Finance Exam 2 Review (Chapter 5)

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

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 PV = -100 I/Y = 6 N = 4 CPT FV

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

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

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.

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

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

A) perpetuity

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

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

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

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.

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

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

C) perpetuity

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.

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

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

________ 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

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

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

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

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

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

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

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

Calculate the future value of $4,600 received today if it is deposited at 9 percent for three years.

FV = PV (1+ r)n = $4,600(1.09)3 = $5,957