Chapter 5

You want to purchase a new condominium that costs $325,000. Your plan is to pay 20 percent down in cash and finance the balance over 15 years at 4.1 percent. What will be your monthly mortgage payment including principal and interest? $1,936.24 $2,185.56 $2,560.39 $2,420.30 $2,258.34

$1,936.24

Krystal plans to save $500 at the end of Year 1, $600 at the end of Year 2, and $800 at the end of Year 3. If she earns 2.8 percent on her savings, how much money will she have saved at the end of Year 3? $1,676.51 $1,714.97 $1,945.19 $1,785.66 $1,878.69

$1,945.19

Kristina started setting aside funds three years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved? $11,542.10 $12,388.19 $15,209.80 $15,366.67 $16,023.13

$11,542.10 FV = $900 × {[1 + (.048 / 4)]12 - 1} / (.048 / 4) = $11,542.10

Bob can afford car payments of $365 per month for 5 years. If the interest rate is 4.9 percent, how much money can he afford to borrow? $7,026,73 $15,880.60 $19,819.16 $19,388.64 $21,247.83

$19,388.64

Max's Kennels spent $220,000 to refurbish its current facility. The firm borrowed 60 percent of the refurbishment cost at 5.95 percent interest for six years. What is the amount of each monthly payment? $1,985.25 $2,205.36 $2,356.23 $2,184.51 $1,895.32

$2,184.51

Julie is borrowing $14,950 to purchase a car. The loan terms are 48 months at 6.95 percent interest, compounded monthly. How much interest, rounded to the nearest dollar, will she pay on this loan if she pays the loan as agreed? $2,338 $2,414 $1,959 $1,806 $2,217

$2,217 PV: 14,950 FV: N: 48 I/Y: .579 {6.95/12} PMT: CPT (357.65) x 48 =17,167.18 17,167.18 - 14,950.00 =2,217.18 (total interest paid)

JK's is borrowing $132,000 for three years at an APR of 7.6 percent. The loan calls for the principal balance to be reduced by equal amounts over the life of the loan. Interest is to be paid in full each year. The payments are to be made annually at the end of each year. How much will be paid in interest over the life of this loan? $10,032 $30,096 $12,840 $20,064 $18,667

$20,064 Year 1 : Beginning Balance $132,000 Total Payment $54,032 Interest Paid $10,032 Principal Paid $44,000 Ending Balance $44,000 Year 2 : Beginning Balance $88,000 Total Payment $50,688 Interest Paid $6,688 Principal Paid $44,000 Ending Balance $44,000 Year 3 : Beginning Balance $44,000 Total Payment $47,344 Interest Paid $3,344 Principal Paid $44,000 Ending Balance $0 Total of Interest Paid $20,064 $10,032 + $6,688 + $3,344 = $20,064

Which one of the following is an ordinary annuity, but not a perpetuity? $75 paid at the beginning of each monthly period for 50 years $15 paid at the end of each monthly period for an infinite period of time $40 paid quarterly for 5 years, starting today $50 paid every year for ten years, starting today $25 paid weekly for 1 year, starting one week from today

$25 paid weekly for 1 year, starting one week from today

A preferred stock pays an annual dividend of $2.95. What is one share of this stock worth to you today if you require a rate of return of 8.2 percent? $51.21 $33.03 $38.00 $35.98 $33.49

$35.98 P = $2.95/.082 = $35.98

Oakville Trucking just signed a $5.0 million contract. The contract calls for a payment of $1.25 million today, $1.75 million one year from today, and $2.0 million two years from today. What is this contract worth today at a discount rate of 7.25 percent? $4,923,275.74 $4,620,444.63 $3,247,628.58 $4.341,851.15 $4,342,468.17

$4,620,444.63

A preferred stock offers a rate of return of 5.45 percent and sells for $78.20? What is the annual dividend amount? $4.26 $4.09 $3.53 $4.50 $3.87

$4.26 C = .0545 ×$78.20 = $4.26

Moonlight Industries just signed a sales contract with a new customer. JK will receive annual payments in the amount of $50,000, $96,000, $123,000, and $138,000 at the end of Years 1 to 4, respectively. What is this contract worth at the end of Year 4 if the firm earns 3.75 percent on its savings? $443,571.88 $348,457.72 $431,417.66 $412,264.53 $424,786.07

$424,786.07 FV = ($50,000 ×1.03753 ) + ($96,000 ×1.03752 ) + ($123,000 ×1.03751 ) + $138,000 = $424,786.07

An amortized, 3-year loan has annual payments and an effective annual rate of 14.56 percent. What is the APR? 13.09 percent 13.46 percent 13.90 percent 14.56 percent 14.82 percent

14.56 percent The APR equals the EAR when interest rate compounding is annual.

What is the effective annual rate of 14.9 percent compounded quarterly? 14.48 percent 14.67 percent 15.23 percent 15.54 percent 15.75 percent

15.75 percent EAR = [1 + (.149/4)]^4- 1 = .1575, or 15.75 percent

Walker's charges a daily rate of .049 percent on its store credit cards. What interest rate is the company required by law to report to potential customers? Assume each quarter has exactly 91.25 days. 15.98 percent 17.89 percent 16.67 percent 17.45 percent 16.65 percent

17.89 percent APR = .049 percent ×365 = .1789, or 17.89 percent

You have just won the lottery! You can either receive $183,555 per year for 20 years or $2,300,000 as a lump sum payment today. What is the interest rate on the annuity option? 4.94 percent 3.98 percent 5.50 percent 4.75 percent 4.25 percent

4.94 percent 20:N, 2,300,000:PV, -183,555:PMT, 0:FV I/Y: 4.94

RB Farworth will pay you $2,500 a year for 15 years in exchange for $25,000 today. What interest rate will you earn on this annuity? 6.23 percent 5.56 percent 7.46 percent 4.23 percent 4.56 percent

5.56 percent 15:N, 25,000:PV, -2,500:PMT, 0:FV I/Y=5.56

Which one of the following has the highest effective annual rate? 6 percent compounded annually 6 percent compounded semiannually 6 percent compounded quarterly 6 percent compounded daily 6 percent compounded every 2 years

6 percent compounded daily

Lionheart Trucking recently purchased a new truck costing $178,000. The firm financed this purchase at 6.6 percent interest with monthly payments of $2,400. How many years will it take the firm to pay off this debt? 8.95 years 6.89 years 9.26 years 8.83 years 7.96 years

7.96 years

What is the effective annual rate of 8.25 percent compounded quarterly? 8.25 percent 8.49 percent 8.38 percent 8.51 percent 8.56 percent

8.51 percent EAR = [1 + (.0825 /4)]^4- 1 = .0851, or 8.51 percent

Which one of the following qualifies as an annuity payment? Weekly grocery bill Clothing purchases Car repairs Auto loan payment Medical bills

Auto loan payment

Which one of the following is the annuity present value formula? C × ({1 − [1 / (1 + r)t]} / r) C × ({1 − [1 / (1 + r)t]} − r) C × ({1 − [r / (1 + r)t]} / r) C × ({1 − [1 / (1 × r)t]} × r) C × ({1 − [r / (1 × r)t]} × r)

C × ({1 − [1 / (1 + r)t]} / r)

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why? Project 1, because the annual cash flows are greater by $4,000 than those of Project 2 Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62 Project 2, because the total cash inflows are $72,000 greater than those of Project 1 Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33 It does not matter as both projects have almost identical present values.

Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33 PV1 = $52,000 ×{1 -[1 / (1 + .15)6]} / .15 = $196,793.10PV2 = $48,000 ×{1 -[1 / (1 + .15)8]} / .15 = $215,391.43Difference = $215,391.43 - 196,793.10 = $18,598.33 Project 2, because the present value of its cash inflows exceeds those of Project 1 by $18,598.33

Which one of the following statements is correct? The APR is equal to the EAR for a loan that charges interest monthly. The EAR is always greater than the APR. The APR on a monthly loan is equal to (1 + monthly interest rate)12 − 1. The APR is the best measure of the actual rate you are paying on a loan. The EAR, rather than the APR, should be used to compare both investment and loan options.

The EAR, rather than the APR, should be used to compare both investment and loan options.

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? The present value of the car is equal to $500 + (36 × $450). The $500 is the present value of the purchase. The car loan is an annuity due. To compute the initial loan amount, you must use a monthly interest rate. The future value of the loan is equal to 36 × $450.

To compute the initial loan amount, you must use a monthly interest rate.

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must: have a one-year term. have a zero percent interest rate. charge interest annually. must be partially amortized with each loan payment. require the accrued interest be paid in full with each monthly payment.

charge interest annually.

Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the: annual percentage rate. simplified rate. quoted rate. stated rate. effective annual rate.

effective annual rate.

Perpetuities have: irregular payments but constant payment periods. equal payments and an infinite life. equal payments and a set number of equal payment periods. less value than comparable annuities. no application in today's world.

equal payments and an infinite life.

Assume all else is equal. When comparing savings accounts, you should select the account that has the: lowest annual percentage rate. highest annual percent rate. highest stated rate. lowest effective annual rate. highest effective annual rate.

highest effective annual rate.