Finance 363 exam 1 practice test

Suppose you deposited $10,000 in a savings account earning 3.0% interest compounding annually. How many years will it take for the balance to grow to $12,000? Round to one decimal place.

6.2

If you buy 100 shares of Tesla Inc. at $245 each and the stock price drops to $80 in three years, what would be your annual rate of return on this investment? Round to the tenth of a percent (e.g. 3.48% = 3.5)

-31.1

You lend $5,000 to a friend. If you agree to a 1% interest rate and a 4 year term, how much does he need to pay you back each month? Rounds to the nearest cent. ​[Hint: Think of $5,000 as the PV of an annuity with a discount rate of 1%. You are looking for the monthly CFs.]

106.31

You are considering putting $30,000 in an investment with an expected annual return of 8%. Suppose you make the investment and after 9 years reinvest your proceeds in another investment that will return 6%. How much will you have after 20 years from today? Round to the nearest cent.

113841.23

You are considering buying a farm. You expect that the farm will generate an annual cash flow of $10,000 indefinitely. If the appropriate discount rate is 8%, what is this farm worth to you today based only on this cash flow stream?

125000

You need to make monthly withdrawals of $400 starting today to pay for rent. You anticipate making these withdrawals for the next 3 years. Assuming the rent stays the same, how much money must you have in the account today to support the withdrawals for the next 3 years? The account pays 2% interest. Round to the nearest cent.

13988.50

You find out that a distant relative has left you $10,000 in a trust fund that you cannot touch for another 5 years. If the fund's trustee offers to pay you $5,000 today in exchange for the inheritance, what is the implied annual interest rate on this "loan" he is offering you? Round to the tenth of a percent.

14.9

If you take out an amortized loan of $100,000 with a 10 year term and 7% interest rate, what are the annual payments you need to make? Round to the nearest cent.

14237.75

You are buying a house for $300,000. Down payment is 20%. The mortgage is for 20 years, interest rate is 4%. What will be your monthly payments? Round to the nearest cent.

1454.35

What is the present value of the following beginning-of-year cash flow stream? Year 1: $2,000; Year 2: $4,000; Year 3: $6,000; Year 4: 0; Year 5: $5,000. The appropriate discount rate is 7%. Round to the nearest cent.

14793.43

What is the simple interest (one period interest) earned on a $500 deposit that earns 3% per year?

15

If you deposit $5,000 each year for the next 20 years starting today into an account paying 4% interest, how much will you have at the end of year 20? Round to the nearest cent.

154846.01

Calculate the future value of an annuity with 12 annual cash flows of $10,000 each. The interest rate is 5%. Round to the nearest cent.

159171.27

Congratulations! You just won a $200,000 prize. You will receive $50,000 immediately and the rest will be paid out in equal annual installments over the following 10 years. If the appropriate discount rate is 6%, what is the present value of this prize?

160401.31

What is the future value of $1,000 earning 5% per year for 12 years? Round to the nearest cent.

1795.86

You have $3,000 in an account which pays 2.0% compounded annually. How many additional dollars of interest would you earn over 10 years if you moved the money to an account earning 2.5% compounded monthly? Round to the nearest cent.

194.09

You have $20,000 in an account earning an interest rate of 5%. What are the equal beginning-of-month withdrawals you can make from this account before it is depleted in 10 years? Round to the nearest cent.

211.25

Suppose you deposited $5,000 in a savings account earning 4.0% interest compounding daily. How many days will it take for the balance to grow to $6,500? Round to one decimal place.

2394.2

You are interested in buying a house and renting it out. You expect to receive a monthly net income of $1,500 from rent. You then expect to sell the house for $300,000 at the end of 60 months. If your discount rate on this investment is 0.8% per month, what is this property worth to you today? Assume that you receive rent at the beginning of each month and you receive the first rent the same day you purchase the property. Round to the nearest cent. ​[Hint: Notice that the interest rate provided is monthy, so this is i/m. Also, 60 months is nxm.]

257816.26

You expect to receive $5,000 next year, cash flows of $4,000 annually over the following 6 years, and one last cash flow of $8,000 the following year. If the appropriate discount rate is 7%, what is this stream of cash flows worth to you today? Round to the nearest cent. ​[Hint: Timeline is very important here. As with all advanced TVM questions, first convert the annuity into its single cash-flow equivalent, in this case using the PV annuity formula. In the second step, you will have three single cash-flows you need to discount back to time zero using different n's.]

27147.81

What is the present value of $5,000 to be received in 10 years if the appropriate discount rate is 6% per year compounded semi-annually? Round to the nearest cent.

2768.38

Suppose you open a savings account and make 8 annual deposits of $1,000 starting today. The account pays an interest rate of 5%. If you don't touch your money at all, how much will you have in the account by the end of 30 years? ​[Hint: Careful with the timing. When is the last deposit and where does the FV annuity due go? That will determine how many more years of interest until year 30.]

29330.31

You have a ballon payment of $400,000 coming up. If you had taken out the loan 4 years ago at an interest rate of 8%, how much did you borrow? Round to the nearest cent.

294011.94

A bank advertises an annual interest rate of 3.5% compounded daily on their savings accounts. What is the effective annual rate (EAR)? Round to the hundredth of a percent (e.g. 3.68% = 3.68).

3.56

Three years from now you will begin receiving annual payments of $5,000, with the last one coming at the end of year 11. Using a discount rate of 6%, what is the present value of this cash flow stream? Round to the nearest cent. ​[Hint: This is a deferred annuity. In step 1, careful with what n is. In the second step, how many years do you need to discount the PV annuity from the first step?]

30267.41

If you make annual deposits of $200, $400, $600, $800 and $1,000 into an account at the end of each year for the next 5 years, what will your balance be by the end of year 5? Interest rate is 4%. Round to the nearest cent.

3164.88

You are buying a house for $450,000. Down payment is 10%. The mortgage is for 30 years, interest rate is 5%, and payments are monthly. How much interest will you pay in total over the life of the loan? Round to the nearest cent.

377685.93

If you invest $50 per month at the end of each month for the next 72 months in an account that pays 3.5%, how much interest will you earn over that time period? Round to the nearest cent.

399.45

Suppose you are planning to deposit $10,000 in a bank account. You'd like your deposit to grow to $13,000 in 6 years. If interest in the account compounds monthly, what annual interest rate do you need? Round to the tenth of a percent (e.g., 4.82% = 4.8)

4.4

A Popeyes chicken sandwich costs $3.99. If its price increases at a 2% annual rate, what will its price be in 5 years? Round to the nearest cent.

4.41

University of South Carolina has approximately $800 million in its endowment. If the endowment were to earn an average annual return of 5% per year in perpetuity, how much annual cash flow would it generate for the university in perpetuity? Round to the nearest cent.

40000000

What is the future value of $300 earning 7% compounded monthly for 6 years? Round to the nearest cent.

456.03

You would like to save $20,000 by the end of 4 years. How much must you save at the end of each year to reach your goal if your savings earn 4%? Round to the nearest cent.

4709.80

An asset is expected to pay $1,000 at the end of each year in perpetuity. If the asset is worth $20,000 today, what is the discount rate? Answer in percent, rounded to two decimal places.

5

In 1985, the average annual cost of attending a public university was $3,800, including tuition, fees, room, and board. By 2018, the average cost had climbed up to $20,000. What was the annual average growth rate over those 33 years? Round to the tenth of a percent (e.g. 3.13% = 3.1)

5.2

Actively managed mutual funds charge higher management fees than passively managed index funds, even though on average they fail to generate higher returns for their investors (We'll talk about this when we get to "Stocks"). Suppose your retirement savings plan is to invest $700 monthly for the next 40 years. If your investments were to earn an average annual return of 8% if invested in the cheap index fund but 7% after fees in the expensive actively managed mutual fund, how much more will you have saved in the index fund compared to the mutual fund by the end of 40 years? Returns are annual returns but monthly compounded. Round to the nearest cent.

606336.10

You have $40,000 in an account earning an interest rate of 4%. What are the equal beginning-of-month withdrawals you can make from this account such that it is depleted after exactly 72 monthly withdrawals starting today? Round to the nearest cent.

623.72

Suppose your company takes out a $5 million 4-year balloon loan from a bank at an interest rate of 6%. What will be the balloon payment at the end of the loan term? Round to the nearest cent.

6312384.8

If the applicable discount rate is 6.0%, what is the present value of the following stream of end-of-year cash flows? Round to the nearest cent. Cash Flow Year 1: $30,000; Cash Flow Year 2: $40,000; Cash Flow Year 3: $10,000.

72297.94

If you need to have a balance of $10,000 after 8 years in an account paying 4% per year compounded monthly, how much would you have to deposit today? Round to the nearest cent.

7265.36

A stock you own is expected to start paying annual dividends of $1 per share in 3 years and continue paying the same amount indefinitely. How much is each share worth if the appropriate discount rate is 10%? Round to the nearest cent. ​[Hint: We have a deferred perpetuity. Find the PV of the perpetuity, put it in the right place on the timeline, and discount it as if it is a single cash flow back to time zero.]

8.26

A friend promises to pay you $1,500 at the end of each year for 8 years. What is the present value of these payments if the appropriate discount rate is 7%? Round to the nearest cent.

8956.95

If you deposit $2,000 at the beginning of year 1, $3,000 one year later, and $4,000 one year after that, into an account earning 3% interest, how much will the balance by the end of year 3? Round to the nearest cent.

9488.15

In four years you will begin receiving 6 annual payments of $1,000 each. If you save the payments in an account earning 5%, what will your balance be after 16 years? Round to the nearest cent. ​[Hint: Draw the timeline carefully. First annuity payment is in year 4. When is the last one? That determines how many more years of interest in the second step.]

9570.97

If you deposit $2,000 into an account paying 4% interest compounded quarterly, how much interest will you earn after 10 years? Round to the nearest cent. ​[Hint: Careful that the question is asking for interest, not future balance. Interest is the difference between final balance and initial deposit.]

977.73