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What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?


A) $1,819
B) $1,915
C) $2,016
D) $2,117
E) $2,223

F) A) and B)
G) None of the above

Correct Answer

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


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

F) B) and D)
G) None of the above

Correct Answer

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How much would $1, growing at 3.5% per year, be worth after 75 years?


A) $12.54
B) $13.20
C) $13.86
D) $14.55
E) $15.28

F) None of the above
G) A) and B)

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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.

F) B) and D)
G) B) and E)

Correct Answer

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The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.

A) True
B) False

Correct Answer

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

A) True
B) False

Correct Answer

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Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on this investment?


A) 6.77%
B) 7.13%
C) 7.50%
D) 7.88%
E) 8.27%

F) C) and D)
G) A) and B)

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A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?


A) The annual payments would be larger if the interest rate were lower.
B) 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.

F) A) and B)
G) B) and C)

Correct Answer

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Which of the following bank accounts has the highest effective annual return?


A) An account that pays 8% nominal interest with monthly compounding.
B) An account that pays 8% nominal interest with annual compounding.
C) An account that pays 7% nominal interest with daily (365-day) compounding.
D) An account that pays 7% nominal interest with monthly compounding.
E) An account that pays 8% nominal interest with daily (365-day) compounding.

F) A) and B)
G) A) and E)

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You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?


A) Bank 1; 6.1% with annual compounding.
B) Bank 2; 6.0% with monthly compounding.
C) Bank 3; 6.0% with annual compounding.
D) Bank 4; 6.0% with quarterly compounding.
E) Bank 5; 6.0% with daily (365-day) compounding.
Multiple Choice: Problems

F) C) and D)
G) B) and E)

Correct Answer

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


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

F) A) and B)
G) A) and C)

Correct Answer

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At a rate of 6.5%, what is the future value of the following cash flow stream?


A) $526.01
B) $553.69
C) $582.83
D) $613.51
E) $645.80

F) A) and B)
G) All of the above

Correct Answer

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Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?


A) $2,404.91
B) $2,531.49
C) $2,658.06
D) $2,790.96
E) $2,930.51

F) C) and E)
G) None of the above

Correct Answer

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Your father's employer was just acquired, and he was given a severance payment of $375,000, which he invested at a 7.5% annual rate. He now plans to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year. How many years will it take to exhaust his funds, i.e., run the account down to zero?


A) 22.50
B) 23.63
C) 24.81
D) 26.05
E) 27.35

F) A) and D)
G) B) and D)

Correct Answer

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Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

A) True
B) False

Correct Answer

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You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?


A) $11,973
B) $12,603
C) $13,267
D) $13,930
E) $14,626

F) B) and C)
G) A) and E)

Correct Answer

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You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?


A) $20,701
B) $21,791
C) $22,938
D) $24,085
E) $25,289

F) None of the above
G) B) and E)

Correct Answer

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Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?


A) $591.09
B) $622.20
C) $654.95
D) $689.42
E) $723.89

F) A) and B)
G) B) and D)

Correct Answer

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Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?


A) $7,531
B) $7,927
C) $8,323
D) $8,740
E) $9,177

F) D) and E)
G) B) and E)

Correct Answer

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

A) True
B) False

Correct Answer

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Showing 101 - 120 of 164

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