Finance CH 5

20) 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) $11,464

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2) 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) $126

31) 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) $ 2,985

28) 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) $ 67,800

45) 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) $127

3) 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) $252

13) 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) $285,714

7) 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) increases; increases

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

C) perpetuity

6) 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) $ 77

24) 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) $1,558

25) 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) $12,093

29) 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) $27,552

11) 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) $178,571

21) 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) $35,098

9) 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) $121,363

17) 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 future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.

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

A) discount rate

43) 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) effective

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

A) perpetuity

26) 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) $3,000,000

18) 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) $31,291

1) ________ 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) Compound interest

23) 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) decreasing

42) 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) nominal

5) 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) present value

4) 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) $ 42

32) $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) $ 727

22) 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) $190,000

44) 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) $253

27) 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) $3,125,000

16) 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) $31,874

30) 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) $98,846

48) 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) 12.75%

10) 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) An annuity due is an equal stream of cash flows is paid or received at the beginning of each period.

33) $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) $ 8,142

15) 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) $144,104

19) 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) $71,152