FINA 3770 Chap. 5 UNT

An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%? A) $885 B) $735 C) $864 D) $900

C) $864

What is the present value of $11,463 to be received 7 years from today? Assume a discount rate of 3.5% compounded annually and round to the nearest $1. A) $6,508 B) $7,210 C) $9,010 D) $5,790

C) $9,010

At what rate must $287.50 be compounded annually for it to grow to $650.01 in 14 years? A) 7 percent B) 8 percent C) 6 percent D) 5 percent

C) 6 percent

A return of 12% compounded annually is the same as a return of 1% per month.

False

If the interest rate is positive, then the present value of an annuity due will be less than the present value of an ordinary annuity.

False

The present value of a $100 perpetuity discounted at 5% is $5,000.

False

When solving time value of money problems on a financial calculator, you must select the "end mode" when you enter the final years cash flow.

False

Charlie wants to retire in 15 years, and he wants to have an annuity of $50,000 a year for 20 years after retirement. Charlie wants to receive the first annuity payment the day he retires. Using an interest rate of 8%, how much must Charlie invest today in order to have his retirement annuity (round to nearest $10). A) $167,130 B) $256,890 C) $315,240 D) $200,450

A) $167,130

You are thinking of buying a craft emporium. It is expected to generate cash flows of $30,000 per year in years 1 through 5, and $40,000 per year in years 6 through 10. If the appropriate discount rate is 8%, what amount are you willing to pay for the emporium? A) $228,476 B) $215,048 C) $135,288 D) $167,943

A) $228,476

You discover an antique in your attic that you purchased at an estate sale 10 years ago for $400. You auction it on eBay and receive $8,000 for your item. What annual rate of return did you earn? A) 34.93% B) 30.47% C) 200.00% D) 20.00%

A) 34.93%

To compound $100 quarterly for 20 years at 8%, we must use A) 80 periods at 2%. B) 5 periods at 12%. C) 10 periods at 4%. D) 40 periods at 4%.

A) 80 periods at 2%

A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives. Which of the following statements is MOST correct? A) The higher the interest rate, the more likely the man will prefer the $500,000 lump sum. B) If the man is certain the company will not default on its future payments, he should select the $50,000 per year. C) Because of the time value of money, the man will always be better off taking the $500,000 up front. D) If the man expects to live more than 10 years, then he will prefer the annuity.

A) The higher the interest rate, the more likely the man will prefer the $500,000 lump sum.

When using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money "leaving your hands."

True

A financial analyst tells you that investing in stocks will allow you to double your money in 7 years. What annual rate of return is the analyst assuming you can earn? A) 9.87% B) 10.41% C) 8.76% D) 10.01%

B) 10.41%

You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The annual interest rate is closest to A) 24 percent. B) 18 percent. C) 12 percent. D) 1.5 percent.

B) 18 percent.

Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What annual rate of interest has he earned over the 10 years? A) 9.10% B) 7.18% C) 10.0% D) 6.45%

B) 7.18%

Which of the following investments has the highest effective annual return (EAR)? (Assume that all CDs are of equal risk.) A) a bank CD that pays 7.10 percent compounded monthly B) a bank CD that pays 7.25 percent compounded semiannually C) a bank CD that pays 7.00 percent interest compounded daily D) a bank CD that pays 7.30 percent annually

B) a bank CD that pays 7.25 percent compounded semiannually

You have contracted to buy a house for $250,000, paying $30,000 down and taking out a fully amortizing loan for the balance, at a 5.7% annual rate for 30 years. What will your monthly payment be if they make equal monthly installments over the next 30 years (to the nearest dollar)? A) $1,189 B) $1,035 C) $1,277 D) $1,123

C) $1,277

You are going to pay $100 into an account at the beginning of each of the next 40 years. At the beginning of the 41st year you buy a 30 year annuity whose first payment comes at the end of the 41st year (the accounts earn 12%). How much will you receive at the end of the 41st year (i.e. the first annuity payment). Round to nearest $100. A) $93,000 B) $11,400 C) $10,700 D) $7,800

C) $10,700

Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded daily. How much will be in the account on your 50th birthday? A) $159,795 B) $162,183 C) $164,631 D) $163,823

C) $164,631

You believe in the power of compounding and decide to save $1 per day by avoiding the purchase of a soda. You deposit the $1 at the end of each day in a bank account that pays 8% interest compounded daily. You are going to take a trip in 20 years with the money you have accumulated. How much money will you have in 20 years, assuming 365 days per year? A) $22,456 B) $7,500 C) $18,032 D) $12,438

C) $18,032

A deferred annuity will pay you $500 at the end of each year for 10 years, however the first payment will not be made until three years from today (payments will be made at the end of years 3 through 12). What amount will you have to deposit today to fund this deferred annuity? Use an 8% discount rate and round your answer to the nearest $100. A) $2,400 B) $3,400 C) $2,900 D) $2,200

C) $2,900

You estimate you'll need $200,000 per year for 25 years starting on your 65th birthday to live on during your retirement. Today is your 50th birthday and you want to make equal deposits into an account paying 9% interest per year, the first deposit today and the last deposit on your 64th birthday. How much must each deposit be (rounded to the nearest $10)? A) $49,380 B) $99,920 C) $61,385 D) $85,840

C) $61,385

You are ready to retire. A glance at your 401(k) statement indicates that you have $750,000. If the funds remain in an account earning 9.0%, how much could you withdraw at the beginning of each year for the next 25 years? A) $55,620 B) $2,500 C) $70,050 D) $35,830

C) $70,050

Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly. Credit Onion is offering you a loan where payments are to be made semiannually; the rate on the loan is also 10%. Local Bank down the street is also offering a loan at 10% where the payments are made quarterly. Which loan has the lowest annual cost? A) Local Bank's loan B) Last National Bank's loan C) Credit Onion's loan D) All of the loans will have the same annual cost.

C) Credit Onion's loan

Assuming two investments have equal lives, a high discount rate tends to favor A) the investment with even cash flow. B) neither investment since they have equal lives. C) the investment with large cash flow early. D) the investment with large cash flow late.

C) the investment with large cash flow early.

You want $20,000 in 5 years to take your spouse on a second honeymoon. Your investment account earns 7% compounded semiannually. How much money must you put in the investment account today? (round to the nearest $1). A) $15,985 B) $13,349 C) $12,367 D) $14,178

D) $14,178

You are going to pay $800 into an account at the beginning of each of 20 years. The account will then be left to compound for an additional 20 years until the end of year 40, when it will turn into a perpetuity. You will receive the first payment from the perpetuity at the end of the 41st year. If the account pays 14%, how much will you receive from the perpetuity each year (round to nearest $1,000)? A) $170,000 B) $140,000 C) $150,000 D) $160,000

D) $160,000

Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded quarterly. How much will be in the account on your 50th birthday? A) $159,795 B) $164,631 C) $163,832 D) $162,183

D) $162,183

The present value of $1,000 to be received in 5 years is ________ if the discount rate is 12.78%. A) $368 B) $687 C) $494 D) $548

D) $548

If you put $2,000 in a savings account that yields 8% compounded semiannually, how much money will you have in the account in 20 years (round to nearest $10)? A) $8,342 B) $6,789 C) $9,972 D) $9,602

D) $9,602

Which of the following conclusions would be true if you earn a higher rate of return on your investments? A) Your rate of return would not have any effect on the present value of any sum to be received in the future. B) The greater the present value would be for any lump sum you would receive in the future. C) The greater the present value would be for any annuity you would receive in the future. D) The lower the present value would be for any lump sum you would receive in the future.

D) The lower the present value would be for any lump sum you would receive in the future.

A certificate of deposit that pays 9.8% compounded monthly is better than a similar certificate of deposit that pays 10% compounded only once per year.

True

If the interest rate is positive, then the future value of an annuity due will be greater than the future value of an ordinary annuity.

True

If you only earned interest on your initial investment, and not on previously earned interest, it would be called simple interest.

True

It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year.

True

The same underlying formula is used for computing both the future value and present value.

True