Chapter 6 Missed

1. An ordinary annuity is best defined by which one of the following?

C. equal payments paid at regular intervals over a stated time period

33. You are scheduled to receive annual payments of $4,800 for each of the next 7 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

A. $1,999 N=7, I/Y=8, PMT=4,800(BGN/do once) Difference= 26,990-24,991=1,999

35. Trish receives $480 on the first of each month. Josh receives $480 on the last day of each month. Both Trish and Josh will receive payments for next three years. At a 9.5 percent discount rate, what is the difference in the present value of these two sets of payments?

A. $118.63 N=3x12, I/Y=9.5/12, PMT=480BGN N=3x12, I/Y=9.5/12, PMT=480 Difference= $15,103-$14,984.57=$118.63

26. You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you today?

A. $172,252.71 N=10x12, I/Y=7/12, PMT=2,000

29. Your employer contributes $75 a week to your retirement plan. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.5 percent. Given these assumptions, what is this employee benefit worth to you today?

A. $40,384.69 N=20x52, I/Y=7.5/12, PMT=75

39. Theresa adds $1,000 to her savings account on the first day of each year. Marcus adds $1,000 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years?

A. $8,062 N=35, I/Y=6.5, PMT=-1,000 N=35, I/Y=6.5, PMT=-1,000BGN

9. Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal?

A. amortized loan

4. The interest rate that is quoted by a lender is referred to as which one of the following?

A. stated interest rate

42. Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service. HT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.65 percent on the funds. How much must HT set aside each year for this purpose?

B. $3,277,973 N=3, I/Y=5.65, FV=10,400,000 (Solve for PMT)

25. Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. At a 5.5 percent discount rate, what are these payments worth to you on the day you enter college?

B. $4,299.88 N=4x12, I/Y= 5.5/12, PMT=100

30. The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 4.5 percent interest compounded monthly. The first deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years?

B. $80,760.79 N=5x12, I/Y=4.5/12, PMT=-1,500BGN

15. Which one of the following statements related to annuities and perpetuities is correct?

B. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.

24. You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.

B. amortized loan with equal principal payments

6. What is the interest rate charged per period multiplied by the number of periods per year called?

B. annual percentage rate

23. An amortized loan:

B. may have equal or increasing amounts applied to the principal from each loan payment.

41. You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

C. $250,332 N=30x12, I/Y=7.5/12, PV=165,000 (Sove for PMT) Total Interest=($1,153.70 x 30 x12)-$165,000=$250,332

27. Phil can afford $180 a month for 5 years for a car loan. If the interest rate is 8.6 percent, how much can he afford to borrow to purchase a car?

C. $8,752.84 N=5x12, I/Y=8.6/12, PMT=-180

13. You are considering two projects with the following cash flows: Project A: 9K, 8K, 7.5K, 7K Project B: 7K, 7.5K, 8K, 9K (In years ascending) Which of the following statements are true concerning these two projects? I. Both projects have the same future value at the end of year 4, given a positive rate of return. II. Both projects have the same future value given a zero rate of return. III. Project X has a higher present value than Project Y, given a positive discount rate. IV. Project Y has a higher present value than Project X, given a positive discount rate.

C. II and III only

16. Which of the following statements related to interest rates are correct? I. Annual interest rates consider the effect of interest earned on reinvested interest payments. II. When comparing loans, you should compare the effective annual rates. III. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. IV. Annual and effective interest rates are equal when interest is compounded annually.

C. II and IV only

12. You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

C. Option B has a higher present value at time zero than does option A.

17. Which one of the following statements concerning interest rates is correct?

C. The effective annual rate equals the annual percentage rate when interest is compounded annually.

10. Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?

C. balloon loan

7. A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

D. pure discount

21. The entire repayment of which one of the following loans is computed simply by computing a single future value?

D. pure discount loan

2. Which one of the following accurately defines a perpetuity?

D. unending equal payments paid at equal time intervals

31. You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $25 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 1.5 percent interest per month. How much money are you

E. $144.57 N=6, I/Y=1.5, PMT=-25BGN

32. You buy an annuity that will pay you $24,000 a year for 25 years. The payments are paid on the first day of each year. What is the value of this annuity today if the discount rate is 8.5 percent?

E. $266,498 N=25, I/Y=8.5, PMT=24,000BGN

40. You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at 8.6 percent interest. What is the amount of each payment?

E. $366.05 N=5x12, I/Y=8.6/12, PV=17,800 (Solve for PMT)

34. You are comparing two annuities with equal present values. The applicable discount rate is 8.75 percent. One annuity pays $5,000 on the first day of each year for 20 years. How much does the second annuity pay each year for 20 years if it pays at the end of each year?

E. $5,438 N=20, I/Y=8.75, PMT=5,000BGN (=PV) N= 20, I/Y=8.75, PV=50,533.56 (=PMT) Because each payment is received one year later, then the cash flow has to equal: $5,000 × (1 + 0.0875) = $5,438

11. You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities?

E. Annuity B has a smaller present value than annuity A. Refer to section 6.2

14. Which one of the following statements is correct given the following two sets of project cash flows? Project A: $6,000, $0, $2,500, $2,500 Project B: $2,000, $3,000, $3,000, $3,000 (In years ascending)

E. As long as the discount rate is positive, Project B will always be worth less today than will Project A.

18. Which one of these statements related to growing annuities and perpetuities is correct?

E. The present value of a growing perpetuity will decrease if the discount rate is increased.

19. Which one of the following statements correctly states a relationship?

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

28. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money. Which option should you take and why?

E. You should accept the $200,000 because the payments are only worth $195,413 to you today. N=20x12, I/Y=6/12, PMT=1,400

20. Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate?

E. continuous

8. Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?

E. interest-only loan