FIN Ch.

5
Terms in this set (106)

The amount of simple interest c. rate per time period, the number of time periods
is equal to the product of the
principal times ____ times ____.

a. (1 + rate per time period), the

number of time periods

b. (1 + rate per time period),

(the number of time periods -1)

c. rate per time period, the

number of time periods

d. rate per time period, (the

number of time periods - 1)

The present value of a single d. a and c

amount can be represented as

a. PV0 = FVn(PVIFi,n)

b. PV0 = FVn(PVIFAi,n)

c. PV0 = FVn[1/(1 + i)n]

d. a and c

The basic future value equation d. FVn = PV0(FVIFi,n)

is given by

a. FVn = PV0(PVIFi,n)

b. FVn = PV0(FVIFAi,n)

c. FVn = PV0(1/(1+ i)n)

d. FVn = PV0(FVIFi,n)

FIN Ch. 5
The process of finding present c. discounting
values is frequently called

a. annualizing

b. compounding

c. discounting

d. leasing

The values shown in ordinary c. multiplying, (1 + i)

annuity tables (either present
value or compound value) can
be adjusted to the annuity due
form by ____ the ordinary
annuity interest factor by ____.

a. dividing, (1 + i)

b. dividing, (1 + i)n

c. multiplying, (1 + i)

d. multiplying, (1 + i)n

A(n) ____ is a financial instrument d. perpetuity

that agrees to pay an equal
amount of money per period
into the indefinite future (i.e.
forever)

a. annuity

b. annuity due

c. sinking fund

d. perpetuity

FIN Ch. 5
Finding the discounted current c. present value of an annuity
value of $1,000 to be received
at the end of each of the next 5
years requires calculating the

a. future value of an annuity

b. future value of an annuity

due

c. present value of an annuity

d. present value of an annuity

due

Finding the compound sum of c. future value of an annuity due

$1,000 to be received at the
beginning of each of the next 5
years requires calculating the

a. future value of an annuity

b. present value of an annuity

c. future value of an annuity

due

d. present value of an annuity

due

When using a present value of d. b and c only

an annuity table(e.g.,Table IV at
the back of the book),

a. payments are assumed to be

made at the beginning of each
period

b. PVIFA factors decrease with

an increase in the interest rate

c. PVIFA factors increase with

an increase in the number of
periods

d. b and c only
FIN Ch. 5
When using a future value of d. all of the above
an annuity table (e.g., Table III
at the back of the book),

a. payments are assumed to be

made at the end of each
period

b. FVIFA factors increase with

an increase in the interest rate

c. FVIFA factors increase with

an increase in the number of
periods

d. all of the above

An annuity due is one in which

b. payments or receipts occur at the beginning of
a. payments or receipts occur each period.
at the end of each period.

b. payments or receipts occur

at the beginning of each
period.

c. payments or receipts occur

forever.

d. cash flows occur

continuously.

FIN Ch. 5
You have just won a $5 million a. it will be worth less
lottery to be received in twenty
annual equal payments of
$250,000. What will happen to
the present value of your
winnings if the interest rate
increases during the next 20
years.

a. it will be worth less

b. it will be worth more

c. it will not change

d. it will increase during the

first ten years

You have just calculated the d. extend the cash flows over a longer period of
present value of the expected time, and decrease the discount rate
cash flows of a potential
investment. Management thinks
your figures are too low. Which
of the following actions would
improve the present value of
your cash flows?
a. extend the cash flows over a
longer period of time

b. increase the discount rate

c. decrease the discount rate

d. extend the cash flows over a

longer period of time, and
decrease the discount rate

FIN Ch. 5
If the present value of a given c. the discount rate must be zero
sum is equal to its future value,
then

a. the discount rate must be

very high

b. there is no inflation

c. the discount rate must be

zero

d. none of the answers is

correct

Using the "Rule of 72," about c. 8 years

how long will it take a sum of
money to double in value if the
annual interest rate is 9
percent?

a. 9 years

b. 7 years

c. 8 years

d. 10 years

The present value of an a. sum of the present value of a series of equal

ordinary annuity is the
periodic payments
a. sum of the present value of a
series of equal periodic
payments

b. future value of an equal

series of payments

c. receipt of equal cash flows

for a specified amount of time

d. sum of the future value of an

equal series of payments

FIN Ch. 5
When a loan is amortized over b. amount of interest paid is reduced each year
a five year term, the

a. rate of interest is reduced

each year

b. amount of interest paid is

reduced each year

c. payment is reduced each

year

d. balance is paid as a balloon

payment in the fifth year

Annuity due calculations are b. lease contracts

especially important when
dealing with

a. term loans

b. lease contracts

c. capital investments

d. capital recovery problems

The more frequent the c. greater the effective interest rate

compounding the

a. greater the present value

b. greater the amount

deposited

c. greater the effective interest

rate

d. lesser the future value

FIN Ch. 5
The effective rate of interest d. equal to or greater than
will always be ____ the nominal
rate.

a. greater than

b. equal to

c. less than

d. equal to or greater than

____ is interest that is paid not d. compound interest

only on the principal, but also
on any interest earned but not
withdrawn during earlier
periods.

a. basic interest

b. simple interest

c. future interest

d. compound interest

Which of the following is worth b. Future value of an annuity due of PMT dollars per
more?
year for n years discounted at i percent.
a. Future value of an ordinary
annuity of PMT dollars per year
for n years discounted at i
percent.

b. Future value of an annuity

due of PMT dollars per year for
n years discounted at i percent.

c. Both are worth the same

amount.

d. Cannot be determined from

the information given.

FIN Ch. 5
The annual effective rate of d. a and b
interest (ieff ) is a function of:

a. the annual nominal rate of

interest (inom)

b. the number of compounding

intervals per year (m)

c. the number of years (n)

d. a and b

More frequent compounding c. higher, lower

results in ____ future values and
____ present values than less
frequent compounding at the
same interest rate.

a. higher, higher

b. lower, higher

c. higher, lower

d. lower, lower

The present value of a(n) ____ is c. perpetuity

determined by dividing the
annual cash flow by the
interest rate.

a. annuity

b. annuity due

c. perpetuity

d. lease

FIN Ch. 5
An annuity that begins more d. deferred annuity
than 1 year in the future is
referred to as a(n) ____.

a. perpetuity

b. annuity due

c. uneven annuity

d. deferred annuity

The ____ of a perpetual stream a. present value; PMT/i

of equal, annual returns (PMT)
discounted at i% per year is
equal to ____.

a. present value; PMT/i

b. present value; PMT x i

c. future value; PMT/i

d. future value; PMT x i

Annuity due calculations are c. lease contracts

most common when dealing
with:

a. cash dividends

b. loan repayments

c. lease contracts

d. interest payments

The payment or receipt of a c. ordinary annuity

series of equal cash flows per
period, at the end of each
period, for a specified amount
of time is called a(n):

a. annuity due

b. perpetuity

c. ordinary annuity

d. simple interest

FIN Ch. 5
The difference between an b. the timing of the payments
ordinary annuity and an annuity
due is:

a. the interest rate

b. the timing of the payments

c. the amount of the payments

d. the number of periods

____ is the return earned by d. interest

someone who has forgone
current consumption.

a. the present value

b. principle

c. an annuity

d. interest

Determine how much $1,000 d. $1,469

deposited in a savings account
paying 8% (compounded
annually) will be worth after 5
years.

a. $5,526

b. $ 784

c. $1,400

d. $1,469

FIN Ch. 5
The earnings of Omega Supply b. 8%
Company have grown from
$2.00 per share to $4.00 per
share over a nine year time
period. Determine the
compound annual growth rate.

a. 11.1%
b. 8%

c. 22.2%

d. 100%

Comet Powder Company has c. 10%

purchased a piece of
equipment costing $100,000. It
is expected to generate a ten-
year stream of benefits
amounting to $16,273 per year.
Determine the rate of return
Comet expects to earn from
this equipment.

a. 16.3%

b. 62.7%

c. 10%

d. 20%

FIN Ch. 5
Mr. Moore is 35 years old c. $2,164
today and is beginning to plan
for his retirement. He wants to
set aside an equal amount at
the end of each of the next 25
years so that he can retire at
age 60. He expects to live to
the maximum age of 80 and
wants to be able to withdraw
$25,000 per year from the
account on his 61st through
80th birthdays. The account is
expected to earn 10 percent
per annum for the entire
period of time. Determine the
size of the annual deposits that
must be made by Mr. Moore.

a. $212,850

b. $23,449

c. $2,164

d. $8,514

Determine (to the nearest a. $929

dollar) the amount you would
be willing to pay for a $1,000
par value bond paying $80
interest each year and
maturing in 12 years, assuming
you wanted to earn a 9 percent
rate of return.

a. $929

b. $573

c. $1,316

d. $1,960
FIN Ch. 5
Determine how much you d. $750
would be willing to pay for a
bond that pays $60 annual
interest indefinitely and never
matures (i.e. a perpetuity),
assuming you require an 8
percent rate of return on this
investment.

a. $480

b. $743

c. $1,000

d. $750

Air Atlantic (AA) has been d. $3,226,200

offered a 3-year old jet airliner
under a 12-year lease
arrangement. The lease
requires AA to make annual
lease payments of $500,000 at
the beginning of each of the
next 12 years. Determine the
present value of the lease
payments if the opportunity
cost of funds is 14 percent.

a. $2,830,000

b. $13,635,500

c. $6,000,000

d. $3,226,200

FIN Ch. 5
If you invest $10,000 in a 4-year c. $14,640
certificate of deposit (CD)
paying 10 percent interest
compounded annually,
determine how much the CD
will be worth at the end of 4
years.

a. $13,600

b. $45,730

c. $14,640

d. $15,958

You sold 100 shares of stock d. 7%

today for $30 per share that
you paid $20 for 6 years ago.
Determine the average annual
rate of return on your
investment, assuming the stock
paid no dividends.

a. 25%

b. 8.33%

c. 150%

d. 7%

FIN Ch. 5
Your grandparents put $1,000 a. $3,870
into a savings account for you
when you were born 20 years
ago. This account has been
earning interest at a compound
rate of 7 percent. What is its
value today?

a. $3,870

b. $1,967

c. $3,026

d. $3,583

Baggos has seen their EPS b. about 40%

increase from $0.30 to $3.16 in
seven years. What has been the
growth rate of Baggos's EPS?

a. about 30%

b. about 40%

c. about 20%

d. about 10%

You have just won a $50,000 a. $7,450

bond that pays no interest and
matures in 20 years. If the
discount rate is 10%, what is the
present value of your bond?

a. $7,450

b. $8,175

c. $8,900

d. $1,490

FIN Ch. 5
BB&C bank has agreed to lend c. 12%
you $30,000 today, but you
must repay $42,135 in 3 years.
What rate is the bank charging
you?

a. 10%

b. 11%

c. 12%

d. 13%

The Florida lottery agrees to b. $12.79 million

pay the winner $250,000 at the
end of each year for the next
20 years. What is the future
value of this lottery if you plan
to put each payment in an
account earning 9 percent?

a. $2.28 million

b. $12.79 million

c. $14.32 million

d. $ 5.00 million

Billy Bob has decided to put c. $1,062,223

$2,400 a year (at the end of
each year) into an IRA over his
40 year working life and then
retire. What will Billy have if the
account will earn 10 percent
compounded annually?

a. $394,786

b. $ 23,470

c. $1,062,223

d. $810,917

FIN Ch. 5
Jane wants to have $200,000 in b. $3,115
an account in 20 years. If her
account earns 11 percent per
annum over the accumulation
period, how much must she
save per year (end of year) to
have the $200,000?
a. $25,116

b. $3,115

c. $10,000

d. $3,492

Many IRA funds argue that a. $43,785

investors should invest at the
beginning of the year rather
than at the end. What is the
difference to an investor who
invests $2,000 per year at 11
percent over a 30 year period?

a. $43,785

b. $36,189

c. $54,244

d. There is no difference

FIN Ch. 5
An insurance company offers b. $438,144
you an end of year annuity of
$48,000 per year for the next
20 years. They claim your
return on the annuity is 9
percent. What should you be
willing to pay today for this
annuity?

a. $429,600

b. $438,144

c. $408,672

d. $398,144

New Jersey Mutual has offered c. 7%

you a single premium annuity
that will pay you $12,000 per
year (end of year) for the next
15 years. If you must pay
$109,296 today for this annuity,
what is your expected rate of
return?

a. 8%

b. 9%

c. 7%

d. 10%

FIN Ch. 5
Columbia Bank & Trust has just a. $5,548
given you a $20,000 term loan
to pay for a new concrete
mixer. The loan requires five
equal annual end of the year
payments. If the loan provides
the bank with a 12 percent
return, what will be your annual
payments?
a. $5,548

b. $3,148.12

c. $6,000

d. $1,666.67

Idlewild Bank has granted you a. 14%

a seven year loan for $50,000.
If your seven annual end of the
year payments are $11,660.45,
what is the rate of interest
Idlewild is charging?

a. 14%

b. 23%

c. 12.6%

d. 11%

FIN Ch. 5
Your firm, New Sunrise, has just d. $6,081.25
leased a $28,000 BMW for you.
The lease requires six
beginning of the year
payments that will fully
amortize the cost of the car.
What is the amount of the
payments if the interest rate is
12 percent?

a. $6,810.99

b. $7,766.99

c. $6,423.74

d. $6,081.25

The lease on a new office b. $149,194

requires an immediate payment
of $24,000 plus $24,000 per
year at the end of each of the
next 10 years. At a discount rate
of 14 percent, what is the
present value of this stream of
lease payments?

a. $130,872

b. $149,194

c. $142,710

d. $264,000

FIN Ch. 5
Alabama Power has preferred b. $104.89
stock that pays an annual
dividend of $9.44. If the
security has no maturity, what is
it's value to an investor who
wishes to obtain a 9 percent
rate of return?

a. $84.96

b. $104.89

c. $95.34

d. $94.40

Designs Now is opening a a. $429,720

showcase office to display and
sell it's computer designed
poster art. Designs expects
cash flows to be $120,000 in
the first year, $180,000 in the
second year, $240,000 in the
third year. If Designs uses 11
percent as its discount rate,
what is the present value of the
cash flows?

a. $429,720

b. $457,620

c. $456,000

d. $424,820

FIN Ch. 5
In six years, your daughter will c. $17,878.80
be going to college. You wish
to have a fund that will provide
her $10,000 per year (end of
year) for each of her four years
in college. How much must you
put into that fund today if the
fund will earn 10 percent in
each of the 10 years?

a. $29,744.65

b. $29,783.76

c. $17,878.80

d. $21,651.10

What is the future value of a b. $18,170

$10,000 college tuition fund if
the nominal rate of interest is 12
percent compounded monthly
for five years?

a. $17,623.42

b. $18,170

c. $16,105.10

d. $16,122.26

What is the effective rate of a. 9.92%

interest on a CD that has a
nominal rate of 9.5 percent
with interest compounded
monthly?

a. 9.92%

b. 9.74%

c. 10.02%

d. 9.86%

FIN Ch. 5
John is 25 years old and wishes c. $4,143.65
to retire in 30 years. His plan is
to invest in a mutual fund
earning a 12 percent annual
return and have a $1 million
retirement fund at age 55. How
much must he invest at the end
of each year to achieve this
goal?

a. $7,499.96

b. $5,024.60

c. $4,143.65

d. $33,333.33

Joe Brady just won a $450,000 b. 15%

lottery in Pennsylvania. Instead
of receiving a lump sum, he
found that he would receive
$22,500 annually (end of year)
for 20 years. Joe is 75 years old
and wants his money now. He
has been offered $140,827 to
sell his ticket. What rate of
return is the buyer expecting
to make if Joe accepts the
offer?

a. less than 1%

b. 15%

c. 18%

d. 12%

FIN Ch. 5
A bank has agreed to loan you c. $2,706
$10,000 at 11% for 5 years. You
are required to make equal,
annual, end-of-year payments
that include both principal and
interest on the outstanding
balance. Determine the amount
of these annual payments (to
the nearest dollar).

a. $2,000

b. $3,100

c. $2,706

d. $1,100

Sales for Triad Inc. have grown c. 15.0%

from $2 million to $8.092
million in 10 years. What is the
implied growth rate of sales for
Triad?

a. 24.72%

b. 4.05%

c. 15.0%

d. 12.2%

If you invest the $10,000 you b. $930,510

receive at graduation (age 22)
in a mutual fund that averages
a 12% annual return, how much
will you have at retirement in
40 years?

a. $909,090

b. $930,510

c. $783,879

d. $510,285

FIN Ch. 5
Five years after an accident, c. $ 65,000
you received $100,000 to pay
the medical expenses incurred
at the time of the accident.
What is the present value (at
the time of the accident) of the
payment? Assume interest
rates are 9%.

a. $153,900

b. $ 68,100

c. $ 65,000

d. $ 70,800

You purchased a piece of a. 12%

property for $30,000 nine
years ago and sold it today for
$83,190. What was your rate of
return on your investment?

a. 12%

b. 11%

c. 10%

d. 9%

FIN Ch. 5
What is the most you should c. $68,105
pay to receive the following
cash flows if your required rate
of return is 12 percent?

Year 1 $5,000

Year 2 $8,000

Year 3 $12,000

Year 4-10 $15,000

a. $58,580

b. $104,135

c. $68,105

d. $40,000

Seebee makes quarterly (end d. $1,062,030

of period) payments of
$30,000 into a pension fund
earning 12 percent per year
compounded quarterly for 10
years. How much interest will
they have earned in 10 years?

a. $2,262,030

b. $2,105,880

c. $905,880

d. $1,062,030

FIN Ch. 5
John borrowed $20,000 to a. $7,173.90
finance his college education.
If the finance charge on the
loan is 6 percent, and he will
pay off the loan in 10 equal,
annual, end of year payments,
how much total interest will he
pay?

a. $7,173.90

b. $2,717.39

c. $12,000.00

d. $25,924.23

Your brother, who is 6 years c. $5,975

old, just received a trust fund
that will be worth $25,000
when he is 21 years old. If the
fund earns 10 percent interest
compounded annually, what is
the value of the fund today?

a. $104,602

b. $6,575

c. $5,975

d. $6,875

FIN Ch. 5
California Life has just offered b. 8%
you a single premium annuity
for $5,000 that will pay
$5,144.12 per year for 20 years,
the first payment being
received exactly 31 years from
today. What is the implied rate
of return on this annuity?

a. 7%

b. 8%

c. 9%

d. 6.5%

Jackie plans to open her own b. $63,925

book store in 10 years. To raise
the "seed" money she has
committed $10,000 she now
has in a mutual fund. In
addition, she plans to save
$2,000 per year (end of year)
for the next 5 years and $3,000
per year (end of year) for the
following 5 years. How much
"seed" money will Jackie have
in 10 years if the investments
earn 10 percent per year
compounded annually?

a. $76,129

b. $63,925

c. $44,255

d. $159,370

FIN Ch. 5
You just purchased a new d. $6,891
$25,000 car and agreed to pay
for the car in 50 monthly
payments. If the monthly
interest rate is 1 percent, what
is your total financing cost?

a. $637.82

b. $12,500

c. $574.25

d. $6,891

A zero coupon bond with a a. 9%

$1,000 par value is selling for
$356 and matures in 12 years.
What is the implied discount
rate (yield to maturity)?

a. 9%

b. 9.36%

c. 9.12%

d. 9.4%

FIN Ch. 5
Roy, who has just turned 40, c. $1,120
would like to have an annual
annuity of $20,000 paid over a
20 year period, the first
payment occurring on his 66th
birthday. How much must Roy
save each year (end of year)
for the next 25 years to have
this annuity, if the investment
will earn 12 percent
compounded annually?

a. $16,000

b. $19,046

c. $1,120

d. $944.10

Your local bank offers 4-year c. $310

certificates of deposit (CD) at a
12 percent annual nominal
interest rate compounded
quarterly. Determine how
much additional interest you
will earn over 4 years on a
$10,000 CD that is
compounded quarterly
compared with one that is
compounded annually.
a. $6,050

b. $0

c. $310

d. $220

FIN Ch. 5
How much will you have at the a. $16,334
end of 5 years in a European
vacation account if you deposit
$200 a month in an account
that is paying a nominal 12
percent per year, compounded
monthly?

a. $16,334

b. $15,247

c. $16,497

d. $15,817

You wish to save $500,000 in c. $ 4,370.13

the next 25 years. You notice
that a corporate bond fund
earns about 11 percent per year
and that is where you put your
savings. How much must you
save each year to obtain your
goal?

a. $20,000.00

b. $ 3,749.98

c. $ 4,370.13

d. $ 2,000.00

FIN Ch. 5
You plan to lease a Saab c. 12%
automobile that sells for
$22,657 and has no salvage
value. If the monthly lease is
$499, with the first of 60
payments due immediately.
What is the implied annual
interest rate on your lease?

a. 10%

b. 11.5%

c. 12%

d. 13.5%

What is the present value of b. $ 86,462

the following net cash flows if
the discount rate is 12%:

Year Cash Flow

1-5 $10,000 each year

6-10 $15,000 each year

11-15 $17,000 each year

a. $151,400

b. $ 86,462

c. $144,037

d. $ 79,252

FIN Ch. 5
If the discount rate is 12%, what d. $ 90, 537
is the present value of the
following cash flows:

Year Cash Flow

1 $10,000

2 $11,000

3 $12,000

4 $13,000

5 $14,000

6-15 $15,000 each year

a. $144,618

b. $127,923

c. $127,197

d. $ 90, 537

You wish to have $10,000 per a. $ 560.17

year as a retirement
supplement for 20 years (from
age 65-85). You are now 40
years old. How much must you
save each year for the next 25
years if you assume your
savings will earn 12% annually?

a. $ 560.17

b. $1,499.99

c. $5,403.87

d. none of the above

FIN Ch. 5
What is the present value of b. $153,895
the following net cash flows if
the discount rate is 10%?

Year Net Cash Flow

1-10 $20,000 each year

11-15 $15,000 each year

16-20 $10,000 each year

a. $217,675

b. $153,895

c. $322,130

d. $167,515

The Summer Breeze Hotel c. $45,788

borrowed $100,000 from the
Meadowlands Bank to pay for
a new air conditioning system.
The loan is for a period of 5
years at an interest rate of 10%
and requires 5 equal end-of-
year payments that include
both principal and interest on
the outstanding balance. What
will be the outstanding balance
after the third payment?

a. $60,000

b. $20,865

c. $45,788

d. $50,866

FIN Ch. 5
Keith Stone has a 10-year old a. $5,569
daughter, Kate, who will be
entering college in 8 years.
Keith estimates college costs
to be $16,000, $17,000, $18,000
and $19,000 payable at the
beginning of each of Kate's
four years in college. How
much must Keith save each
year (assume end of year
payments) for each of the next
8 years to have enough savings
to pay for Kate's education?
Assume Keith can earn 9% on
his savings.

a. $5,569

b. $7,720

c. $5,108

d. $7,677

1st Bank offers you a car loan at d. 10.47%

an annual interest rate of 10%
compounded monthly. What
effective annual interest rate is
the bank charging you?

a. 10.38%

b. 10.42%

c. 10.45%

d. 10.47%

FIN Ch. 5
Your monthly statement from c. 19.56%
your bank credit card shows
that the monthly rate of interest
is 1.5%. What is the annual
effective rate of interest you
are being charged on your
credit card?

a. 18.00%

b. 18.64%

c. 19.56%

d. 29.74%

What monthly rate of interest b. 1.10%

will yield an annual effective
rate of interest of 14%?

a. 1.17%

b. 1.10%

c. 1.08%

d. 1.14%

What is the present value of d. $836

$1,000 received 2 years from
today if the nominal interest
rate is 9% and compounded
monthly?

a. $842

b. $914

c. $833

d. $836

FIN Ch. 5
Cosmos Touring wishes to b. $11,465
replace its luxury bus in 10
years by accumulating funds in
a special account. The new bus
is expected to cost $180,000.
How much must Cosmos put
into the fund in equal, end-of-
year amounts if earnings are
expected to be 8% for the first
4 years and 10% thereafter?

a. $12,107

b. $11,465

c. $9,901

d. $14,727

FIN Ch. 5
Al Corbin is 25 years old today c. $12,321
and he wishes to accumulate
enough money over the next
35 years to provide for a 20
year retirement annuity of
$100,000 at the beginning of
each year, starting with his 60th
birthday. He can save $2,000 at
the end of each of the next 10
years and $3,000 each year for
the following 10 years. How
much must he save each year
at the end of years 21 through
35 to obtain his goal? Assume
that the average rate of return
over the entire period will be
10%.

a. $9,642

b. $26,969

c. $12,321

d. $24,289

If a 16 year old high school a. $442,014

student put $2,000 at the end
of each year for 4 years into an
IRA that earned a rate of 9%,
how much would she have
accumulated by age 65?
Assume funds are left to
accumulate for 45 years (age
20 - 65) at 9%.

a. $442,014

b. $386,616

c. $1,767,995

d. $9,146
FIN Ch. 5
If your parents put $2,000 a a. $1,569,758
year into an IRA account for
you in each of your last 4
teenage years (age 16,17,18, and
19), how much would the IRA
account have in it at your
retirement 45 years later if the
account earned 12% each
year? (Assume end-of-year
payments.)

a. $1,569,758

b. $ 68,613

c. $3,457,169

d. $1,148,958

What is the value in 10 years of b. $22,285

$10,000 deposited in an
account earning 8%
compounded monthly?

a. $33,004

b. $22,285

c. $102,530

d. $21,589

Assume you purchased a home b. $733.76

and borrowed $100,000 at a
rate of 8% compounded
monthly over 30 years. What is
your monthly payment?

a. $917.77

b. $733.76

c. $666.67

d. $878.14

FIN Ch. 5
Inco purchased a computer for c. 6.61%
$200,000 and this machine is
expected to generate annual
cash flows of $48,271 over the
next 5 years. What is the
expected rate of return on this
investment?

a. 8.84%

b. 26.58%

c. 6.61%

d. none of the above

When you purchased a car, a. 9.82%

you borrowed $20,000 from
the bank and agreed to make
monthly payments of $423.17
for 5 years. What rate of
interest is the bank charging
you?

a. 9.82%

b. 5.00%

c. 25.39%

d. 10.00%

When you purchased a car, b. $637.86

you borrowed $20,000 from
the bank at 9.20% and agreed
to make monthly payments for
3 years. What is your monthly
payment?

a. $153.33

b. $637.86

c. $584.12

d. $559.78
FIN Ch. 5
What is the present value of b. $19,813
the following mixed cash flow
stream if interest is 6%
(rounded)?

YEAR CASH FLOW

1 $5,000

2 $8,000

3 $9,500

a. $25,370

b. $19,813

c. $21,225

d. $18,750

Which of the following b. II only

statements is/are correct?

I. At 6% interest, the present

value of: $400 for the first year,
$600 for the second year, and
$800 for the third year is
$1,603.00.

II. The future value of the

following mixed cash flow
stream (if it is from an annuity
due at 6% interest): $400 for
the first year, $600 for the
second year, and $800 for the
third year is $1,999 (rounded).

a. I only

b. II only

c. Both I and II

d. Neither I nor II

FIN Ch. 5
Approximately how long b. 4 years
would it take to double my
money if I invest it now at 18%?

a. 6 years

b. 4 years

c. 12 years

d. It cannot be determined

Based on the Rule of 72, what b. 12%

interest rate do you need to
earn to double your money in
6 years?
a. 8%

b. 12%

c. 7%

d. 6%

Jenny Genius wants to b. A Malibu selling for $12,320

purchase a new car. She knows
that she can afford to pay $250
per month and that her bank
will charge her 8% interest on
the car loan. She intends to pay
off the car in five years. Interest
will be compounded monthly.
Of the following, which is the
most expensive vehicle in her
price range that she could
consider?

a. A Taurus selling for $11,900

b. A Malibu selling for $12,320

c. A Civic selling for $14,670

d. A Celica selling for $17,500

FIN Ch. 5
Bill Swill decides to try his luck a. $2,574,578
at Powerball where the
projected winnings are
$12,000,000. If he wins, he can
choose the annuity option (to
be paid over 20 years) or a
lump sum settlement that he
can invest at 8% interest. How
much must the lump sum
option be to make the lump
sum option equal to the
annuity option (rounded)?

a. $2,574,578

b. $1,743,620

c. $1,130,668

d. $1,200,000

FIN Ch. 5
Nukin' Gnats Pest Control b. $158,604
wants to offer a contract to its
customers that would protect
the property of their existing
customers against termite
infestation. Should termites
invade a customer's home,
Nukin' Gnats will pay for the
repairs to the home provided
the customer has maintained
service with Nukin' Gnats. The
corporation must develop an
account with a value of
$500,000. They will accumulate
this account over three years,
after which they will offer this
new contract provision. How
much must be deposited
annually (rounded amount) to
accumulate the needed funds
if they can get 5% interest at
their local bank?

a. $275,026

b. $158,604

c. $80,255

d. $97,985

FIN Ch. 5
Sherry Smart is buying a c. $1,318.69
$350,000 home and will pay
the mortgage monthly for 30
years. She has a good credit
score and has qualified for a
5.125% loan interest. How much
will she be paying monthly for
the home?

a. $2,013.67

b. $1,572.72

c. $1,318.69

d. $975.88