Reading 5B

Your insurance agent wants to sell you an annuity consisting of 20 equal end of year payments of $10,000 each, starting at the end of this year. Your desired rate of return for investments of this type is 7 percent. What is the most you would pay for this annuity today? Multiple choice question. $104,950.14 $100,000 $105,940.14 $200,000

$105,940.14

If a bank quotes a loan with an APR of 15 percent, compounded monthly, what is the periodic rate on this loan? Multiple choice question. 15 percent 1.25 percent 1 percent 1.5 percent

1.25 percent Reason: 15/12 = 1.25 percent

*****A bank offers a savings account with an APR of 9 percent with monthly compounding. What is the effective annual interest rate of this investment? Multiple choice question. 9.25 percent 9.00 percent 9.38 percent 9.30 percent

9.38 percent Reason: EAR=(1 + 0.09/12)^12 - 1 = 9.38 percent

The effective annual interest rate is also known as the ______________. Multiple choice question. simple interest rate annually compounded rate annual percentage rate

annually compounded rate

A perpetuity is a constant stream of cash flows for a(n) ______ period of time. Multiple choice question. infinite finite undetermined random

infinite

Which type of interest rate is generally quoted for loans and by banks and other financial institutions? Multiple choice question. real nominal Treasury

nominal

C/r is the formula for the present value of a(n) ____. Multiple choice question. annuity growing perpetuity perpetuity growing annuity

perpetuity

How much is $100 received at the end of each year forever, at 10% interest, worth today? Multiple choice question. $8,830.14 $9,255.75 $1,000 $7,621.09

$1,000

Your neighborhood bank is offering investors a money market account that pays 3.5 percent interest on deposits. If the current annual rate of inflation is 1.2 percent, how much is the exact real rate for this account? Multiple choice question. 2.80 percent 2.30 percent 2.27 percent 3.05 percent

2.27 percent Reason: Use 1+real interest rate=(1+nominal)/(1+inflation)

Inflation can be defined as: Multiple choice question. A rise in interest rates during an economic boom. An increase in the price of imports caused by government tariffs. An overall general rise in prices.

An overall general rise in prices.

Select all that apply Which of the following statements are true regarding the present value of a stream of cash payments? Nominal cash payments should be discounted using a nominal interest rate. Real cash payments may be discounted using a real or nominal rate. Real cash payments should be discounted using a real interest rate. Nominal cash payments may be discounted using a real or nominal rate.

Nominal cash payments should be discounted using a nominal interest rate. Real cash payments should be discounted using a real interest rate.

Select all that apply ______ dollars refer to the actual number of dollars of the day, whereas ______ dollars refer to the amount of purchasing power. Nominal, real Real, nominal Constant, current Current, constant

Nominal, real Current, constant

Which of the following is the correct equation for the present value of an annuity with regular payment C for t periods at interest rate r? Multiple choice question. PV = C/r PV = C/r^t PV = C/(1+r)^t - C/r PV = C[1/r - 1/r(1+r)^t]

PV = C[1/r - 1/r(1+r)^t]

True or false: the nominal interest rate can be defined as an interest rate quoted today by a financial institution on a loan or investment, such as an APR or a periodic rate.

True

Select all that apply Which of the following are annuities? Yearly lease payments Monthly grocery bill Annual installment loan payments Tips to a waiter

Yearly lease payments Annual installment loan payments

The present value of an annuity of $1 per period is called the ______________. Multiple choice question. interest rate annuity factor perpetuity annuity payment

annuity factor

An ordinary annuity is a series of level payments that begin ____. Multiple choice question. at the end of one payment period at any time in the future immediately one year in the past

at the end of one payment period

A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time. Multiple choice question. fixed random infinite uneven

fixed

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate. Multiple choice question. annuity perpetuity growing annuity growing perpetuity

perpetuity

The equation used to determine the approximate real interest rate is: Multiple choice question. real interest rate= inflation rate - nominal interest rate real interest rate= nominal interest rate - inflation rate real interest rate= inflation rate + nominal interest rate real interest rate = inflation rate x nominal interest rate

real interest rate= nominal interest rate - inflation rate

A bank offers a savings account with an APR of 9 percent with monthly compounding. What is the effective annual interest rate of this investment? Multiple choice question. 9.00 percent 9.30 percent 9.38 percent 9.25 percent

9.38 percent Reason: EAR=(1 + 0.09/12)12 - 1 = 9.38 percent

A series of level payments that begins immediately for a specified period of time is called a(n): Multiple choice question. perpetuity due delayed annuity annuity due corporate bond

annuity due

If interest rates go up, the present value of a perpetuity will ______. Multiple choice question. decrease remain unchanged increase

decrease

If interest rates go down, the present value of a perpetuity will _____________. Multiple choice question. increase remain unchanged decrease

increase

To use your financial calculator to solve annuity problems, you use the _____ key for entry of the constant payment C. Multiple choice question. n pmt pv i fv

pmt

Find the future value of an annuity of $100 per year for 10 years at 10 percent per year. Multiple choice question. $1,682.09 $1,437.60 $1,755.25 $1,593.75

$1,593.75

The present value of $100 paid annually at year end for 20 years at 10% per year is: Multiple choice question. $1,880.09 $1,422.53 $851.36 $2,000.00

$851.36

Which of the following is a perpetuity? Multiple choice question. A constant stream of cash flows forever An undulating stream of cash flows forever A constant stream of cash flows for a fixed period A growing stream of cash flows for a fixed period

A constant stream of cash flows forever

If the interest rate is greater than zero, the present value of an annuity due is always ______ an ordinary annuity. Multiple choice question. greater than less than equal to

greater than

An annuity due is a series of level payments that begin ____. Multiple choice question. one year hence one year in the past any time in the future immediately

immediately

Which type of price refers to the of purchasing power of money? Multiple choice question. current real nominal

real

The future value of an annuity that lasts n years is equal to Multiple choice question. the present value allowed to grow n years. the present value of a perpetuity. the present value allowed to grow n+1 years. the future value of a perpetuity.

the present value allowed to grow n years.

The rate quoted by Big Bank on a car loan is 8 percent. The annual rate of inflation is currently 1.5 percent. What is the approximate real interest rate paid by the consumer on this loan? Multiple choice question. 12 percent 8 percent 6.5 percent 9.5 percent

6.5 percent

Real cash flow must be discounted by the Multiple choice question. nominal interest rate. real interest rate. real deflation rate. nominal GDP.

real interest rate.

The best known price index used by economists who measure inflation is ________. Multiple choice question. the index of leading indicators the Dow Jones index the consumer price index (CPI) the purchasing managers' index (PMI)

the consumer price index (CPI)

Which of the following is a proper definition for the effective annual interest rate? Multiple choice question. the interest rate that is annualized using compound interest the interest rate that is annualized using interval interest the interest rate that is annualized using simple interest

the interest rate that is annualized using compound interest

The ________ is the rate at which invested funds will grow over the course of a year. Multiple choice question. effective annual interest rate simple interest rate annual percentage rate

effective annual interest rate

In 2013 the CPI was about 2.5 times its level in 1981. If the price of a pack of cigarettes was $1.00 in 1981 and $5.00 in 2013, then the real price has ______ since 1981. The inflation-adjusted price today should be _______ if there had been no real growth in the price of a pack. Multiple choice question. is less than; $5.00 increased; $2.50 increased; $5.00 is the same as; $2.50

increased; $2.50

In 2013 the CPI was about 2.5 times its level in 1981. If the cost of one semester of college was $5000 in 1981, what should the nominal cost of a semester of college be in 2013 assuming the real price is constant? Multiple choice question. $12,500 $2,000 $12,000 $10,000

$12,500

What is the future value of a series of $2000 end of year deposits into an IRA account paying 5 percent interest, over a period of 35 years? Use your financial calculator. Multiple choice question. $200,000.00 $179,200.22 $189.991.91 $180,640.61

$180,640.61

$200 at the end of each year forever at 10% per year is worth how much today? Multiple choice question. $7,621.09 $2,000.00 $3,294.12 $1,228.91

$2,000.00 Reason: PV = PMT/r $200/0.10 = $2,000

What is the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10% per year? Multiple choice question. $300.00 $269.73 $288.88 $248.69

$248.69

What is the present value of an annuity consisting of 100 end of year payments of $50,000 when the interest rate is 6 percent? Use your financial calculator. Multiple choice question. $830,877.31 $829,800.30 $1,010,010.01 $799,899.20

$830,877.31

******The effective annual interest rate is equal to: Multiple choice question. (1 + APR)^m - 1 (1 + m)^APR - 1 (1 + APR/m)^m - 1 (1 + APR*m)^m - 1

(1 + APR/m)^m - 1

If a bank account pays a monthly interest rate on deposits of 0.5 percent, what is the APR the bank will quote for this account? Multiple choice question. 0.5 percent 12 percent 3 percent 6 percent

6 percent Reason: APR = MR*12 12 x 0.5 = 6 percent

A fixed stream of cash flows that ends after a specified number of years is called a(n): Multiple choice question. annuity perpetuity net present value consol

annuity

The present value of an annuity due is equal to the: Multiple choice question. present value of an ordinary annuity x (1+r) present value of ordinary annuity + (1 - r) present value of an ordinary annuity x r present value of an ordinary annuity/(1+r)

present value of an ordinary annuity x (1+r)

The real interest rate can be defined as: Multiple choice question. the rate of interest on an investment or loan quoted by a financial institution today the real change in value of an investment (or real cost of a loan) after adjustment for inflation the final rate of interest applied to an investment or loan after fees have been deducted the interest rate set by the Federal Reserve Bank through open market operations

the real change in value of an investment (or real cost of a loan) after adjustment for inflation