FIN5008 - ch. 5

Cromwell Enterprises is acquiring Athens, Inc. for $899,000. Athens has agreed to accept annual payments of $210,000 at an interest rate of 8.5 percent. How many years will it take Cromwell Enterprises to pay for this purchase?

5.55 years

Which one of the following has the highest effective annual rate?

6 percent compounded monthly

You want to buy a new sports car from Roy's Cars for $51,800. The contract is in the form of a 48-month annuity due at a 9.2 percent APR. What will your monthly payment be?

$1,284.13

The manager of Gloria's Boutique has approved Carla's application for credit. The maximum payment that has been approved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carla can make given this credit approval?

$1,331.42 APV = 65{(1-[1/(1+0.157/12)24])/(0.157/12)

Katie's Dinor spent $84,000 to refurbish its current facility. The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for five years. What is the amount of each monthly payment?

$1,401.49

Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting 1 year from today. What is the amount of each payment?

$10,462.15

What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the end of this week.

$14,239.14

Billingsley, Inc. is borrowing $60,000 for five years at an APR of 8 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for year 3 of this loan?

$14,880

How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent.

$187,391.34

A local magazine is offering a $2,500 grand prize to one lucky winner. The prize will be paid in four annual payments of $625 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 9 percent on your money?

$2,024.82

Steve is considering investing $3,600 a year for 40 years. How much will this investment be worth at the end of the 40 years if he earns an average annual rate of return of 11.6 percent? Assume Steve invests his first payment of the end of this year.

$2,471,685.70

Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously delinquent so your firm has offered to arrange a payment plan in the hopes that it might at least collect a portion of this receivable. Your firm's offer consists of weekly payments for one year at an interest rate of 3 percent. What is the amount of each payment?

$2,706.33

Appalachian Bank offers you a $135,000, nine-year term loan at 7.5 percent annual interest. What will your annual loan payment be?

$21,163.57

Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the required return on this investment is 4.75 percent, how much will you pay for the policy?

$210,526.32

A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent compounded semiannually, what is the value of this annuity 4 years from now?

$37,139.58

If you put up $46,000 today in exchange for a 6.75 percent 15-year annuity, what will the annual cash flow be?

$4,971.10

What is the effective annual rate of 10 percent compounded semiannually?

10.25 percent

The Men's Warehouse charges 1.6 percent interest per month. What rate of interest are its credit customers actually paying?

20.98 percent

A new financial services company just opened in your town. To attract customers, it is offering a "9-11" loan special. The company will lend $9 today in exchange for a payment of $11 one year from today. What is the APR on this loan?

22.22 percent

Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months?

$443.13

West Coast Builders is offering preferred stock for sale with a 6.75 percent rate of return. What is the amount of the annual dividend on this stock if the current market price per share is $83.87?

$5.66

Which one of the following statements concerning annuities is correct? - The present value of an annuity is equal to the cash flow amount divided by the discount rate. - If unspecified, you should assume an annuity is an annuity due. - An annuity is an unending stream of equal payments occurring at equal intervals of time. - An annuity due has payments that occur at the beginning of each time period. - The future value of an annuity decreases as the interest rate increases.

An annuity due has payments that occur at the beginning of each time period.

The Egg House just borrowed $260,000 to build a new restaurant. The loan terms call for equal annual payments at the end of each year. The loan is for 15 years at an APR of 8 percent. How much of the first annual payment will be used to reduce the principal balance?

$9,575.68

Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?

$9,672.48

A recent alumnus of your university gifted money to the school to fund annual scholarships for students in need. The school expects to earn an average rate of return of 5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the gift?

$909,090.91

Sticks and Stuff Furniture is offering a bedroom suite for $3,000. The credit terms are 60 months at $50 per month. What is the interest rate on this offer?

0.00 percent

A perpetuity in Canada is frequently referred to as which one of the following? - Forevermore - Forever cash - Consul - Infinity - Dowry

Consul

Which one of the following statements is correct? - The EAR, rather than the APR, should be used to compare both investment and loan options. - The EAR is always greater than the APR. - The APR is the best measure of the actual rate you are paying on a loan. - The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1. - The APR is equal to the EAR for a loan that charges interest monthly.

The EAR, rather than the APR, should be used to compare both investment and loan options.

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain? - Lump sum - Amortized - Pure discount - Interest-only - Perpetual

interest-only

Julie is borrowing $12,800 to purchase a car. The loan terms are 36 months at 7.5 percent interest. How much interest will she pay on this loan if she pays the loan as agreed? Round your answer to the nearest whole dollar.

$1,534 Total interest paid = ($398.16 × 36) - $12,800 = $1,534 (rounded)

Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest?

$1,666,666.67

Kristina started setting aside funds three years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved for her down payment?

$11,542.10

Anne plans to save $40 a week for the next five years. She expects to earn 3 percent for the first two years and 5 percent for the last three years. How much will her savings be worth at the end of the five years?

$11,708.15

Hometown Builders is borrowing $150,000 today for five years. The loan is an interest-only loan with an APR of 8.5 percent. Payments are to be made annually. What is the amount of the first annual payment?

$12,750

What is the effective annual rate of 14.9 percent compounded quarterly?

15.75 percent

Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?

$7,546.70

Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of 7.75 percent and monthly payments of $310. Your financial situation recently changed such that you can no longer afford these payments. After talking with your banker and explaining the situation, he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 percent. How much longer will it take you to repay this loan than you had originally planned?

15.84 months

Compass Bank is offering 0.8 percent compounded daily on its savings accounts. If you deposit $2,500 today, how much will you have in the account in 15 years?

2,818.74

Standards Life Insurance offers a perpetuity that pays annual payments of $100,000. This contract sells for $2,750,000 today. What is the interest rate?

3.64 percent

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms? - Amortized payment - Annuity due - Perpetuity - Continuation - Ordinary annuity

Perpetuity

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why? - Project 2, because the total cash inflows are $70,000 greater than those of Project 1 - Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62 - It does not matter as both projects have almost identical present values. - Project 1, because the annual cash flows are greater than those of Project 2 - Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

Project 2; because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the: - compounded rate. - annual percentage rate. - effective annual rate. - simple rate. - perpetual rate.

annual percentage rate

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

charge interest annually.

Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the: - effective annual rate. - annual percentage rate. - compounded rate. - stated rate. - quoted rate.

effective annual rate.

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: - can either be less than or equal to 12.9 percent. - will be less than 12.9 percent. - can either be greater than or equal to 12.9 percent. - will be greater than 12.9 percent. - is 12.9 percent.

will be greater than 12.9 percent.

Which one of the following statements is true concerning annuities? - All else equal, an ordinary annuity is more valuable than an annuity due. - An annuity with payments at the beginning of each period is called an ordinary annuity. - All else equal, a decrease in the number of payments increases the future value of an annuity due. - All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity. - All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?

Amortized

Which of the following characteristics apply to a perpetuity? I. Constant cash flow dollar amount II. Unequal cash flow dollar amount III. Limited time period IV. Infinite time period

I and IV only

First Trust offers personal loans at 7.7 percent compounded monthly. Second Bank offers similar loans at 7.75 percent compounded semiannually. Which one of the following statements is correct concerning these loans? - First Trust offers the best deal on loans. - The First Trust loan has an effective rate of 7.98 percent. - The annual percentage rate for the Second Bank loans is 7.90 percent. - The Second Bank loan has an effective rate of 8.03 percent. - Borrowers should prefer the loans offered by Second Bank.

The First Trust loan has an effective rate of 7.98 percent.