Business Finance Chapter 5 Part I & 2

You see a used sporty car that you would like to own. It costs $9,000 and you would pay 7.2% interest, compounded monthly and finance for 3 years. How much principal did you pay with the first payment?

$54.00

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 5.5%, how much is the bond worth today?

$585.43

You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

$6,744.83

You have deposited $96,780 into an account that will earn an interest rate of 15% compounded semiannually. How much will you have in the account by the end of 14 years?

$733,200.27

You see a used sporty car that you would like to own. It costs $9,000 and you would pay 7.2% interest, compounded monthly and finance for 3 years. How much will you loan balance be after the first payment?

$8,775.28

Suppose you are buying your first condo for $145,000, 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?

$821.69

Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

$1,240,960

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

$1,400.00

You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

$13,267

In 1626, Dutchman Peter Minuit purchased Manhattan Island from a local Native American tribe. Historians estimate that the price he paid for the island was about $24 worth of goods, including beads, trinkets, cloth, kettles, and axe heads. Many people find it laughable that Manhattan Island would be sold for $24, but you need to consider the future value (FV) of that price in more current times. If the $24 purchase could have been invested at a 6% annual interest rate, what is its value as of 2012 (386 years later)?

$140,693,888,847.36

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

$16,112

You decide to deposit $2,750 at the beginning of every year at an annual interest rate of 5%. How much money will you have available at the end of six years?

$19,641

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

$2,016

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

$2,030.30

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?

$2,531.49

Luana loves shopping for clothes, but considering the state of the economy, she has decided to start saving. At the end of each year, she will deposit $1,790 in her local bank, which pays her 11% annual interest. Luana decides that she will continue to do this for the next eight years. How much will she save by the end of eight years?

$23,363.09

Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

$240.08

Your grandmother just died and left you $100,000 in a trust fund that pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

$27,409

You see a used sporty car that you would like to own. It costs $9,000 and you would pay 7.2% interest, compounded monthly and finance for 3 years. How much interest did you pay with the first payment?

$278.72

You see a used sporty car that you would like to own. It costs $9,000 and you would pay 7.2% interest, compounded monthly and finance for 3 years. How much would your monthly payment be?

$278.72

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

$28,532

Olivia deposited $1,700 in a savings account at her bank. Her account will earn an annual simple interest rate of 7.8%. If she makes no additional deposits or withdrawals, how much money will she have in her account in 11 years?

$3,158.60

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

$3,602

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

$3,704.02

Olivia deposited $1,700 in a savings account at her bank. Her account will earn a compound interest rate of 7.8%. If she makes no additional deposits or withdrawals, how much money will she have in her account in 11 years?

$3,883.79

Olivia deposits $1,700 into a savings account. The bank pays a nominal interest rate of 7.8% but with quarterly compounding. Keeping everything else constant, how much money will Olivia have in her account in 11 years?

$3,976.37

You are planning to put $3,250 in the bank at the end of each year for the next eight years in hopes that you will have enough money for a down payment on a condo. If you are investing at an annual interest rate of 9%, you'll have accumulated ______ at the end of eight years.

$35,843

Your goal is to have $20,000 in your bank account by the end of four years. If the interest rate is constant at 6% and you want to make annual identical deposits, how much will you need to deposit in your account at the end of each year to reach your goal?

$4,571

Your goal is to have $20,000 in your bank account by the end of four years. If the interest rate remains constant at 6% and you want to make annual identical deposits, how much will you need to deposit in your account by the end of each year to reach your goal?

$4,571.85

If Gerry makes a deposit of $1,500 at the end of each quarter for five years, how much will he have at the end of the five years assuming a 12% annual return and quarterly compounding?

$40,305

You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

$5,987

What is the present value of the following cash flow stream at a rate of 6.25%?

$505.30

Rahul needs a loan and is speaking to several lending agencies about the interest rates they would charge and the terms they offer. He particularly likes his local bank because he is being offered a nominal rate of 14%. But the bank is compounding quarterly. What is the effective interest rate that Rahul would pay for the loan?

14.752%

Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the endof each year, starting at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?

14.96

You see a used sporty car that you would like to own. It costs $9,000 and you would pay 7.2% interest, compounded monthly and finance for 3 years. What is the periodic interest rate?

0.6%

It is now January 1, 2015; and you will need $1,000 on January 1, 2019, in 4 years. Your bank compounds interest at an 8% annual rate. How much must you deposit today to have a balance of $1,000 on January 1, 2019? The formula method for this questions is

1000/(1+0.08)4

The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods.

True

You would like to go to Hawaii at the end of this year and lie on the beach for 3 years before you start your first job. You figure you will need $15,000 per year to support you with Blue Hawaii and suntan lotion. If you can earn 12% return, how much money would you have to deposit into an account today? The formula method for this question is _________.

15,000/(1+12%)1+ 15,000/(1+12%)2+ 15,000/(1+12%)3

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?

19.56%

Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

29.46

If you deposit $300 at the end of each year for next three years, how much are you going to have three years from now given an interest rate of 8% per year? The formula to solve this question is ________

300*(1+8%)2 +300*(1+8%)1 + 300*(1+8%)0

If a security currently worth$12,800 will be worth $18,807.40 five years in the future, what is the implied interest rate the investor will earn on the security--assuming that no additional deposits or withdrawals are made?

8.00%

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 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.

7.49%

Which of the following is an example of an annuity?

A job contract that pays a regular monthly salary for three years

You have the opportunity to invest in several annuities. Which of the following 10-year annuities has the greatest present value? Assume that all annuities earn the same positive interest rate.

An annuity that pays $1,000 at the beginning of each year

The process for converting present values into future values is called

Compounding

Which of the following is true about finding the present value of cash flows?

Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return.

After the end of the second year and all other factors remaining equal, a future value based on compound interest will exceed a future value based on simple interest.

True

Which of the following is true about present value calculations?

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest.

True

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?

The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

Which of the following investments that will pay $19,000 in five years will have a higher price today?

The security that earns an interest rate of 14.50%.

Which of the following statements about annuities is false? a. When equal payments are made at the end of each period for a certain time period, they are treated as an annuity due. b. A perpetuity is a series of equal payments made at fixed intervals that continue infinitely and can be thought of as an infinite annuity. c. An ordinary annuity of equal time earns less interest than an annuity due. d. When equal payments are made at the end of each period for a certain time period, they are treated as ordinary annuities.

a

Which of the following statements is CORRECT? a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. b. The cash flows for an annuity due must all occur at the beginning of the periods. c. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. d. The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.

b

Which of the following statements is CORRECT? a. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. b. Time lines are useful for visualizing complex problems prior to doing actual calculations. c. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. d. A time line is not meaningful unless all cash flows occur annually.

b

As the interest rate increases, the present value ______ if other things remaining the same.

decreases

Over time, for an amortization loan,

interest payment of each period declines

Eric wants to invest in government securities that promise to pay $1,000 at maturity. The interest rate of the security is 6.80%. Assuming that both investments will have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price?

nine years

A dollar today is worth more than a dollar to be received in the future because

the dollar can be invested today and earn interest