Finance- Chapter 5

The rate of return earned on an investment of $50,000 today that guarantees an annuity of $10,489 for six years is approximately ________. A) 5% B) 7% C) 10% D) 12%

B

What annual rate of return would Jia need to earn if she deposits $20,000 per year into an account beginning one year from today in order to have a total of $1,000,000 in 30 years? A) 2.3% B) 3.3% C) 1.3% D) 4.3%

B

The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is ________. A) $236 B) $699 C) $ 42 D) $ 75

C

An annuity with an infinite life is called a(n) ________. A) perpetuity B) primia C) option D) deep discount

A

A beach house in Southern California now costs $350,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Eric and Karinna retire from successful careers in commercial art. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement? A) $11,472 B) $4,323 C) $79,977 D) $17,350

A

Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective annual return? A) Account A B) Account B C) Both provide the same effective annual return D) We don't have sufficient information to make a choice

A

Aunt Butch borrows $19,500 from the bank at 8 percent annually compounded interest to be repaid in 10 equal annual installments. The interest paid in the third year is ________. A) $1,336.00 B) $1,560.14 C) $2,906.11 D) $1,947.10

A

Danny Joe borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments. The interest paid in the first year is ________. A) $1,155 B) $2,481 C) $ 144 D) $1,327

A

Entertainer's Aid plans five annual colossal concerts, each in a different nation's capital. The concerts will raise funds for an endowment which would provide the World Wide Hunger Fund with $3,000,000 per year into perpetuity. The endowment will be given at the end of the fifth year. The rate of interest is expected to be 9 percent in all future periods. How much must Entertainer's Aid deposit each year to accumulate to the required amount? A) $5,569,749 B) $3,333,333 C) $1,830,275 D) $8,568,980

A

How long would it take for Nico to save an adequate amount for retirement if he deposits $40,000 per year into an account beginning one year from today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement? A) 12.2 years B) 15.7 years C) 14.5 years D) 16.5 years

A

If a United States Savings bond can be purchased for $29.50 and has a maturity value of $100 at the end of 25 years, what is the annual rate of return on the bond? A) 5 percent B) 6 percent C) 7 percent D) 8 percent

A

If you expect to retire in 30 years, live on $50,000 per year and expect the inflation to average 3% over the next 30 years, what amount of annual income will you need to live at the same comfort level in 30 years? A) $121,363 B) $$95,000 C) $20,599 D) $51,500

A

In comparing an ordinary annuity and an annuity due, which of the following is true? A) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity. B) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due. C) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. D) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.

A

The annual rate of return is referred to as the ________. A) discount rate B) marginal rate C) risk-free rate D) marginal cost

A

The future value of $100 received today and deposited at 6 percent for four years is ________. A) $126 B) $ 79 C) $124 D) $116

A

The future value of $200 received today and deposited for three years in an account which pays semiannual interest of 8 percent is ________. A) $253.00 B) $252.00 C) $158.00 D) $134.66

A

The future value of an ordinary annuity of $2,000 each year for 10 years, deposited at 12 percent, is ________. A) $35,098 B) $20,000 C) $39,310 D) $11,300

A

The present value of $100 received at the end of year 1, $200 received at the end of year 2, and $300 received at the end of year 3, assuming an opportunity cost of 13 percent, is ________. A) $ 453 B) $ 416 C) $1,181 D) $ 500

A

The present value of a $25,000 perpetuity at a 14 percent discount rate is ________. A) $178,571 B) $285,000 C) $350,000 D) $219,298

A

The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ________ interest rate. A) effective B) nominal C) discounted D) continuous

A

What is the rate of return on an investment of $124,090 if the company expects to receive $10,000 per year for the next 30 years? A) 7 percent B) 4 percent C) 6 percent D) 5.5 percent

A

Xiao Li wishes to accumulate $50,000 by the end of 10 years by making equal annual end-of-year deposits over the next 10 years. If Xiao Li can earn 5 percent on her investments, how much must she deposit at the end of each year? A) $3,975 B) $6,475 C) $5,000 D) $4,513

A

A generous benefactor to a local ballet plans to make a one-time endowment that would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be? A) $ 300,000 B) $3,000,000 C) $ 750,000 D) $1,428,571

B

Ashley owns stock in a company which has consistently paid a growing dividend over the last five years. The first year Ashley owned the stock, she received $1.71 per share and in the fifth year, she received $2.89 per share. What is the growth rate of the dividends over the last five years? A) 7 percent B) 11 percent C) 12 percent D) 5 percent

B

Detta borrows $20,000 from the bank. For a five-year loan, the bank requires annual end-of-year payments of $4,878.05. The annual interest rate on the loan is ________. A) 6 percent B) 7 percent C) 8 percent D) 9 percent

B

If the present value of a perpetual income stream is increasing, the discount rate must be ________. A) increasing B) decreasing C) changing unpredictably D) increasing proportionally

B

Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000, and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents on the cruise? A) $1,862 B) $2,457 C) $3,000 D) $2,234

B

Julian was given a gold coin originally purchased for $1 by his great-grandfather 50 years ago. Today the coin is worth $450. The rate of return realized on the sale of this coin is approximately equal to ________. A) 7.5% B) 13% C) 9% D) 18%

B

Mary will receive $12,000 per year for the next 10 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent? A) $120,000 B) $ 67,800 C) $ 38,640 D) $ 72,560

B

Nico makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest rate of 13 percent. The original principal amount was ________. A) $24,450 B) $15,000 C) $3,100 D) $20,175

B

Otto is planning for his son's college education to begin ten years from today. He estimates the end-of-the-year tuition, books, and living expenses to be $10,000 per year for a four-year degree. How much must Otto deposit today, at an interest rate of 12 percent, for his son to be able to withdraw $10,000 per year for four years of college? A) $12,880 B) $ 9,780 C) $40,000 D) $18,950

B

The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called ________. A) future value B) present value C) future value of an annuity D) compounded value

B

The future value of $100 received today and deposited in an account for four years paying semiannual interest of 6 percent is ________. A) $450 B) $127 C) $889 D) $134

B

The future value of $200 received today and deposited at 8 percent for three years is ________. A) $248 B) $252 C) $158 D) $200

B

The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years is ________. A) $28,974 B) $31,291 C) $14,494 D) $13,420

B

The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly is ________. A) $17,549 B) $75,401 C) $93,049 D) $11,200

B

The future value of an ordinary annuity of $1,000 each year for 10 years, deposited at 3 percent, is ________. A) $11,808 B) $11,464 C) $ 8,530 D) $10,000

B

The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is ________. A) $2,500 B) $3,044 C) $6,516 D) $2,856

B

The present value of a $20,000 perpetuity at a 7 percent discount rate is ________. A) $186,915 B) $285,714 C) $140,000 D) $325,000

B

The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate. A) effective B) nominal C) discounted D) continuous

B

What is the rate of return on an investment of $16,278 if the company expects to receive $3,000 per year for the next 10 years? A) 18 percent B) 13 percent C) 8 percent D) 3 percent

B

Xiao Xin is planning to accumulate $40,000 by the end of 5 years by making 5 equal annual deposits. If she plans to make her first deposit today and can earn an annual compound rate of 9 percent on her investment, how much must each deposit be in order to accumulate the $40,000? A) $ 6,132 B) $ 6,684 C) $23,844 D) $ 9,434

B

You have been offered a project paying $300 at the beginning of each year for the next 20 years. What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment? A) $ 2,738 B) $ 2,985 C) $15,347 D) $ 6,000

B

________ is the amount earned on a deposit that has become the part of the principal at the end of a specified time period. A) Discount interest B) Compound interest C) Primary interest D) Future value

B

$100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is ________. A) $1,536 B) $ 672 C) $ 727 D) $1,245

C

A college received a contribution to its endowment fund of $2 million. It can never touch the principal, but can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year? A) $95,000 B) $19,000 C) $190,000 D) $18,000

C

A generous philanthropist plans to make a one-time endowment to a renowned heart research center which would provide the facility with $250,000 per year into perpetuity. The rate of interest is expected to be 8 percent for all future time periods. How large must the endowment be? A) $2,314,814 B) $2,000,000 C) $3,125,000 D) $3,000,000

C

A local bank is offering a zero-coupon certificate of deposit for $25,000. At maturity, three years from now, the investor will receive $32,000. What is the rate of return on this investment? A) 3 percent B) 6 percent C) 9 percent D) 12 percent

C

A local brokerage firm is offering a zero-coupon certificate of deposit for $10,000. At maturity, three years from now, the investor will receive $14,000. What is the rate of return on this investment? A) 14 percent B) 13 percent C) 12 percent D) 11 percent

C

A wealthy art collector has decided to endow her favorite art museum by establishing funds for an endowment which would provide the museum with $1,000,000 per year for acquisitions into perpetuity. The art collector will give the endowment upon her fiftieth birthday 10 years from today. She plans to accumulate the endowment by making annual end-of-year deposits into an account. The rate of interest is expected to be 6 percent in all future periods. How much must the art collector deposit each year to accumulate to the required amount? A) $1,575,333 B) $ 736,000 C) $1,264,466 D) $ 943,396

C

A(n) ________ is an annuity with an infinite life making continual annual payments. A) amortized loan B) principal C) perpetuity D) APR

C

Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment is ________. A) $ 942 B) $1,125 C) $1,482 D) $2,641

C

Aunt Tilly borrows $3,500 from the bank at 12 percent annually compounded interest to be repaid in four equal annual installments. The interest paid in the first year is ________. A) $ 152 B) $ 277 C) $ 420 D) $1,152

C

Dan plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 10 percent on his contributions, how much will he have at the end of the tenth year? A) $12,290 B) $20,000 C) $31,874 D) $51,880

C

Dorothy borrows $10,000 from the bank. For a four-year loan, the bank requires annual end-of-year payments of $3,223.73. The annual interest rate on the loan is ________. A) 9 percent B) 10 percent C) 11 percent D) 12 percent

C

Gina has planned to start her college education four years from now. To pay for her college education, she has decided to save $1,000 a quarter for the next four years in a bank account paying 12 percent interest. How much will she have at the end of the fourth year? A) $ 1,574 B) $19,116 C) $20,157 D) $16,000

C

Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest rate. The original principal amount was ________. A) $31,000 B) $30,000 C) $25,000 D) $20,000

C

How many years would it take for Jughead to save an adequate amount for retirement if he deposits $2,000 per month into an account beginning today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement? A) 13 years B) 16 years C) 15 years D) 12 years

C

How much would Sophie have in her account at the end of 10 years if she deposit $2,000 into the account today if she earned 8 percent interest and interest is compounded continuously? A) $4,317 B) $4,134 C) $4,451 D) $4,521

C

If a United States Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond? A) 6 percent B) 7 percent C) 8 percent D) 9 percent

C

James plans to fund his individual retirement account, beginning today, with 20 annual deposits of $2,000, which he will continue for the next 20 years. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account upon retirement will be ________. A) $19,636 B) $91,524 C) $98,846 D) $21,207

C

The future value of $200 received today and deposited at 8 percent compounded semiannually for three years is ________. A) $380 B) $158 C) $253 D) $252

C

The future value of a dollar ________ as the interest rate increases and ________ the further in the future an initial deposit is to be received. A) decreases; decreases B) decreases; increases C) increases; increases D) increases; decreases

C

What annual rate of return would Grandma Zoe need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years? A) 4.55% B) 5.28% C) 5.98% D) 6.23%

C

What is the highest effective rate attainable with a 12 percent nominal rate? A) 12.00% B) 12.55% C) 12.75% D) 12.95%

C

Which of the following is true of annuities? A) An ordinary annuity is an equal payment paid or received at the beginning of each period. B) An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period. C) An annuity due is an equal stream of cash flows is paid or received at the beginning of each period. D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.

C

$1,200 is received at the beginning of year 1, $2,200 is received at the beginning of year 2, and $3,300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is ________. A) $ 6,700 B) $17,072 C) $12,510 D) $ 8,142

D

A ski chalet at Peak n' Peak now costs $250,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 10 years before Chris and Julie retire from successful investment banking careers. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon retirement? A) $ 8,333 B) $13,572 C) $25,005 D) $22,109

D

Alexis owns stock in a company which has consistently paid a growing dividend over the last 10 years. The first year Alexis owned the stock, she received $4.50 per share and in the 10th year, she received $4.92 per share. What is the growth rate of the dividends over the last 10 years? A) 15 percent B) 14.8 percent C) 12.2 percent D) 9.3 percent

D

Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year? A) $19,292 B) $14,938 C) $40,000 D) $144,104

D

How long would it take for you to save an adequate amount for retirement if you deposit $40,000 per year into an account beginning today that pays 12 percent per year if you wish to have a total of $1,000,000 at retirement? A) 12.2 years B) 10.5 years C) 14.8 years D) 11.5 years

D

Jia borrows $50,000 at 10 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year loan payment is ________. A) $10,774 B) $12,500 C) $14,340 D) $15,773

D

Rita borrows $4,500 from the bank at 9 percent annually compounded interest to be repaid in three equal annual installments. The interest paid in the third year is ________. A) $277.95 B) $405.00 C) $352.00 D) $147.00

D

The future value of a $10,000 annuity due deposited at 12 percent compounded annually for each of the next 5 years is ________. A) $36,050 B) $63,530 C) $40,376 D) $71,152

D

The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is ________. A) $ 50 B) $200 C) $518 D) $ 77

D

The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost of 11 percent, is ________. A) $ 1,020 B) $27,869 C) $18,800 D) $12,093

D

The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, is ________. A) $288 B) $1,896 C) $1,750 D) $1,558

D

The time value concept/calculation used in amortizing a loan is ________. A) future value of a dollar B) future value of an annuity C) present value of a dollar D) present value of an annuity

D

Thelma is planning for her son's college education to begin five years from today. She estimates the yearly tuition, books, and living expenses to be $5,000 per year for a four-year degree, assuming the expenses incur only at the end of the year. How much must Thelma deposit today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four years of college? A) $20,000 B) $13,620 C) $39,520 D) $11,270

D

To pay for her college education, Gina is saving $2,000 at the beginning of each year for the next eight years in a bank account paying 12 percent interest. How much will Gina have in that account at the end of 8th year? A) $16,000 B) $17,920 C) $24,600 D) $27,552

D

What effective annual rate of return (EAR) would Rayne need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years? A) 5.98% B) 6.55% C) 4.87% D) 6.14%

D

Zheng Sen wishes to accumulate $1 million by the end of 20 years by making equal annual end-of-year deposits over the next 20 years. If Zheng Sen can earn 10 percent on his investments, how much must he deposit at the end of each year? A) $ 14,900 B) $ 50,000 C) $117,453 D) $ 17,460

D