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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.

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 rateincreases. 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.

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

Month 1 Interest.13. but we could set up an example to see: Loan Rate Periodic rate 100000 10% 0. The present value would be greater if the lump sum were discounted back for more periods. e.33 $7. The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. A smaller proportion of the last monthly payment will be interest. The present value of the $1.33 a. c. Answer: b b is correct. 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. It is not obvious whether e is correct or not. Month 360 Principal. as are c and d. than for the last monthly payment. c. which is much larger than 10%. The periodic rate is less than 3%. Answer: b b is correct. d. 15.00833333 Term Periods/Year Total periods 30 12 360 $833. Treasury bond will pay a lump sum of $1. a is clearly wrong. A U. Exactly 10% of the first monthly payment represents interest. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.000 would be smaller if interest were compounded monthly rather than semiannually. d. b. . b. semiannual compounding.25 $870. 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. The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. but we could set up an example to see: Loan Rate Periodic rate Payment Interest as % of total payment: 100000 10% 0.S. The periodic interest rate is greater than 3%. c.32 a. The nominal interest rate is 6%. e.000 exactly 3 years from today.57 Interest Month 1 95%.008333333 Term Periods/Year Total periods Interest. d. and a larger proportion will be principal. Exactly 10% of the first monthly payment represents interest. Month 360 30 12 360 $833. Payment -$877. than for the first monthly payment. Which of the following statements is CORRECT? a. -$877. 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.57 Interest as % of total #360 payment: 1% Principal as % of total #360 payment 99% 14. A larger proportion of the first monthly payment will be interest. and a smaller proportion will be principal. as are c and d. b.

The present value of a 5-year. $333. semiannual compounding. $150 annuity due will exceed the present value of a 3-year. A 30-year. b. $150 ordinary annuity. its effective annual rate will be less than 10%. Answer: d 19. c. Which of the following statements is CORRECT. The PV of the $1. c. $333.S. compounded quarterly. assuming positive interest rates and holding other things constant? a. b. periodic. compounded annually. d. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. If a loan has a nominal annual rate of 8%. Banks A and B offer the same nominal annual rate of interest. Which of the following statements is CORRECT? a. The periodic rate is less than 3%. c. A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. Treasury bond will pay a lump sum of $1. b. b. The PV of the $1.000 would be larger if interest were compounded monthly rather than semiannually.e. The proportion of the payment that goes toward interest on a fully amortized loan increases over time. The present value of the $1. its effective annual rate will be greater than 10%. A U. If an investment pays 10% interest. $150. but A pays interest quarterly and B pays semiannually. Banks A and B offer the same nominal annual rate of interest. e.000 exactly 3 years from today. then the effective. $250 annuity due will be lower than the PV of a similar ordinary annuity. If a loan or investment has annual payments. The present value of a 5-year. The nominal interest rate is 6%. and nominal rates of interest will all be different. Answer: c 18. Answer: d 16. d. Which of the following statements is CORRECT? a.33 ordinary annuity. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. $150.000 lump sum has a smaller present value than the PV of a 3-year. A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.33 ordinary annuity. d. assuming positive interest rates and holding other things constant? a. If an investment pays 10% interest. c. A 30-year. e. The present value would be greater if the lump sum were discounted back for more periods. The present value of a 3-year. Which of the following statements is CORRECT. e. e.000 lump sum has a higher present value than the PV of a 3-year. The periodic interest rate is greater than 3%. d.000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. . $250 annuity due will be lower than the PV of a similar ordinary annuity. then the effective rate can never be greater than 8%.000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. Answer: e 17. but A pays interest quarterly and B pays semiannually.

You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years.000 per year for 10 years. and the future value of ORD also exceeds the future value of DUE. while Investment DUE is an annuity due.Answer: a 20. The present value of DUE exceeds the present value of ORD. $150 ordinary annuity will exceed the present value of a 3-year. What is the most you should pay for the annuity? a. while the future value of DUE exceeds the future value of ORD. each of which pays $5. If a loan or investment has annual payments. e. You are considering two equally risky annuities. $1. Investment ORD is an ordinary (or deferred) annuity. and nominal rates of interest will all be different. If a loan has a nominal annual rate of 8%. Which of the following statements is CORRECT? The present value of a 3-year. periodic. The present value of ORD exceeds the present value of DUE. Answer: b 21. c. the difference between the present value of ORD and the present value of DUE would remain constant. c. $1. $1. while the future value of DUE is less than the future value of ORD.5% on your money in other investments with equal risk. e. Investment ORD is an ordinary (or deferred) annuity. If the going rate of interest decreases from 10% to 0%.94 Answer: c a.75 e. Which of the following statements is CORRECT? a. e.84 b. the difference between the present value of ORD and the present value of DUE would remain constant. A rational investor would be willing to pay more for DUE than for ORD.725. $1. and the future value of ORD also exceeds the future value of DUE. d. each of which pays $5. and the future value of DUE also exceeds the future value of ORD.565. then the effective. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. but the future value of ORD may be less than the future value of DUE. If the going rate of interest decreases from 10% to 0%. b. .000 per year for 10 years. b. The present value of DUE exceeds the present value of ORD. $1. d. The present value of ORD exceeds the present value of DUE.20 c. so their market prices should differ.412. The present value of ORD exceeds the present value of DUE. Answer: a 23.643. The present value of DUE exceeds the present value of ORD. The present value of ORD must exceed the present value of DUE. Which of the following statements is CORRECT? a. c. You are considering two equally risky annuities. $150 annuity due. The proportion of the payment that goes toward interest on a fully amortized loan increases over time. while the future value of DUE is less than the future value of ORD. while Investment DUE is an annuity due. You could earn 5. Answer: d 22. b. d.487. then the effective rate will never be less than 8%.48 d.

00 $963.303.48 You have a chance to buy an annuity that pays $5.052 d.968 b.BEGIN Mode N I/YR PMT FV PV 24. $25.5% $550 $0. $24.063. $1. with the first payment coming immediately.000 $0.791 c. Your father is about to retire.011.374 Answer: d BEGIN Mode N I/YR PMT FV PV 20 5.289 Answer: c BEGIN Mode N I/YR PMT FV PV 5 4.5% $5.912 d.000 $0.00 $1. $1.240.213 e. $22.835 b.085 e. The going rate on such annuities is 5.938 d.960 e. $963.300 c.938 25.008 Answer: d BEGIN Mode N 25 .966 c. The going rate on such annuities is 5. How much would it cost him to buy the annuity today? a. $915. $825. 3 5.701 b. $1.5% on your money in other investments with equal risk.000 at the beginning of each year for 5 years. You could earn 4.000 of income a year for 25 years. $869. $21.178.25%.15%. $1. How much would it cost him to buy the annuity today? a. and he wants to buy an annuity that will provide him with $75. $1.00 $22.25% $75. Your uncle is about to retire. $1. and he wants to buy an annuity that will provide him with $85.119.565.000 of income a year for 20 years. What is the most you should pay for the annuity? a 20.213 26. with the first payment coming immediately.

$9.250 $3.5% $25.000 Alternative setup: 0 1 $2.000 per year for 25 years.509 b.545 e.960 You inherited an oil well that will pay you $25.00 $237.428 d.0% $2.574 28.367 b.595 b.281 e.00 $299. If a fair return is 7. $9.622 Answer: b BEGIN Mode N I/YR PMT FV PV 15 7. $8. $261. $299.553 d.957 c.15% $85. $284.250 $2.250 $2.I/YR PMT FV PV 27.250 4 $2.795 Answer: b BEGIN Mode N I/YR PMT FV PV 25 7.5%.250 $2.446 Answer: e N I/YR PMT FV 4 5. $10. 5. $225. $314. with the first payment being made today.250 . how much should you ask for it if you decide to sell it? a.250 per year plus an additional $3.000 per year for 15 years.090 d.250 2 $2. and the insurance company has offered him the choice of $25.5%. or a lump sum. with the first payment being made today. What¶s the present value of a 4-year ordinary annuity of $2.5% $25.250 3 $2. $330.000 $0. $346. Sam was injured in an accident. $274. If you think a fair return on the well is 7. $237.229 29.229 c.000 at the end of Year 4 if the interest rate is 5%? a. $249.000 $0.000 $5. $8.250 $3.00 $1. how large must the lump sum be to leave him as well off financially as with the annuity? a.574 c.240.924 e.000 $0.

$29.000 and wants to retire. $28. You must spend the money on your college education.446. $32.843.5% $375.532 b. $35.959 c.46 c. $31. Your uncle has $375.243.25% $275. and he also expects to earn 7. $31.50 32.859. $10.10 Answer: c BEGIN Mode N 25 I/YR 7.532 31.50 Suppose you inherited $275.294. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account? a.000 FV $0.70 c. How much could you withdraw at the end of each of the next 20 years? a.030 e.5% on his invested funds.000 $0. Your uncle has $375. He expects to live for another 25 years and to earn 7.38 b.959.5% interest.21 b. $29.457 d.000 in a trust fund that pays 6. beginning .43 d.5% PV $375.446 PV = $10.42 33. $31.000 and invested it at 8. Your grandmother just died and left you $100.58 Answer: d N I/YR PV FV PMT 25 7.641.14 e.00 $33. $28. $30.00 PMT $31.361.641.PV 30.681 Answer: a N I/YR PV FV PMT 20 8.294.502. He expects to live for another 25 years. and you must withdraw the money in 4 equal installments.000 $0. $33.42 d.729.00 $28. $34. $28. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account? a.50 e.000 and wants to retire.5% on his invested funds.323. $34. $33.25% per year.

357. $22.000.81 d.82 Answer: d BEGIN Mode N 20 I/YR 8.05 e. i. For how many years can he make the $35. 4 6.409 d.5% annual rate. 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.000 $0. run the account down to zero? a. He now plans to retire.000 at the end of each year.03 c. which he invested at a 7.788. 27.00 22.409 Suppose you inherited $275. $23.e. 23. starting at the end of this year.5%.000 $0.92 35. $28.675. $24. starting at the end of this year.5% $100.immediately. He wants to withdraw $35.00 $27.040. 26.50 36.. $27. $30. He also wants to have $25. How much could you withdraw at the beginning of each of the next 20 years? a. 22.35 Answer: a I/YR PV PMT FV N 7. 24.03 d.25% per year.000 at the end of each year.038 c.000 invested at 7.000 withdrawals and still have $25.5% $375. and he now wants to retire.736 b. and he was given a severance payment of $375. and he wants to withdraw $35.000 left to give you when he ceases to withdraw funds from the account. Your uncle has $300.598.63 b. $25.000 FV $0.00 PMT $26.000 left in the end? .92 e. How many years will it take to exhaust his funds.000 $35. $27.63 c. $26.218 Answer: c BEGIN Mode N I/YR PV FV PMT 34.000 and invested it at 8. $26.50 b.357.779 e.25% PV $275. Your father's employer was just acquired.

and she now wants to retire.00 22. 17.63 d.60 c. 16. 7..36 c.32 Answer: b I/YR PV PMT FV N 37.000 at the beginning of each year. What rate of return is built into the annuity? Disregard taxes. She wants to withdraw $45.5% $500. 15.22 d. 18. She wants to withdraw $40. 15. run the account down to zero? a.86 38. She also wants to have $50.000 $0. 7.71 d.e. and she plans to retire. Suppose you just won the state lottery.000 $40. and you have a choice between receiving $2.000 $25.a. How many years will it take to exhaust her funds. 17.000 at the beginning of each year.000 invested at 6.71 e.550.08 e. Your aunt has $500. 14. 20.12% .000 left to give you when she ceases to withdraw funds from the account.49 e. 21.99 Answer: c BEGIN Mode I/YR PV PMT FV N 5.50% $300. 22.5% $500. a.54 b.000 invested at 5. 14. 18. 19.000 14.62 b.000 $50. 16.5%.21 b.000 left in the end? a. starting immediately.86 Answer: e BEGIN Mode I/YR PV PMT FV N 6.5%. 18. For how many years can she make the $45.22 39.96 c.000.000 $45.96 Your Aunt Ruth has $500. with the first payment coming one year from today.000 withdrawals and still have $50.000 today or a 20year annuity of $250.000 17.000 $35. i. beginning immediately.

000 $250. what rate of return would your uncle earn on his investment? a. and your uncle offers to give you $120. If you sell it.000 for the annuity.000. 3.000 $0. $81.5% rate of return on a perpetuity that has a cost of $1. 7. 7.000 $0.550. with the first payment being made today. She has the choice of $15. What rate of return is built into the annuity? a.17% d. 8.b.59% d.06 Answer: b . 7.26% e.41% 42.050. 7. What annual payment must you receive in order to earn a 6.000 $0. $85. 4.87% d.250? a.58 e. 3. $89.000.000 $15.000 per year for 12 years.04% Answer: a N PV PMT FV I/YR 20 $15. Assume that you own an annuity that will pay you $15.000.25 c.050.49% c.000 today or a 20-year annuity of $1. $94.19 b.44% b. 5.99% e.31 d.00 3.49% Your girlfriend just won the Florida lottery. 4. 6.58% e.85% b.67% Answer: b N PV PMT FV I/YR 40. 7.00 8.21% c.44% 41.79% c. 8.000 $1. 8.00 7. 20 $2. You need money today to start a new business. $77.41% Answer: e BEGIN Mode N PV PMT FV I/YR 12 $120. with the first payment coming one year from today.

0% CFs: PV of CFs: PV = $10. $10. What is the present value of the following cash flow stream at a rate of 8.203 4 $6. 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 44.25 Multiply Cost by I/YR. $1. $9.23 c.5% $81.03 e. $10.813 0 | $0 1 | $1. Alternately.500 2 | $3.250 6.000 $2.57 b. Found by summing individual PVs.747 PV = $10.0%? Years: CFs: a.849 Answer: c I/YR = 12.000 Found using the Excel NPV function. Found using the calculator NPV key.747 0 $0 $0 1 $1.210 c. What is the present value of the following cash flow stream at a rate of 12.25% CFs: PV of CFs: PV = $505.25%? Years: CFs: a. $505.699 b. you can automate the process using Excel or a calculator.0%? Years: 0 | 1 | 2 | 3 | .Cost (PV) I/YR PMT 43. $11.392 3 $4. $411. $11.000 $3. by inputting the data into the cash flow register and pressing the NPV key.30 PV = $505.284 e.000 3 | $4. $456.30 Answer: e I/YR = 6. 45.747 PV = $10. What is the present value of the following cash flow stream at a rate of 6. $433.03 d. $480.500 $1.500 $3.747 d.500 4 | $6.30 You can find the individual PVs and sum them.339 2 $3.

000 $1. $582. $5. $750 $2.000 Found using the Excel NPV function.277 Answer: a I/YR = 6. input the cash flows and I into the cash flow register. $7.69 c. $6.333 c.233 PV = $9.780 3 $2. $6.987 PV = $5.772 d. Found by summing individual PVs. $553. You sold a car and accepted a note with the following cash flow stream as your payment.584 0 | $0 1 | $1.233 46.493 Found by summing individual PVs.930 e. Found with a calculator or Excel to automate the process.987 b.679 4 $2.987 0 $0 $0 1 $1.83 d.722 $3. At a rate of 6.01 b.0%? Years: CFs: a. what is the future value of the following cash flow stream? Years: CFs: a.000 $1.175 3 $4.5%.175 $4. then press the NPV key.000 4 | $2.917 b. With a calculator.CFs: a. $9.269 $2.0% CFs: PV of CFs: PV = $5.51 e.233 e. $8.80 Answer: e 0 | $0 1 | $75 2 | $225 3 | $0 4 | $300 . $526.400 $750 $2.000 3 | $2.000 $1.286 c.400 0 $750 1 $2.000 2 | $2. $6. Found using the calculator NPV key.987 PV = $5. $613.450 $3.450 2 $3. $8. $645.695 Answer: d I/YR = 8.0% CFs: PV of CFs: PV = $9. What was the effective price you received for the car assuming an interest rate of 6. 47. $7.000 $943 2 $2.600 d. $9.

000 I/YR 7.13% c. 7. 49.80 FV = $645.05% 1 $750 2 $1.50% d.50% 1 $750 $750 2 $750 $750 3 $750 $750 4 $750 $750 5 $750 $10. 50. and $6.250 CFs: I/YR I is the discount rate that causes the PV of the positive inflows to equal the initial negative CF. Found with a calculator by first finding the PV of the stream.80 FV = $645. What¶s the future value of $1.500 after 5 years if the appropriate interest rate is 6%.80 Your father paid $10.000 -$10. 8. 6.27% Answer: c 0 -$10. 5. Found with the NFV key in some calculators. then finding the FV of that PV. $1.750 CFs: I is the discount rate that causes the PV of the inflows to equal the initial negative CF. 4. $1. 5.250 6.250 that is expected to produce cash flows of $750 at the end of Year 1. 5.88% e.80 PV of the stream: FV of the PV: 48. then an additional lump sum payment of $10.250 at the end of Year 4.99 $645. and is found with Excel's IRR function or by inputting the CFs into a calculator and pressing the IRR key. What is the expected rate of return on this investment? a.I/YR = 6. What rate of return would you earn if you bought this asset? a. 7. 0 $0 $0 1 $75 $91 2 $225 $255 3 $0 $0 4 $300 $300 Found by summing individual FVs. I can be found using Excel's IRR function or by inputting the CFs into a calculator and pressing the IRR key. $501.19% c.05% Answer: e 0 -$7. compounded semiannually? a. 6.000 $10.000 3 $850 4 $6.93% b. $850 at the end of Year 3.5% CFs: FV of CFs: FV = $645.75% e.46% d.000 at the end of Year 2.77% b.000 at the end of the 5th year. 7.819 .000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years. You are offered a chance to buy an asset for $7.

618.5% $1. Note that we must first convert to periods and rate per period. the equation.602 e.422 d.76 Answer: b Years Periods/Yr Nom.699.0% $1.784. Note that we must first convert to periods and rate per period.53 e. $3. compounded monthly? a.117 e.0% 10 $0 3. the equation. or Excel.200 $1. .251 c.200 after 5 years if the appropriate interest rate is 6%. $3. $3.618. $1.223 Answer: c Years Periods/Yr Nom. 52.0% 60 $0 0. What¶s the future value of $1. $1. or Excel. compounded semiannually? a.602 Could be found using a calculator. $1.69 b. What¶s the present value of $4.873. $2. I/YR N = Periods PMT I = I/Period PV FV = 51.62 c. $3.782 Answer: d Years Periods/Yr Nom. $2. $3.25% $3. $1. I/YR FV N = Periods PMT I = I/Period PV = 5 2 4.62 Could be found using a calculator.089 b.500 discounted back 5 years if the appropriate interest rate is 4. I/YR N = Periods PMT I/Period PV FV 5 12 6.b.500 $2. 5 2 6.500 10 $0 2.016 d. $1. $2.55 d. Note that we must first convert to periods and rate per period.915 c. or Excel.5%. $1.537. an equation.5% $4.016 Could be found using a calculator.

Midwest Bank also offers to lend you the $50.187 Answer: d Years Periods/Yr Nom.52% b.131 Found using a calculator or Excel 54.000 at a nominal rate of 6.00% 12 19. Riverside Nominal rate. Midwest EFF% Riverside = (1+(rNOM/N))N ± 1 = 6.44% c. 0. $1. 20. Midwest Periods/yr. We used the conversion formula. 0.00%. 22. $1.54% d.70% .131 = FV/(1+rPer)N PV = $1. What¶s the present value of $1. with interest paid monthly.30% e. compounded monthly.131 e. $1.58% b.65% Answer: b APR = Nominal rate Periods/yr EFF% =(1+(rNOM/N))N í 1 = 55. 18. 19. 21.56% Riverside Bank offers to lend you $50.525 PV = $1. Nominal rate.525 discounted back 5 years if the appropriate interest rate is 6%.5%.53. It could also be worked using the conversion formula. but it will charge an annual rate of 7.24% Answer: d This problem can be worked using the interest conversion feature of a calculator or Excel. $1. compounded monthly? a. 0. with no interest due until the end of the year.074 d.0%.0% 12 1 6. 0. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside? a. 0. If the APR is stated to be 18. 18.56% c. Riverside Periods/yr.36% d.57% e. I/YR 5 12 6.5% 7. $969 b. Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.020 c.0% N=Periods 60 PMT $0 I/Period 0. The loan (principal plus interest) must be repaid at the end of the year.5% FV $1. what is the card's EFF%? a.000.

EFF% Midwest Difference 56.10% Answer: a Nominal I/YR Periods/yr EFF% = (1+(rNOM/N))N í 1 8. but you must make interest payments at the end of each quarter and then pay off the $10.13% .88% e.00% Annual effective rate = 8.00 3 -200.00% 0.00% 57.38% vs.72% 4.000.00 2 -200.250 IRR (quarterly) = 2.00% 4 = 8. Suppose a bank offers to lend you $10.000 principal amount at the end of the year.000 1 -250 -250 2 -250 -250 3 -250 -250 4 -250 -10.50% nominal rate on deposits.66% d.00% 58. 9. 8. 3. What is the effective annual rate on the loan? a. 8.37% d.000 10.00 -200.000. 8.00 4 -200.00 -200. nominal rate = 8. 8.24% b. This procedure is obviously longer.200. nominal rate = 10.000 for one year at a nominal annual rate of 8.30% Suppose Community Bank offers to lend you $10. 9.00 IRR (quarterly) = 2.00%.00 -10.38% Answer: e Interest payment: $250.45% c.000 for 1 year on a loan contract that calls for you to make interest payments of $250. CFs: 0 10.000.90% c.00 10.00 CFs: 0 10.46% b. 8. 9.00 1 -200.00 -10. What is the effective annual rate on the loan? a. with monthly compounding. 8. 7.50% Annual effective rate = 10. 10.86% e. b.000 -10.24% vs. What effective annual rate (EFF%) does the bank pay? a.00 Then find the IRR as a quarterly rate and convert to an annual rate.00 -200.24% You could also find the EFF% as follows: Interest paid each quarter = Loan × rate/4 = Qtrly PMT = $200.00 at the end of each quarter and then pay off the principal amount at the end of the year. Charter Bank pays a 4.

How much would be in the account after 8 months.38% 4. 16.0146% 240 . with interest paid at the end of each month. Suppose you deposited $5.994.22 d. $6.87 Answer: a Nominal I/YR Days/yr Amount borrowed Interest per month = Interest/day × 30 = 7.178. 15.88 e. which amounts to monthly compounding. 4.294. 4. What is the effective annual rate? a. $5. 5.000 $5.708.09 b.99 c. 5.25% 360 $20. but you must make monthly payments. $139.56% Answer: c Nominal I/YR Periods/yr Periodic rate EFF% = (1+(rNOM/N))N ± 1 = 59. $133.59% Suppose your credit card issuer states that it charges a 15. assuming each month has 30 days? a. $5.83 Days in month Daily rate Interest per day 30 0.28 e. 18.83 b.020139% $4. $120.61% Answer: b Nominal I/YR = APR Periods/yr EFF% = (1+(rNOM/N))N ± 1 = 15.88% d.72% e.25% with daily compounding based on a 360day year. The bank uses a 360-day year.50% 12 0. $146.05% e.84 d. borrowed $20.25%. How much interest would Pace have to pay in a 30-day month? a.08% 60.178.00% nominal annual rate.000 in a bank account that pays 5.25% 8 360 30 $5.000 at a rate of 7.00 Answer: a Nominal I/YR Number of months Days in year Days in month Amount deposited Ending amount 5. 17.08% c.c.59% d.436. simple interest. Pace Co. $5. $5.88 c.000 $120.09 Rate/day = rNOM/360 = Days = Months × 30 = 0. $126. 16.00% 12 16.02778 61.27% b.

0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year? a.200.60 c. 63.0% and must repay it in 4 equal installments at the end of each of the next 4 years.0% 0.69 64. $3.704.000 $0.000.029. Suppose you borrowed $14.67 d. Suppose you borrowed $12.44 c. $905.77 e.000. so interest must be calculated on a monthly basis.66 e. monthly payment. Your uncle will sell you his bicycle shop for $250.699. $3.000 down payment.91 Answer: c Years Payments/year Nominal rate Purchase price Down payment 30 12 6. and you will make a $15.889. $4. $4. $741. Years 4 Payments/year N 48 Nominal rate PV $250.000 at a rate of 9. What will your monthly payments be? a. How large would your payments be? a.57 b.5% $4.464.33 . $4.000 at a rate of 10.241.000 $15.0% nominal annual rate. amortized mortgage at a 6.947. as the PMT. $780. What would your equal monthly payments be? a. $4.62. $4. $821. You have arranged to finance the remainder with a 30-year.000 $3.26 Answer: a Years = N I/YR FV Amount borrowed = PV Payments = PMT 4 9. $1.37 b.704." at a 6.69 d. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years.02 b.69 d. $4.000 N Periodic rate PV FV PMT 360 0.083.00 $821.287. with "seller financing. $862.01 Answer: e Monthly annuity.000 at the end of the last month.87 e.50% $145.502.5% nominal interest rate.01 65.02 Found with a calculator. $4. Suppose you are buying your first condo for $145. $4. and then make an additional final (balloon) payment of $50.947.000 I/period FV $50.0% $0 $12.000 PMT 12 6.23 c.54% $130. with the first payment due in one month.

49 b.01 2 31.241 Found with a calculator or Excel.27 e.531 b.5% annual interest rate to start your new business.b.00 6.99 6.741 7.400. Balance 93.608.000 $0 $6. $7. $8.400.945 Amortization schedule (first 2 years) Year Beg.0% 5 $14.326.326.000 at a 7.263.099.625. 10.442.00 Answer: d I/YR Years Amount borrowed Interest in Year 1 66.000.016. $1.00 e.177 Answer: b Find the required payment: N I PV FV PMT 10 8.50 c.27 Principal 3. Balance 31.74 End.281. $2.000 $0 $15.994.01 67. The terms require you to amortize the loan with 7 equal end-of-year payments.46 c. Interest 2. $9.59 Answer: d Find the required payment: N I PV FV PMT 7 7.00 2.259 85. $2.209.96 d.000 $1.608.927 c. Balance Payment 1 100. $1.983.323 d.5% $35.241 2 93.500 7. Interest 8. $1. You plan to borrow $35. $2. $1.5% $100.5% annual interest rate.330. How much interest would you be paying in Year 2? a.608. $1. Your bank offers to lend you $100.016.01 4.927 Principal 6. $8.01 Found with a calculator or Excel. How much interest would you be paying in Year 2? a.000 at an 8.99 26.00 d.259 15. The terms require you to amortize the loan with 10 equal end-of-year payments.25 Amortization schedule (first 2 years) Year Beg. $7.740 e. $2.241 .735.000 15. Balance Payment 1 35.00 Simply multiply the rate times the amount borrowed.314 End.470.

If you invest $3. so interest must be calculated on monthly basis 70.68.24 e.5% $0 $5.000? Round fractional months up. The second plan requires you to make monthly payments of $137. how many months will it take for your account to grow to $150.583333% $0 $3.36% e. compounded monthly.0021 Monthly annuity. 48. so interest must be calculated on monthly basis.000 at the beginning of each month.96% c.000 $150.000 $250. 13. 27 c. Rounded up: 38 69. 58. 12.16 Monthly annuity due. how many months would it take for your account to grow to $250. a.20% Monthly annuity. What nominal annual interest rate is built into the monthly payment plan? a.41.0% 0. You are considering investing in a bank account that pays a nominal annual rate of 7%. 39.31% b. 38 e.000 at the end of each month. If you invest $5. 44 Answer: d BEGIN Mode I/YR I/MO PV PMT FV N 18.000 $137.000 immediate up-front payment.0% 1. rNOM/12.57 Answer: b I/YR I/MO PV PMT FV N 7. payable at the end of each month for 3 years. 23 b.40 d.60 b.000 37.000 44. The first plan requires a $4. compounded monthly.00 c.41 $0 1. 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.64% d. 14. 12. so interest must be calculated on monthly basis . 44. 32 d.08% Answer: d N PV PMT FV I/MO 36 $4. 15.000? a. 53.

I/YR = I/MO × 12 = 14.36% .

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