ch. 5 principles of finance

The effective rate of interest will always be ___ the norminal rate.

equal or greater than

The more frequent the compounding, the ____.

greater the effective interest rate.

The payment or receipt of a series of equal cash flows per period, at the end of each period, for a specified amount of time is called a(n) _____.

ordinary annuity

Determine how much $1,000 deposited in a savings account paying 8% (compounded annually) will be worth after 5 years

$1,469

The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years. What is the future value of this lottery if you plan to put each payment in an account earning 9 percent?

$12.79 million

If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded annually, determine how much the CD will be worth at the end of 4 years.

$14,640

How much will you have at the end of 5 years in a European vacation account if you deposit $200 a month in an account that is paying a nominal 12 percent per year, compounded monthly?

$16,334

In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years?

$17,878.80

What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded monthly for five years?

$18,170

A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. Determine the amount of these annual payments (to the nearest dollar).

$2,706

Your grandparents put $1,000 into a savings account for you when you were born 20 years ago. This account has been earning interest at a compound rate of 7 percent. What is its value today?

$3,870

Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual end-of-the-year payments. If the loan provides the bank with a 12 percent return, what will be your annual payments?

$5,547.85

When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for 3 years. What is your monthly payment?

$637.86

Assume you purchased a home and borrowed $100,000 at a rate of 8% compounded monthly over 30 years. What is your monthly payment?

$733.76

You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was the rate of return on your investment?

12%

Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the annual effective rate of interest you are being charged on your credit card?

19.56%

Using the "Rule of 72," about how long will it take a sum of money to double in value if the annual interest rate is 9 percent?

8 years

When a loan is amortized over a 5 year term, the ______.

amount of interest paid is reduced each year

The process of finding present values is frequently called

discounting

Which of the following is worth more? a. Future value of an ordinary annuity of PMT dollars per year for n year discounted at i percent b. Future value of an annuity due of PMT dollars per year for n year discounted at i percent. c. Both are worth the same amount d. cannot be determined from the information given

future value of an annuity due of PMT dollars per year for n years discounted at i percent

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases during the next 20 years?

it will be worth less

A(n) ____ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e., forever).

prepetuity

Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the ____.

present value of an annuity

The amount of simple interest is equal to the product of the principal times ____ times ____.

rate per time period; the number of time periods

If the present value of a given sum is equal to its future value, then ____.

the discount rate must be zero