Question 1

Your girlfriend just won the Florida lottery.She has the choice of $10,800,000 today or a 20-year annuity of $1,050,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A)   8.71%
B)   7.60%
C)   5.69%
D)   7.38%
E)   6.57%F) A) and B)
G) A) and C)

Question 2

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The present value of a 3-year,$150 ordinary annuity will exceed the present value of a 3-year,$150 annuity due.
B)   If a loan has a nominal annual rate of 8%,then the effective rate will never be less 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) B) and D)
G) B) and E)

Question 4

Five years ago,Weed Go Inc.earned $1.50 per share.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS) over the 5-year period?

Accepted Answer

A)   16.36%
B)   19.31%
C)   14.07%
D)   16.69%
E)   18.49%F) C) and D)
G) A) and C)

Question 5

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

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

Question 6

Suppose you are buying your first condo for $180,000,and you will make a $15,000 down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Accepted Answer

A)   $792.61
B)   $886.48
C)   $1,251.49
D)   $855.19
E)   $1,042.91F) None of the above
G) B) and E)

Question 7

​Suppose you just won the state lottery,and you have a choice between receiving $3,025,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A)   ​5.62%
B)   5.35%
C)   3.95%
D)   ​6.65%
E)   ​6.34%F) B) and D)
G) A) and B)

Question 8

Your bank offers to lend you $90,100 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?

Accepted Answer

A)   $5,713.81
B)   $6,428.03
C)   $6,785.15
D)   $7,142.26
E)   $8,213.60F) A) and B)
G) C) and E)

Question 9

You have a chance to buy an annuity that pays $24,000 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?

Accepted Answer

A)   $110,100.62
B)   $128,817.72
C)   $131,019.73
D)   $114,504.64
E)   $94,686.53F) A) and B)
G) C) and D)

Question 10

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 11

Your Aunt Ruth has $340,000 invested at 6.5%,and she plans to retire.She wants to withdraw $40,000 at the beginning of each year,starting immediately.How many years will it take to exhaust her funds,i.e. ,run the account down to zero?

Accepted Answer

A)   13.59
B)   10.45
C)   13.71
D)   13.01
E)   11.61F) None of the above
G) D) and E)

Question 12

What's the future value of $4,500 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Accepted Answer

A)   $5,321.91
B)   $6,047.62
C)   $4,777.62
D)   $4,959.05
E)   $4,656.67F) A) and B)
G) None of the above

Question 13

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?

Accepted Answer

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

Question 14

You want to quit your job and return to school for an MBA degree 3 years from now,and you plan to save $5,600 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?

Accepted Answer

A)   $18,608.56
B)   $21,772.01
C)   $16,747.70
D)   $15,259.02
E)   $22,516.35F) All of the above
G) C) and D)

Question 15

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)   Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments) .
B)   Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments) .
C)   Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments) .
D)   Investment D pays $2,500 at the end of 10 years (just one payment) .
E)   Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments) .F) A) and C)
G) C) and E)

Question 16

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 3.1%,how much is the bond worth today?

Accepted Answer

A)   $736.91
B)   $817.97
C)   $869.55
D)   $840.08
E)   $714.80F) B) and E)
G) A) and B)

Question 17

You inherited an oil well that will pay you $26,000 per year for 25 years,with the first payment being made today.If you think a fair return on the well is 7.5%,how much should you ask for it if you decide to sell it?

Accepted Answer

A)   $352,059.56
B)   $295,979.28
C)   $320,903.85
D)   $311,557.14
E)   $339,597.28F) A) and D)
G) D) and E)

Question 18

You just inherited some money,and a broker offers to sell you an annuity that pays $16,800 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Accepted Answer

A)   $180,054.02
B)   $236,582.60
C)   $209,365.13
D)   $244,957.21
E)   $255,425.46F) B) and C)
G) C) and D)

Question 19

What's the present value of $17,500 discounted back 5 years if the appropriate interest rate is 4.5%,compounded semiannually?

Accepted Answer

A)   $14,008.93
B)   $14,569.28
C)   $14,149.02
D)   $11,907.59
E)   $11,207.14F) A) and E)
G) A) and D)

Question 20

All other things held constant,the present value of a given annual annuity decreases as the number of periods per year increases.

Accepted Answer

A) True 
 B)False

Exam 5: Time Value of Money

What's the future value of $4,500 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Correct AnswerverifiedShow Answer

All other things held constant,the present value of a given annual annuity decreases as the number of periods per year increases.

Correct AnswerverifiedShow Answer

What's the present value of $17,500 discounted back 5 years if the appropriate interest rate is 4.5%,compounded semiannually?

Correct AnswerverifiedShow Answer

You inherited an oil well that will pay you $26,000 per year for 25 years,with the first payment being made today.If you think a fair return on the well is 7.5%,how much should you ask for it if you decide to sell it?

Correct AnswerverifiedShow Answer

​Suppose you just won the state lottery,and you have a choice between receiving $3,025,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Correct AnswerverifiedShow Answer

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Correct AnswerverifiedShow Answer

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Correct AnswerverifiedShow Answer

Your girlfriend just won the Florida lottery.She has the choice of $10,800,000 today or a 20-year annuity of $1,050,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Correct AnswerverifiedShow Answer

You have a chance to buy an annuity that pays $24,000 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?

Correct AnswerverifiedShow Answer

Your Aunt Ruth has $340,000 invested at 6.5%,and she plans to retire.She wants to withdraw $40,000 at the beginning of each year,starting immediately.How many years will it take to exhaust her funds,i.e. ,run the account down to zero?

Correct AnswerverifiedShow Answer

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Suppose you are buying your first condo for $180,000,and you will make a $15,000 down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Five years ago,Weed Go Inc.earned $1.50 per share.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS) over the 5-year period?

Correct AnswerverifiedShow Answer

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 3.1%,how much is the bond worth today?

Correct AnswerverifiedShow Answer

You just inherited some money,and a broker offers to sell you an annuity that pays $16,800 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Correct AnswerverifiedShow Answer

You want to quit your job and return to school for an MBA degree 3 years from now,and you plan to save $5,600 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?

Correct AnswerverifiedShow Answer

Your bank offers to lend you $90,100 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?

Correct AnswerverifiedShow Answer

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct AnswerverifiedShow Answer

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Suppose you just won the state lottery,and you have a choice between receiving $3,025,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Correct Answer
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