quiz 3

The future value of $200 received today and deposited for three years in an account which pays semiannual interest of 8 percent is ________.

$253.00

Find the present value of the following stream of cash flows assuming an opportunity cost of 25 percent.

$27,168

If a United States Savings bond can be purchased for $29.50 and has a maturity value of $100 at the end of 25 years, what is the annual rate of return on the bond?

5 percent

The future value of a dollar ________ as the interest rate increases and ________ the longer the money remains invested.

increases; increases

The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.

nominal

You receive $1,000 in 1 year, $1,200 in 2 years, and $1,300 in 3 years. The present value today of these future receipts is ________ if the opportunity cost is 7 percent.

not $3,257

How many years would it take for Harry to save an adequate amount for retirement if he deposits $2,000 per month into an account beginning today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement?

not 13 years

A certain investment promises to pay you $2,500 per year forever with the first payment starting 5 years from now. If you can earn a 5% return on similar investments, what's the most you would pay for this investment today?

not 50,000

Find the present value of the following stream of cash flows assuming an opportunity cost of 9 percent.

not 65,213

A(n) ________ is an annuity with an infinite life making continual annual payments.

perpetuity

An annuity with an infinite life is called a(n) ________.

perpetuity

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 ________.

present value

The future value of $200 received today and deposited at 8 percent for three years is approximately ________.

252

Danny Joe borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments. The interest paid in the first year is ________.

$1,155

A wealthy art collector has decided to endow her favorite art museum by establishing funds for an endowment which would provide the museum with $1,000,000 per year for acquisitions into perpetuity. The art collector will give the endowment upon her fiftieth birthday 10 years from today. She plans to accumulate the endowment by making annual end-of-year deposits into an account. The rate of interest is expected to be 6 percent in all future periods. How much must the art collector deposit each year to accumulate to the required amount?

$1,264,466

The future value of an ordinary annuity of $1,000 each year for 10 years, deposited at 3 percent, is ________.

$11,464

A beach house in Southern California now costs $350,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Eric and Karinna retire from successful careers in commercial art. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement?

$11,472

The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost of 11 percent, is ________.

$12,093

Find the present value of the following stream of a firm's cash flows, assuming that the firm's opportunity cost is 14 percent.

$131,068

Bill plans to fund his individual retirement account (IRA) by contributing $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?

$144,105

Jia borrows $50,000 at 10 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year loan payment is ________.

$15,773

Zheng Sen wishes to accumulate $1 million by the end of 20 years by making equal annual end-of-year deposits over the next 20 years. If Zheng Sen can earn 10 percent on his investments, how much must he deposit at the end of each year?

$17,460

The present value of a $25,000 perpetuity at a 14 percent discount rate is ________.

$178,571

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?

$2,985

Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year, assuming the firm can earn 17 percent on its investments.

$20,127

Gina has planned to start her college education four years from now. To pay for her college education, she has decided to save $1,000 a quarter for the next four years in an investment account paying 12 percent interest. How much will she have at the end of the fourth year?

$20,157

A ski chalet at Peak n' Peak now costs $250,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 10 years before Chris and Julie retire from successful investment banking careers. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon retirement?

$22,108

Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest rate. The original principal amount was ________.

$25,000

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?

$27,551

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?

$3,000,000

The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years is ________.

$31,291

Dan plans to fund his individual retirement account (IRA) by contributing $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?

$31,875

The future value of an ordinary annuity of $2,000 each year for 10 years, deposited at 12 percent, is ________.

$35,097

How much would Sophie have in her account at the end of 10 years if she deposit $2,000 into the account today if she earned 8 percent interest and interest is compounded continuously?

$4,451

The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is approximately ________.

$42

Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year, assuming the firm can earn 8 percent on its investments.

$47,944

Entertainer's Aid plans five annual colossal concerts, each in a different nation's capital. The concerts will raise funds for an endowment which would provide the World Wide Hunger Fund with $3,000,000 per year into perpetuity. The endowment will be given at the end of the fifth year. The rate of interest is expected to be 9 percent in all future periods. How much must Entertainer's Aid deposit each year to accumulate to the required amount?

$5,569,749

Xiao Xin is planning to accumulate $40,000 by the end of 5 years by making 5 equal annual deposits. If she plans to make her first deposit today and can earn an annual compound rate of 9 percent on her investment, how much must each deposit be in order to accumulate the $40,000?

$6,684

The future value of a $10,000 annuity due deposited at 12 percent compounded annually for each of the next 5 years is ________.

$71,152

The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is approximately ________.

$77

James plans to fund his individual retirement account, beginning today, with 20 annual deposits of $2,000. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account 20 years from today will be ________.

$98,846

How long would it take for you to save an adequate amount for retirement if you deposit $40,000 per year into an account beginning today that pays 12 percent per year if you wish to have a total of $1,000,000 at retirement?

11.5 years

A local brokerage firm is offering a zero-coupon certificate of deposit for $10,000. At maturity, three years from now, the investor will receive $14,000. What is the rate of return on this investment?

12%

How long would it take for Nico to save an adequate amount for retirement if he deposits $40,000 per year into an account beginning one year from today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement?

12.2 years

What is the rate of return on an investment of $16,278 if the company expects to receive $3,000 per year for the next 10 years?

13 percent

What annual rate of return would Grandma Zoe need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years?

5.98%

What effective annual rate of return (EAR) would Rayne need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years?

6.14%

Detta borrows $20,000 from the bank. For a five-year loan, the bank requires annual end-of-year payments of $4,878.05. The annual interest rate on the loan is ________.

7 percent

What is the rate of return on an investment of $124,090 if the company expects to receive $10,000 per year for the next 30 years?

7 percent

A local bank is offering a zero-coupon certificate of deposit for $25,000. At maturity, three years from now, the investor will receive $32,000. What is the rate of return on this investment?

9 percent

________ is the amount earned on a deposit that has become the part of the principal at the end of a specified time period.

Compound interest

For any interest rate and for any period of time, the more frequently interest is compounded, the greater the amount of money that has to be invested today in order to accumulate a given future amount.

False

Future value is the value of a future amount at the present time, found by applying compound interest over a specified period of time.

False

In general, with an amortized loan, the payment amount remains constant over the life of the loan, both the principal portion of and the interest portion declines over the life of the loan.

False

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment declines over the life of the loan, and the interest portion of each payment grows over the life of the loan.

False

The effective rate of interest is the contractual rate of interest charged by a lender or promised by a borrower.

False

The nominal (stated) annual rate is the rate of interest actually paid or earned.

False

The time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

False

When computing an interest or growth rate, the rate will decrease with an increase in future value, holding present value and the number of periods constant.

False

When computing the number of deposits needed to accumulate a future sum, it will take longer if the interest rates are higher, holding the future value and deposit size constant.

False

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? Assume that payments come at the end of each year.

NOT $75,939

A certain investment that costs $10,000 today promises to pay you $10,500 in five years. This investment ________.

NOT may be a good investment if the rate of return you can earn on alternative investments is very high

In comparing an ordinary annuity and an annuity due, which of the following is true?

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

Everything else being equal, the longer the period of time, the lower the present value.

True

For any positive interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value.

True

Future value increases with increases in the interest rate or the period of time funds are left on deposit.

True

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion of each payment declines over the life of the loan.

True

The annual percentage rate (APR) is the nominal rate of interest, found by multiplying the periodic rate by the number of periods in one year.

True

The annual percentage yield (APY) is the effective rate of interest that must be disclosed to customers by banks on their savings products as a result of "truth in savings laws."

True

The effective annual rate increases with increasing compounding frequency.

True

The effective rate of interest differs from the nominal rate of interest in that it reflects the impact of compounding frequency.

True

The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity for interest rates greater than zero.

True

The process of taking cash flow that is received or paid in the future and stating that cash flow in present value terms is called discounting.

True

You invest a certain amount of money today. The process of determining how much money that investment will produce in the future is called ________.

compounding

The present value of a perpetual income stream increases when the discount rate ________.

decreases