FIN CH 5

45. You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment? A. $1,736.25 B. $1,833.33 C. $1,908.16 D. $2,221.43 E. $2,406.11 Amount financed = 0.80 × $329,000 = $263,200

A. $1,736.25

63. Janice plans to save $75 a month, starting today, for 20 years. Kate plans to save $80 a month for 20 years, starting one month from today. Both Janice and Kate expect to earn an average return of 5.5 percent on their savings. At the end of the 20 years, Kate will have approximately _____ more than Janice. A. $2,028.39 B. $2,066.67 C. $2,091.50 D. $2,178.14 E. $2,189.12 Difference $34,850.19 - $32,821.80 = $2,028.39

A. $2,028.39

47. Kurt wants to have $25,000 in an investment account four years from now. The account will pay 0.2 percent interest per month. If he saves money every month, starting one month from now, how much will he have to save each month to reach his goal? A. $496.75 B. $497.03 C. $497.75 D. $501.03 E. $502.14

A. $496.75

42. Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow? A. $9,672.48 B. $9,734.95 C. $9,899.60 D. $10,022.15 E. $10,422.09

A. $9,672.48

31. Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have? A. Amortized B. Blended discount C. Interest-only D. Pure discount E. Complex Refer to Section 5.4.

A. Amortized

32. Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have? A. Amortized B. Complex C. Pure discount D. Lump sum E. Interest-only Refer to Section 5.4.

A. Amortized

11. Which one of the following is the annuity present value formula? A. C × {{1 - [1/(1 + r)t]}/r} B. C × {1 - [1/(1 + r)t]} - r C. C × {1 - [r/(1 + r)t]}/r D. C × {{1 - [1/(1 × r)t]} × r} E. C × {1 - [r/(1 × r)t]} × r Refer to Section 5.2.

A. C × {{1 - [1/(1 + r)t]}/r}

4. A perpetuity in Canada is frequently referred to as which one of the following? A. Consul B. Infinity C. Forever cash D. Dowry E. Forevermore Refer to Section 5.2.

A. Consul

30. Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have? A. Interest-only B. Pure discount C. Compound D. Amortized E. Complex Refer to Section 5.4.

A. Interest-only

33. You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain? A. Interest-only B. Amortized C. Perpetual D. Pure discount E. Lump sum Refer to Section 5.4.

A. Interest-only

12. Which one of the following is an example of a perpetuity? A. Trust income of $1,200 a year forever B. Retirement pay of $2,200 a month for 20 years C. Lottery winnings of $1,000 a month for life D. Car payment of $260 a month for 60 months E. Apartment rent payment of $800 a month for one year Refer to Section 5.2.

A. Trust income of $1,200 a year forever

7. Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the: A. annual percentage rate. B. compounded rate. C. effective annual rate. D. perpetual rate. E. simple rate. Refer to Section 5.3.

A. annual percentage rate.

46. Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting 1 year from today. What is the amount of each payment? A. $9,511.08 B. $10,462.15 C. $10,754.40 D. $11,013.20 E. $12,208.19

B. $10,462.15

37. Doris's Fashions has just signed a $2.2 million contract. The contract calls for a payment of $0.6 million today, $0.8 million one year from today, and $0.8 million two years from today. What is this contract worth today if the firm can earn 8.2 percent on its money? A. $2,038,616.67 B. $2,022,709.37 C. $2,108,001.32 D. $2,124,339.07 E. $2,202,840.91 PV = $0.6m + ($0.8m/1.082) + ($0.8m/1.0822) = $2,022,709.37

B. $2,022,709.37

44. Webster Mining is considering the purchase of a new sorting machine. The quote consists of a quarterly payment of $29,600 for seven years at 8 percent interest. What is the purchase price of the equipment? A. $621,380.92 B. $629,925.66 C. $687,418.22 D. $774,311.28 E. $836,267.35

B. $629,925.66

14. Which one of the following statements concerning annuities is correct? A. The present value of an annuity is equal to the cash flow amount divided by the discount rate. B. An annuity due has payments that occur at the beginning of each time period. C. The future value of an annuity decreases as the interest rate increases. D. If unspecified, you should assume an annuity is an annuity due. E. An annuity is an unending stream of equal payments occurring at equal intervals of time. Refer to Section 5.2.

B. An annuity due has payments that occur at the beginning of each time period.

1. Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms? A. Perpetuity B. Annuity C. Consol D. Lump sum E. Factor Refer to Section 5.2.

B. Annuity

2. Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments? A. Ordinary annuity B. Annuity due C. Consol D. Ordinary perpetuity E. Perpetuity due Refer to Section 5.2.

B. Annuity due

21. Which one of the following cannot be computed? A. Future value of an ordinary annuity B. Future value of a perpetuity C. Present value of a perpetuity D. Present value of an annuity due E. Present value of an ordinary annuity Refer to Section 5.2.

B. Future value of a perpetuity

17. Which of the following will increase the present value of an annuity, all else held constant?I. Increase in the number of paymentsII. Increase in the interest rateIII. Decrease in the interest rateIV. Decrease in the payment amount A. I and II only B. I and III only C. II and IV only D. I, II, and IV only E. I, III, and IV only Refer to Section 5.2.

B. I and III only

16. Which of the following characteristics apply to a perpetuity?I. Constant cash flow dollar amountII. Unequal cash flow dollar amountIII. Limited time periodIV. Infinite time period A. I and III only B. I and IV only C. II and III only D. II and IV only E. I plus either III or IV Refer to Section 5.2.

B. I and IV only

28. Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n): A. interest-only loan. B. pure discount loan. C. quoted rate loan. D. compound interest loan. E. amortized loan. Refer to Section 5.4.

B. pure discount loan.

43. The manager of Gloria's Boutique has approved Carla's application for credit. The maximum payment that has been approved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carla can make given this credit approval? A. $1,288.90 B. $1,300.00 C. $1,331.42 D. $1,350.00 E. $1,428.46

C. $1,331.42

34. Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3? A. $2,200.00 B. $2,238.47 C. $2,309.80 D. $2,309.16 E. $2,402.19 FV = ($500 × 1.062) + ($800 × 1.061) + $900 = $2,309.80

C. $2,309.80

38. Capstone Investments is considering a project that will produce cash inflows of $11,000 in year 1, $24,000 in year 2, and $36,000 in year 3. What is the present value of these cash inflows if the company assigns the project a discount rate of 12 percent? A. $41,997.60 B. $46,564.28 C. $54,578.17 D. $54,868.15 E. $63,494.54 PV = ($11,000/1.12) + ($24,000/1.122) + ($36,000/1.123) = $54,578.17

C. $54,578.17

22. You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options? A. To be the perpetuity, the payments must occur on the first day of each monthly period. B. The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years. C. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due. D. The future value of all three investments must be equal. E. The present value of all three investments must be equal. Refer to Section 5.2.

C. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.

27. A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must: A. have a one-year term. B. have a zero percent interest rate. C. charge interest annually. D. must be an interest-only loan. E. require the accrued interest be paid in full with each monthly payment. Refer to Section 5.3.

C. charge interest annually.

48. Katie's Dinor spent $84,000 to refurbish its current facility. The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for five years. What is the amount of each monthly payment? A. $1,108.91 B. $1,282.16 C. $1,333.33 D. $1,401.49 E. $1,487.06 Amount borrowed = 0.80 × $84,000 = $67,200

D. $1,401.49

40. Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from today. How much should she pay for this investment if she wishes to earn a 13 percent rate of return? A. $17,899.08 B. $18,023.88 C. $20,186.75 D. $22,113.05 E. $23,749.24

D. $22,113.05

49. Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months? A. $425.15 B. $428.67 C. $431.09 D. $443.13 E. $462.25

D. $443.13

62. The Food Store is planning a major expansion for four years from today. In preparation for this, the company is setting aside $35,000 each quarter, starting today, for the next four years. How much money will the firm have when it is ready to expand if it can earn an average of 6.25 percent on its savings? A. $528,409.29 B. $540,288.16 C. $610,411.20 D. $640,516.63 E. $662,009.14

D. $640,516.63

23. Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semiannually C. 6 percent compounded quarterly D. 6 percent compounded monthly E. All the other answers have the same effective annual rate. Refer to Section 5.3.

D. 6 percent compounded monthly

10. Which one of the following statements is true concerning annuities? A. All else equal, an ordinary annuity is more valuable than an annuity due. B. All else equal, a decrease in the number of payments increases the future value of an annuity due. C. An annuity with payments at the beginning of each period is called an ordinary annuity. D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. E. All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity. Refer to Section 5.2.

D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

18. You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information? A. The present value of Annuity A is equal to the present value of Annuity B. B. Annuity B will pay one more payment than Annuity A will. C. The future value of Annuity A is greater than the future value of Annuity B. D. Annuity B has both a higher present value and a higher future value than Annuity A. E. Annuity A has a higher future value but a lower present value than Annuity B. Refer to Section 5.2.

D. Annuity B has both a higher present value and a higher future value than Annuity A.

15. Which one of the following qualifies as an annuity? A. Weekly grocery bill B. Clothing purchases C. Car repairs D. Auto loan payment E. Medical bills Refer to Section 5.2.

D. Auto loan payment

13. Which one of the following can be classified as an annuity but not as a perpetuity? A. Increasing monthly payments forever B. Increasing quarterly payments for six years C. Unequal payments each year for nine years D. Equal annual payments for life E. Equal weekly payments forever Refer to Section 5.2.

D. Equal annual payments for life

3. The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms? A. Ordinary annuity B. Annuity due C. Amortized payment D. Perpetuity E. Continuation Refer to Section 5.2.

D. Perpetuity

39. 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? A. Project 1, because the annual cash flows are greater than those of Project 2 B. Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62 C. Project 2, because the total cash inflows are $70,000 greater than those of Project 1 D. Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33 E. It does not matter as both projects have almost identical present values.

D. Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

9. Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 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? A. The present value of the car is equal to $500 + (36 × $450). B. The $500 is the present value of the purchase. C. The car loan is an annuity due. D. To compute the initial loan amount, you must use a monthly interest rate. E. The future value of the loan is equal to 36 × $450. Refer to Section 5.2.

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

5. The stated interest rate is the interest rate expressed: A. as if it were compounded one time per year. B. as the quoted rate compounded by 12 periods per year. C. in terms of the rate charged per day. D. in terms of the interest payment made each period. E. in terms of an effective rate. Refer to Section 5.3.

D. in terms of the interest payment made each period.

41. How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent. A. $176,800.16 B. $180,419.81 C. $181,533.33 D. $185,160.98 E. $187,391.34

E. $187,391.34

50. Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously delinquent so your firm has offered to arrange a payment plan in the hopes that it might at least collect a portion of this receivable. Your firm's offer consists of weekly payments for one year at an interest rate of 3 percent. What is the amount of each payment? A. $2,229.90 B. $2,318.11 C. $2,409.18 D. $2,599.04 E. $2,706.33

E. $2,706.33

20. Which one of the following is an ordinary annuity, but not a perpetuity? A. $75 paid at the beginning of each monthly period for 50 years B. $15 paid at the end of each monthly period for an infinite period of time C. $40 paid quarterly for 5 years, starting today D. $50 paid every year for ten years, starting today E. $25 paid weekly for 1 year, starting one week from today Refer to Section 5.2.

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

8. Which one of the following will decrease the present value of an annuity? A. Increase in the annuity's future value B. Increase in the payment amount C. Increase in the time period D. Decrease in the discount rate E. Decrease in the annuity payment Refer to Section 5.2.

E. Decrease in the annuity payment

29. Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this? A. Principal-only B. Amortized C. Interest-only D. Compound E. Pure discount Refer to Section 5.4.

E. Pure discount

26. Which one of the following statements is correct? A. The APR is equal to the EAR for a loan that charges interest monthly. B. The EAR is always greater than the APR. C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1. D. The APR is the best measure of the actual rate you are paying on a loan. E. The EAR, rather than the APR, should be used to compare both investment and loan options. Refer to Section 5.3.

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

19. Which one of the following features distinguishes an ordinary annuity from an annuity due? A. Number of equal payments B. Amount of each payment C. Frequency of the payments D. Annuity interest rate E. Timing of the annuity payments Refer to Section 5.2.

E. Timing of the annuity payments

6. Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the: A. annual percentage rate. B. compounded rate. C. quoted rate. D. stated rate. E. effective annual rate. Refer to Section 5.3.

E. effective annual rate.

24. When comparing savings accounts, you should select the account that has the: A. lowest annual percentage rate. B. highest annual percent rate. C. highest stated rate. D. lowest effective annual rate. E. highest effective annual rate. Refer to Section 5.3.

E. highest effective annual rate.

25. A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: A. will be less than 12.9 percent. B. can either be less than or equal to 12.9 percent. C. is 12.9 percent. D. can either be greater than or equal to 12.9 percent. E. will be greater than 12.9 percent. Refer to Section 5.3.

E. will be greater than 12.9 percent.