FINC MANAGEMENT

9) A perpetuity is defined as: A) unending equal payments paid at equal time intervals. B) unending equal payments paid at either equal or unequal time intervals. C) varying amounts that are paid at even intervals forever. D) payments of equal amounts that are paid irregularly but indefinitely. E) a limited number of equal payments paid in even time increments.

A) unending equal payments paid at equal time intervals.

Kris borrowed $25,000 with an interest-only, 4-year loan at 4.75 percent. What is the amount of the loan payment in Year 4 if payments are made annually?

Annual interest payments = 25000 x .0475 = $1,187.50 Year 4 = $25,000 + $1,187.50 = $26,187.50

Today, you are retiring. You have a total of $289,416 in your retirement savings. You want to withdraw $2,500 at the beginning of every month, starting today and expect to earn 4.6 percent, compounded monthly. How long will it be until you run out of money?

BGN: PVAD = 289416; PMT = -2500; I/Y = 4.6/12 CPT n = 152.52 months / 12 = 12.71 years PVAD = 289,416 = 2500 x [(1 - {1/[1 + (.046/12)]t})/(.046/12)][1+(.046/12)] T = 152.52 months or 12.71 years

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now? A) Discounted value B) Principal amount C) Future value D) Present value E) Invested principal

C) Future value

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) ________ loan. A) continuous B) balloon C) pure discount D) amortized E) interest-only

C) pure discount

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct? A) The interest amount you earn will double in value every year. B) The interest you earn in Year 6 will equal the interest you earn in Year 10. C) The future value of this amount is equal to $1,000 × (1 + 40).06. D) The present value of this investment is equal to $1,000. E) The total amount of interest you will earn will equal $1,000 × .06 × 40.

D) The present value of this investment is equal to $1,000.

Which one of these will increase the present value of a set amount to be received sometime in the future? A) Increase in the discount rate B) Decrease in both the future value and the number of time periods C) Increase in the time until the amount is received D) Decrease in the future value E) Decrease in the interest rate

E) Decrease in the interest rate

Which one of the following statements correctly defines a time value of money relationship? A) Interest rates and time are positively related, all else held constant. B) An increase in time increases the future value given a zero rate of interest. C) Time and future values are inversely related, all else held constant. D) An increase in a positive discount rate increases the present value. E) Time and present value are inversely related, all else held constant.

E) Time and present value are inversely related, all else held constant.

What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly?

EAR = [(1 + .0765/4)4)-1 EAR = 7.87%

Suppose the first comic book of a classic series was sold in 1954. In 2017, the estimated price for this comic book was $310,000, which is an annual return of 22 percent. For this to be true, what was the original price of the comic book in 1954?

FV = 310000; I/Y = 22; n = 63 CPT PV = $1.12 PV = $310,000/1.2263 = $1.12

Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year?

PMT = -3600; n = 12; I/Y = 8 CPT PVOA = $27,129.88 CPT PVAD = $29,300.27 PVAD = 3,600{[1 - (1/1.0812)]/.08}(1.08) = $29,300.27 PVA = 3,600{[1 - (1/1.0812)]/.08} = $27,129.88 Difference = $2,170.39

Molly can afford $250 a month for five years for a car loan. If the interest rate is 7.5 percent, how much can she afford to borrow to purchase a car?

PMT = 250; n = 60; I/Y = 7.5/12 CPT PV = $12,476.33 PVA = 250({1 - [1/(1 + .075/12)(5)(12)]}/(.075/12)) PVA = $12,476.33

Al obtained a mortgage of $195,000 at 5.25 percent for 15 years. How much of the second monthly payment is applied to interest?

PV = 195000; I/Y = 5.25/12; n = 15x12 CPT PMT = $1,567.56 1: 195,000 x .0525/12 = $853.13 1st interest amount; $714.44 1st principal payment 2: 194,285.57 x .0525/12 = $850 2nd interest amount

Today, you earn a salary of $31,000. What will be your annual salary ten years from now if you receive annual raises of 2.2 percent?

PV = 31000; I/Y = 2.2; n = 10 FV = $31,000(1.02210) = $38,536.06 CPT FV = $38,536.06

You just received a $5,000 gift from your grandmother which you have decided to save and then gift to your grandchildren 50 years from now. How much additional money will you give to them if you earn 7.5 percent interest rather than 7 percent interest over the next 50 years?

PV = 5000; n = 50; I/Y = 7.5 CPT FV = $185,948.73 PV = 5000; n = 50; I/Y = 7 CPT FV = $147,285.13 FV = $5,000(1.07550) = $185,948.73 FV = $5,000(1.0750) = $147,285.13 Add'l funds = $38,663.60 ($185,948.73 - $147,285.13)

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy?

PV = C/r 480000 = 15,000/r r = 3.125%

Your anticipated wedding is three years from today. You don't know who your spouse will be but you do know that you are saving $10,000 today and $17,000 one year from today for this purpose. You also plan to pay the final $12,000 of anticipated costs on your wedding day. At a discount rate of 5.5 percent, what is the current cost of your upcoming wedding?

PV CF1= $10,000 PV CF2 = FV = 17,000; n = 1; I/Y = 5.5 = $16,113,74 PV CF3 = FV = 12,000; n = 3; I/Y = 5.5 = $10,219.36 PV = $10,000 + $17,000/1.055 + $12,000/1.0553 PV (sum) = $36,333.10

Travis invested $8,000 in an account that pays 4 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?

Simple = $8,000 + ($8000 x .04 x 7) = $10,240 Compound: PV = 8000; I/Y 4; n = 7 CPT FV = $10,527.45 FV = $8,000(1.047) = $10,527.45 Difference = $287.45 = $10,527.45 - $10,240