exhaust his funds.35 Answer: a I/YR PV PMT FV N 7.
Your uncle has $300. $28. $22. and he wants to withdraw $35.000 and invested it at 8.409 d. He wants to withdraw $35.5% annual rate. $23. $27.92 e.5% $100. $26.
4 6.92
35. which he invested at a 7. $26.779 e.05 e.000 at the end of each year.50
36. $25.040.

14. a. and you have a choice between receiving $2.49 e.99 Answer: c BEGIN Mode I/YR PV PMT FV N
5.000 invested at 5. How many years will it take to exhaust her funds. starting immediately.5%.00 22.62 b.63 d. 20.000 $35.
Suppose you just won the state lottery. 21. 7.000 left in the end? a. and she plans to retire.50% $300. 19. 15.71 e. i.000 at the beginning of each year.96 c. What rate of return is built into the annuity? Disregard taxes.000 14. 18.000 $40.60 c.12%
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. 18. She wants to withdraw $45.22
39. She also wants to have $50.21 b.a. 7.22 d.36 c.86
38.
Your aunt has $500. 14. 17.e.000 $50.000 today or a 20year annuity of $250.000 withdrawals and still have $50.000. 22. with the first payment coming one year from today. and she now wants to retire. 18. beginning immediately.08 e. run the account down to zero? a.000 at the beginning of each year.71 d.000 invested at 6. 17.86 Answer: e BEGIN Mode I/YR PV PMT FV N
6.550.000 $25. She wants to withdraw $40. For how many years can she make the $45..32 Answer: b I/YR PV PMT FV N 37.5% $500. 16. 15.000 $45.54 b.000 left to give you when she ceases to withdraw funds from the account.96
Your Aunt Ruth has $500.000 17.5% $500. 16.000 $0.5%.

44%
41.58% e.
What annual payment must you receive in order to earn a 6.000. 7.41% Answer: e BEGIN Mode N PV PMT FV I/YR
12 $120.31 d. 8.41%
42.00 8. 8.000 today or a 20-year annuity of $1.000 $0.b. $77.050.06 Answer: b
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.000.000 $0.25 c.19 b.00 3. $81. You need money today to start a new business. with the first payment being made today.17% d. 4. If you sell it. 8. 20 $2.000 $1.99% e.67% Answer: b N PV PMT FV I/YR 40.44% b.000 $250. $85.87% d.
Assume that you own an annuity that will pay you $15.49%
Your girlfriend just won the Florida lottery. 3. 3. She has the choice of $15. 6.26% e.550. $94. 5. 7. 4.59% d.00 7. What rate of return is built into the annuity? a.04% Answer: a N PV PMT FV I/YR 20 $15.000 $15.85% b.5% rate of return on a perpetuity that has a cost of $1. 7. 7. and your uncle offers to give you $120.050. $89.000 per year for 12 years. 7.79% c. what rate of return would your uncle earn on his investment? a.21% c.250? a.000 $0.49% c. with the first payment coming one year from today.58 e.000.000 for the annuity.

339 2 $3.284 e.
$1. 0 $0 $0 1 $75 $71 2 $225 $199 3 $0 $0 4 $300 $235 0 | $0 1 | $75 2 | $225 3 | $0 4 | $300
44. $9. $10.5% $81.813 0 | $0 1 | $1.Cost (PV) I/YR PMT 43.30 PV = $505.0%? Years: CFs: a. Found by summing individual PVs.747 PV = $10.250 6.57 b.500 $3. Alternately.23 c.0% CFs: PV of CFs: PV = $10.699 b. $11.203 4 $6.000 $2. $433.392 3 $4.
45.25
Multiply Cost by I/YR.747 d.000
Found using the Excel NPV function. Found using the calculator NPV key.747 0 $0 $0 1 $1.747 PV = $10.500 4 | $6.000 $3.25%? Years: CFs: a.30 You can find the individual PVs and sum them.25% CFs: PV of CFs: PV = $505. you can automate the process using Excel or a calculator.500 2 | $3.210 c. $456. $11. $480. by inputting the data into the cash flow register and pressing the NPV key.0%? Years: 0 | 1 | 2 | 3 |
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. $411.03 e.
What is the present value of the following cash flow stream at a rate of 6.500 $1. $505.30 Answer: e I/YR = 6.
What is the present value of the following cash flow stream at a rate of 8.03 d.
What is the present value of the following cash flow stream at a rate of 12.849 Answer: c I/YR = 12.000 3 | $4. $10.

987 0 $0 $0 1 $1. what is the future value of the following cash flow stream? Years: CFs: a. then press the NPV key.000 3 | $2.233 PV = $9.277 Answer: a I/YR = 6.
$750
$2.
47.000
Found using the Excel NPV function.000 2 | $2.987 b.000 $1.286 c. Found using the calculator NPV key.80 Answer: e 0 | $0 1 | $75 2 | $225 3 | $0 4 | $300
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. input the cash flows and I into the cash flow register.400
0 $750
1 $2. $7.987 PV = $5. With a calculator. $6.400
$750 $2.175
$4.450
2 $3.917 b.333 c.695 Answer: d I/YR = 8.175
3 $4. $582.0% CFs: PV of CFs: PV = $9. Found by summing individual PVs. $8.584 0 | $0 1 | $1. $6.450
$3. Found with a calculator or Excel to automate the process. $9.83 d.01 b.493 Found by summing individual PVs.987 PV = $5. $5.51 e. $9.
At a rate of 6.0% CFs: PV of CFs: PV = $5.772 d.233 46.000 $943 2 $2.269 $2.722 $3.930 e.5%.233 e. $8.600 d.000 4 | $2.679 4 $2. $7.
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 6.780 3 $2. $645.000 $1. $613.000 $1. $526. $553. $6.69 c.0%? Years: CFs: a.CFs: a.

5% CFs: FV of CFs: FV = $645. then an additional lump sum payment of $10.
50.50% d. and is found with Excel's IRR function or by inputting the CFs into a calculator and pressing the IRR key.000 3 $850 4 $6.000 at the end of the 5th year. $1. compounded semiannually? a. 7.250 that is expected to produce cash flows of $750 at the end of Year 1. then finding the FV of that PV. 8.
You are offered a chance to buy an asset for $7.80
Your father paid $10. What rate of return would you earn if you bought this asset? a.75% e.000 I/YR 7.19% c. 6. $850 at the end of Year 3.88% e.I/YR = 6.27% Answer: c 0 -$10. 7.80 PV of the stream: FV of the PV: 48. and $6.93% b. Found with a calculator by first finding the PV of the stream. $501. 5.05% Answer: e 0 -$7.000 -$10.250 at the end of Year 4.000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years.
What¶s the future value of $1.80 FV = $645. 4.13% c. I can be found using Excel's IRR function or by inputting the CFs into a calculator and pressing the IRR key.77% b. 7.05% 1 $750 2 $1.750
CFs:
I is the discount rate that causes the PV of the inflows to equal the initial negative CF.46% d.819
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.80 FV = $645. 0 $0 $0 1 $75 $91 2 $225 $255 3 $0 $0 4 $300 $300
Found by summing individual FVs. 5.500 after 5 years if the appropriate interest rate is 6%. What is the expected rate of return on this investment? a.250
CFs: I/YR
I is the discount rate that causes the PV of the positive inflows to equal the initial negative CF. Found with the NFV key in some calculators.50% 1 $750 $750 2 $750 $750 3 $750 $750 4 $750 $750 5 $750 $10. 6.99 $645. $1.250 6. 5.000 at the end of Year 2.000 $10.
49.

500 $2.915 c. or Excel.251 c. compounded semiannually? a.0% 10 $0 3. $1. 5 2 6.782 Answer: d Years Periods/Yr Nom.602
Could be found using a calculator.016
Could be found using a calculator.500 10 $0 2.
52. an equation.500 discounted back 5 years if the appropriate interest rate is 4.618.537.016 d. I/YR N = Periods PMT I = I/Period PV FV = 51.618. the equation. $1. or Excel. $1.200 after 5 years if the appropriate interest rate is 6%. $3.53 e.0% $1. $1.62
Could be found using a calculator.5%. $2.200 $1. Note that we must first convert to periods and rate per period.5% $1.602 e. $3.0% 60 $0 0.55 d.223 Answer: c Years Periods/Yr Nom. the equation. $3.69 b.873. $3.62 c.
What¶s the present value of $4. Note that we must first convert to periods and rate per period.
What¶s the future value of $1.422 d.b. I/YR FV N = Periods PMT I = I/Period PV = 5 2 4.76 Answer: b Years Periods/Yr Nom. $3.
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. I/YR N = Periods PMT I/Period PV FV 5 12 6. $2. compounded monthly? a. $2. Note that we must first convert to periods and rate per period.699.25% $3. $1.784. or Excel.089 b.5% $4. $1.117 e.

52% b. with no interest due until the end of the year. Nominal rate. $1. I/YR 5 12 6.131 e. We used the conversion formula. compounded monthly.020 c. with interest paid monthly. 19.56% c.525 PV = $1.000 at a nominal rate of 6.
What¶s the present value of $1.5% FV $1.58% b. $1.187 Answer: d Years Periods/Yr Nom. 18. The loan (principal plus interest) must be repaid at the end of the year.00% 12 19.36% d. $1. what is the card's EFF%? a.70%
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. 0. Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. 0.65% Answer: b APR = Nominal rate Periods/yr EFF% =(1+(rNOM/N))N í 1 = 55. 20. Midwest Bank also offers to lend you the $50. It could also be worked using the conversion formula. Riverside Periods/yr.44% c. $969 b. Midwest Periods/yr.0%.131 = FV/(1+rPer)N PV = $1.24% Answer: d This problem can be worked using the interest conversion feature of a calculator or Excel.57% e.000.525 discounted back 5 years if the appropriate interest rate is 6%.074 d.0% 12 1 6. 0. 18. but it will charge an annual rate of 7. 22. Midwest EFF% Riverside = (1+(rNOM/N))N ± 1 = 6. 0. $1.5% 7.0%
N=Periods 60 PMT $0 I/Period 0. 21.30% e. If the APR is stated to be 18.54% d. Riverside Nominal rate. compounded monthly? a. 0. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside? a.5%.00%.53.56%
Riverside Bank offers to lend you $50.131 Found using a calculator or Excel 54.

24% b.00 4 -200.24%
You could also find the EFF% as follows: Interest paid each quarter = Loan × rate/4 = Qtrly PMT = $200.00 3 -200. Charter Bank pays a 4.000 1 -250 -250 2 -250 -250 3 -250 -250 4 -250 -10.00
IRR (quarterly) = 2. 8.00 10.000 for 1 year on a loan contract that calls for you to make interest payments of $250.66% d. 8.00%. What is the effective annual rate on the loan? a. but you must make interest payments at the end of each quarter and then pay off the $10.38% Answer: e Interest payment: $250.00 1 -200. What effective annual rate (EFF%) does the bank pay? a.00 at the end of each quarter and then pay off the principal amount at the end of the year.200. This procedure is obviously longer.00% Annual effective rate = 8. 9.000 principal amount at the end of the year. 8.00 -10.46% b. b.000. CFs: 0 10.000 for one year at a nominal annual rate of 8.000 10. 9.88% e. 8.10% Answer: a Nominal I/YR Periods/yr EFF% = (1+(rNOM/N))N í 1 8.000. 10.00 -200.38% vs.000 -10.250
IRR (quarterly) = 2.
7.00 Then find the IRR as a quarterly rate and convert to an annual rate.37% d.00% 58.50% nominal rate on deposits. 8.72% 4.30%
Suppose Community Bank offers to lend you $10. nominal rate = 10. What is the effective annual rate on the loan? a.00 -200. 9.EFF% Midwest Difference 56. nominal rate = 8.13%
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.00 -10.00% 4 = 8.45% c.00% 57. 3. with monthly compounding.00% 0.00 CFs: 0 10.24% vs. Suppose a bank offers to lend you $10.00 2 -200.000.90% c.00 -200.86% e.50% Annual effective rate = 10. 8.

84 d.
Suppose you deposited $5.
Pace Co.22 d.00% nominal annual rate. What is the effective annual rate? a. $126.000 in a bank account that pays 5.02778
61.56% Answer: c Nominal I/YR Periods/yr Periodic rate EFF% = (1+(rNOM/N))N ± 1 = 59. $5. which amounts to monthly compounding.88 c.88 e.994. 17.25% 8 360 30 $5. $120. 16. 4.27% b.294.00 Answer: a Nominal I/YR Number of months Days in year Days in month Amount deposited Ending amount 5.020139% $4.72% e.000 at a rate of 7. $6.28 e. 5.00% 12 16.25%.87 Answer: a Nominal I/YR Days/yr Amount borrowed Interest per month = Interest/day × 30 = 7. borrowed $20.08% c.88% d. $146.436.61% Answer: b Nominal I/YR = APR Periods/yr EFF% = (1+(rNOM/N))N ± 1 = 15.59% d.59%
Suppose your credit card issuer states that it charges a 15.09 b. $5. 4. $5.08%
60. 5.83 b.05% e.99 c. with interest paid at the end of each month. assuming each month has 30 days? a.000 $120.708.178.c. How much would be in the account after 8 months. 16.50% 12 0.38% 4. How much interest would Pace have to pay in a 30-day month? a. The bank uses a 360-day year.000 $5.25% with daily compounding based on a 360day year.0146% 240
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. 18.83 Days in month Daily rate Interest per day 30 0.25% 360 $20. 15.178. $133. $139. but you must make monthly payments. simple interest.09 Rate/day = rNOM/360 = Days = Months × 30 = 0. $5.

000.889.67 d.44 c. You have arranged to finance the remainder with a 30-year. so interest must be calculated on a monthly basis.66 e. $4. $780.69 d. $862. $4.5% $4.54% $130.01
65.0% 0.464. as the PMT.947. What will your monthly payments be? a.000 at the end of the last month.241.000 PMT
12 6.00 $821.000 at a rate of 9.
Suppose you borrowed $14.0% nominal annual rate.50% $145. $821.
Your uncle will sell you his bicycle shop for $250. What would your equal monthly payments be? a.
Suppose you are buying your first condo for $145.91 Answer: c Years Payments/year Nominal rate Purchase price Down payment 30 12 6.33
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. $741.26 Answer: a Years = N I/YR FV Amount borrowed = PV Payments = PMT 4 9.000 $15.704. Years 4 Payments/year N 48 Nominal rate PV $250." at a 6.02 b.62.60 c. $4.
63. $4.000 down payment. $4. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years.287.000 $0.23 c.200.000 I/period FV $50.699.69 d.37 b.02
Found with a calculator.0% and must repay it in 4 equal installments at the end of each of the next 4 years.704.000 N Periodic rate PV FV PMT 360 0.77 e. $4.000 at a rate of 10.000 $3.69
64. $3. and then make an additional final (balloon) payment of $50.947.0% and must repay it in 5 equal installments at the end of each of the next 5 years.000. and you will make a $15.57 b. How much interest would you have to pay in the first year? a.029.01 Answer: e Monthly annuity. $3. $1. monthly payment. $4. $4. How large would your payments be? a.0% $0 $12. with the first payment due in one month. amortized mortgage at a 6.87 e.083. with "seller financing.502. $905.5% nominal interest rate.
Suppose you borrowed $12.

$2. 10.994.
You plan to borrow $35.259 85.177 Answer: b Find the required payment: N I PV FV PMT
10 8.400.5% annual interest rate to start your new business.608.59 Answer: d Find the required payment: N I PV FV PMT
7 7.01 2 31.00 2.
Your bank offers to lend you $100.b.000 $0 $15.00 e.281.000 $0 $6.263. $8.442.01
Found with a calculator or Excel.27 e.927 c.531 b. $9.625.330.50 c.01 67. The terms require you to amortize the loan with 7 equal end-of-year payments.241
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. How much interest would you be paying in Year 2? a.209.000 $1.01 4.99 6.00
Simply multiply the rate times the amount borrowed. $1.945
Amortization schedule (first 2 years) Year Beg.74 End.49 b.314 End.46 c.470.241 2 93.000 15.016. Balance 93.326.5% annual interest rate. Interest 8.25
Amortization schedule (first 2 years) Year Beg. Interest 2. $8.099.00 Answer: d I/YR Years Amount borrowed Interest in Year 1 66.016. The terms require you to amortize the loan with 10 equal end-of-year payments.00 d.241
Found with a calculator or Excel.99 26.608. $7. $1.983. $2.400.5% $35.740 e.927 Principal 6.323 d. $7. $2.608. Balance Payment 1 100. $2.735.00 6.500 7.96 d.27 Principal 3.000. Balance 31.000 at a 7.000 at an 8. $1.0% 5 $14.5% $100. How much interest would you be paying in Year 2? a. $1. $1.741 7.326. Balance Payment 1 35.259 15.

000 37.0021
Monthly annuity. so interest must be calculated on monthly basis
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.40 d.000 44. a. What nominal annual interest rate is built into the monthly payment plan? a. 14. 38 e.000 at the end of each month.000 at the beginning of each month.0% 1.00 c.36% e. rNOM/12.5% $0 $5. 44. 23 b.08% Answer: d N PV PMT FV I/MO 36 $4. If you invest $3.41. how many months would it take for your account to grow to $250. compounded monthly.16
Monthly annuity due.31% b. 48. 27 c. 12. so interest must be calculated on monthly basis
70.000? a.
You are considering investing in a bank account that pays a nominal annual rate of 7%. 58.57 Answer: b I/YR I/MO PV PMT FV N 7.000 $150. compounded monthly.000 immediate up-front payment.000 $137. 44 Answer: d BEGIN Mode I/YR I/MO PV PMT FV N
18. If you invest $5.60 b.41 $0 1.96% c. The first plan requires a $4.
You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%.
Your child¶s orthodontist offers you two alternative payment plans.000 $250. 39.
Rounded up: 38
69. 12.68. 13. 32 d. payable at the end of each month for 3 years.000? Round fractional months up.583333% $0 $3. so interest must be calculated on monthly basis. 53.24 e.64% d.20%
Monthly annuity. The second plan requires you to make monthly payments of $137. 15.0% 0. how many months will it take for your account to grow to $150.

I/YR = I/MO × 12 = 14.36%
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.