Questions No. Correct Answer Questions No.

Correct Answer
1 D 11 B
2 B 12 C
3 A 13 B
4 C 14 D
5 C 15 B
6 A 16 A
7 D 17 C
8 C 18 B
9 C 19 C
10 D 20 D

1. If you borrow 𝑃 amount for 𝑛 years carrying a simple interest rate of 𝑖. At the end of 𝑛
years, you will pay back
a) 𝑃 + 𝑃 × 𝑖 × 𝑛
b) 𝑃(1 + 𝑛 × 𝑖)
c) 𝑃(1 + 𝑖)
d) Answers (a) and (b)

2. The time it would take for a given sum of money to double at 4% per year simple interest
is closest to:
a) 30 years
b) 25 years
c) 20 years
d) 10 years

3. All of the following are examples of cash outflows, except:

a) Asset salvage value
b) Income taxes
c) Operating cost of asset
d) First cost of asset

4. Which of the following is true for compounding?

a) Compounding decreases the amount
b) It is the process of converting “F” into “P”
c) It is the process of converting “P” into “F”
d) Answers (a) and (b
5. If your friend loans you $10,000 with the agreement that you must repay him/her in 4 years
at an interest rate of 6% per year simple interest, the amount you must give her is closest
to:
a) $11,000
b) $12,000
c) $12,400
d) Over $12,500

6. Which of the following bank accounts has the highest effective annual return?
a) An account which pays 10 percent nominal interest with daily compounding.
b) An account which pays 10 percent nominal interest with monthly compounding.
c) An account which pays 10 percent nominal interest with annual compounding.
d) All of the investments above have the same effective annual return.

7. You are interested in investing your money in a bank account. Which of the following
banks provides you with the highest effective rate of interest?
a) Bank 1; 8 percent with monthly compounding.
b) Bank 2; 8 percent with annual compounding.
c) Bank 3; 8 percent with quarterly compounding.
d) Bank 4; 8 percent with daily (365-day) compounding.

8. A shifted uniform series of payments begins in year 3 and ends in year 15. If you use the
P/A factor, the P value you get in first step will be located in year
a) 0
b) 1
c) 2
d) 3

9. A uniform series of payments begins in year one and ends in year 8. If you use the F/A
factor with n = 8, the F value you get will be located in year
a) 0
b) 7
c) 8
d) 9

10. The A/F factor values can be derived by multiplying

a) (A/P) and (F/P) factor values
b) (F/A) and (A/P) factor values
c) (P/F) and (F/A) factor values
d) (A/P) and (P/F) factor values

11. The interest tables in the back of your book are based on
a) simple interest
 b) compound interest
c) regular interest
d) banking interest

12. A series of equal payments begins in year 1 and ends in year n. The present worth of the
machine is represented by which of the following equations
( )
a) 𝑃 = 𝐴 ( )
( )
b) 𝐹 = 𝐴
(𝟏 𝒊)𝒏 𝟏
c) 𝑷 = 𝑨
𝒊(𝟏 𝒊)𝒏
d) None of the above

13. The amount of money a person must deposit 3 years from now in order to be able to
withdraw $10,000 per year for 10 years beginning 15 years from now at an interest rate of
11% per year is closest to:
a) P = 10,000(P/A,11%,10)(P/F,11%12)
b) P = 10,000(P/A,11%,10)(P/F,11%11)
c) P = 10,000(P/A,11%,11)(P/F,11%12)
d) P = 10,000(P/A,11%,11)(P/F,11%11)

14. You have just graduated from college and plan to begin a retirement fund. It is your desire
to withdraw money every year for 30 years starting 25 years from now. The retirement fund
earns 6% interest. What uniform annual amount will you be able to withdraw when you
retire in 25 years if you deposit $1,000 per year in years 1 thru 20 and nothing thereafter?
a) A = 1000(F/A,6%,20)(F/P,6%,5)(A/P,6%,30)
b) A = 1000(F/A,6%,21)(F/P,6%,5)(A/P,6%,30)
c) A = 1000(F/A,6%,21)(F/P,6%,4)(A/P,6%,30)
d) A = 1000(F/A,6%,20)(F/P,6%,4)(A/P,6%,30)

15. How much would be in an account 10 years from now if a company deposits $10,000 now
and $1000 every 6 months thru year 7. Assume the account earned interest at a rate of 10%
per year compounded quarterly?
a) F= 10,000(F/P,5%,20) + 1000(F/A,5%,14)(F/P,5%,12)
b) F= 10,000(F/P,5.06%,20) + 1000(F/A,5.06%,14)(F/P,5.06%,6)
c) F= 10,000(F/P,10.38%,10) + 1000(F/A,10.38%,7)(F/P,10.38%,6)
d) F= 10,000(F/P,2.5%,40) + 1000(F/A,2.5%,28)(F/P,2.5%,24)

16. Find the future worth in year 10 for a cash flow of $5,000 in year 4 if the interest rate is
10% per year compounded quarterly.
a) F = 5000(F/P,2.5%,24)
b) F = 5000(F/P,5%,12)
c) F = 5000(F/P,10%,6)
d) All of the above
17. For an interest rate of i per month, then
×
a) 𝐸𝐴𝑅 = 1 + −1

b) 𝐸𝐴𝑅 = 1 + −1
𝒊×𝟏𝟐 𝟏𝟐
c) 𝑬𝑨𝑹 = 𝟏 + −𝟏
𝟏𝟐
d) None of the above

18. An interest rate of a nominal 16% per year compounded quarterly is the same as
a) An effective 8% per semiannual period
b) 4% per quarter
c) 15.65% per year
d) Answers (a) and (b)

19. For an interest rate of 0.2% per month, the effective interest rate per six months is closest
to:
a) 1.2%
b) 1.203%
c) 1.206%
d) Over 1.207%

20. A manufacturing company expects to spend $50,000 for a certain machine 4 years from
now. At an interest rate of 12% per year compounded quarterly, the present worth of the
machine is represented by which of the following equations:
a) P = 50,000 (P/F, 3%, 16)
b) P = 50,000 (P/F, eff i/6 mos, 8)
c) P = 50,000 (P/F, eff i/yr, 4)
d) Any of the above