Chapter 5-6 Finance

Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true

Martin earned a lower interest rate than he expected

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

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

How is the principal amount of an interest-only loan repaid?

The principal is repaid in a lump sum at the end of the loan period.

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

annual percentage rate

The process of determining the present value of the future cash flows in order to know their worth today is called which of the following?

discounted cash flow valuation

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

e. compounding

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

interest-only loan

Shelley won a lottery and will receive $1,00 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following?

present value

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. What type of interest is Sara earning?

simple interest

Which one of the following variables is the exponent in the present value formula?

time

You just purchased a parcel of land for $113,000. To earn a 5% annual rate of return on your investment, how much must you sell the land for in 4 years? Assume annual compounding. (Round to nearest penny, e.g. 1234.56)

137352.21 Solve for FV. FV = PV * (1 + rate/m)^(years * m) where m = number of compounding periods per year.

Earnest T needs $880 for his next trip to Raleigh. He has $590 in cash. How long in years will it take the $590 cash to grow to $880 if Earnest T earns 7.2% per annum on his cash, compounded quarterly? (Enter your answers in years to 2 decimal places, e.g., 12.34)

5.60

Based on the rule of 72, what per annum interest rate must Oprah earn on her savings of $50 million to double these savings in 9 years? (Round to 100th of a percent and enter your answer as a percentage, e.g., 12.34 for 12.34%)

8.01

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

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

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

An amortized loan

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?

Annuity B has a smaller present value than annuity A.

Which one of the following statements is correct given the following two sets of project cash flows? Project A Project B Year 1 $6,000 $2,000 Year 2 0 3,000 Year 3 2,500 3,000 Year 4 2,500 3,000

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

Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years?

$13,020

You own a classic automobile that is currently valued at %150,000. If the value increases by 6.5 percent annually, how much will the automobile be worth ten years from now?

$281,570.62