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A time line is meaningful even if all cash flows do not occur annually.

A) True
B) False

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What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?


A) $4,750
B) $5,000
C) $5,250
D) $5,513
E) $5,788

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

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Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?


A) $5,178.09
B) $5,436.99
C) $5,708.84
D) $5,994.28
E) $6,294.00

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

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Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?


A) $28,532
B) $29,959
C) $31,457
D) $33,030
E) $34,681

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

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Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?


A) The monthly payments will increase over time.
B) A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment.
C) The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity.
D) The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.
E) Exactly 10% of the first monthly payment represents interest.

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

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Your grandmother just died and left you $100,000 in a trust fund that pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. 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) $24,736
B) $26,038
C) $27,409
D) $28,779
E) $30,218

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

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Which of the following statements is CORRECT?


A) The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
B) If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
C) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
D) The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
E) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

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

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You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?


A) 7.62%
B) 8.00%
C) 8.40%
D) 8.82%
E) 9.26%

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

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You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?


A) $20,993
B) $22,098
C) $23,261
D) $24,424
E) $25,645

F) A) and D)
G) D) and E)

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You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?


A) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
B) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
C) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
D) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.
E) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

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

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Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?


A) 18.58%
B) 19.56%
C) 20.54%
D) 21.57%
E) 22.65%

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

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You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?


A) 39.60
B) 44.00
C) 48.40
D) 53.24
E) 58.57

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

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What is the present value of the following cash flow stream at a rate of 12.0%?


A) $ 9,699
B) $10,210
C) $10,747
D) $11,284
E) $11,849

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

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Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?


A) $28,843.38
B) $30,361.46
C) $31,959.43
D) $33,641.50
E) $35,323.58

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

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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 smaller the percentage of the payment that will be a repayment of principal.

A) True
B) False

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

Correct Answer

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Which of the following statements is CORRECT?


A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C) 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.

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

Correct Answer

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Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate.

A) True
B) False

Correct Answer

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Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?


A) $271.74
B) $286.05
C) $301.10
D) $316.16
E) $331.96

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

Correct Answer

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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%.

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

Correct Answer

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