Study set for Finance Exam 2
You are due to receive a lump-sum payment of $2,350 in seven years. Assuming a discount rate of 2.5 percent interest, what would be the value of the payment in Year 4?
$2,182.21
Julie is borrowing $14,950 to purchase a car. The loan terms are 48 months at 6.95 percent interest, compounded monthly. How much interest, rounded to the nearest dollar, will she pay on this loan if she pays the loan as agreed?
$2,217
You deposit $1,200 into an account that earns 1.75 percent interest in three years. If you deposit an additional $1,200 in the same account 2 years later, how much would be in the account six years from now?
$2,485.11
You are due to receive a lump-sum payment of $1,350 in four years and an additional lump-sum payment of $1,450 in five years. Assuming a discount rate of 2.0 percent interest, what would be the value of the payments today?
$2,560.50
You want to have $32,000 for a down payment on a house 5 years from now. If you can earn 4.3 percent, compounded annually on your savings, how much do you need to deposit today to reach your goal?
$25,925.58
What is the future value of $8,000 invested today and held for 15 years at 8.5 percent compounded annually?
$27,197.94
You have just made your first $5,000 contribution to your retirement account. Assuming you earn a rate of return of 5 percent and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing?
$27,580.08; $21,609.71
Theodoro has just received an insurance settlement of $18,500. She wants to save this money until her daughter goes to college. If she can earn an average of 5.2 percent, compounded annually, how much will she have saved when her daughter enters college 9 years from now?
$29,195.33
Twelve years from now, you will be inheriting $60,000 What is this inheritance worth to you today if you can earn 6.0 percent interest, compounded annually
$29,818.16
Twelve years from now, you will be inheriting $60,000 What is this inheritance worth to you today if you can earn 6.0 percent interest, compounded annually?
$29,818.16
You are due to receive a lump-sum payment of $1,750 in three years and an additional lump-sum payment of $1,850 in five years. Assuming a discount rate of 3.0 percent interest, what would be the value of the payments today?
$3,197.32
Two years from today, you deposit $1,675 into an account that earns 2.35 percent interest. Four years from today, you deposit an additional $1,950 in the same account. How much will be in the account six years from today?
$3,880.81
Your grandparents just gave you a gift of $3,000. You are investing this money at 3 percent simple interest. How much money will you have at the end of the 10 years?
$3,900
Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?
Increasing the interest rate
Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?
Interest-only
Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years
Kurt will have a larger account value than Stacey will.
Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years:
Kurt will have a larger account value than Stacey will.
Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.
PV = $600 ÷ (1 + .07)6raise to the power of 6
Katlyn needs to invest $5,318 today for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?
Present value
What is the future value of $25 a week for 40 years at 8.5 percent interest? Assume the first payment occurs at the end of this week.
$441,710.03
Western Bank pays 5 percent simple interest on its savings account balances, whereas Eastern Bank pays 5 percent compounded annually. If you deposited $6,000 in each bank, how much more money would you earn from the Eastern Bank account at the end of 3 years?
$45.75
Today, you deposit $2,500 in a bank account that pays 3.6 percent simple interest. How much interest will you earn over the next 5 years?
$450.00
Your parents spent $7,800 to buy 200 shares of stock in a new company 15 years ago. The stock has appreciated 12.6 percent per year on average. What is the current value of those 200 shares?
$46,256.25
Travis invests $4,500 today into a retirement account. He expects to earn 11 percent, compounded annually, on his money for the next 12 years. After that, he wants to be more conservative, so only expects to earn 9 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account?
$48,265.05
You will receive annual payments of $800 at the end of each year for 12 years. The first payment will be received three years from today. What is the present value of these payments if the discount rate is 7 percent?
$5,549.96
Varian wants to have $500,000 in an investment account six years from now. The account will pay .58 percent interest per month. If he saves money every month, starting one month from now, how much will he have to save each month to reach his goal?
$5,614.90
A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?
13.53%
You have an outstanding loan with an EAR of 14.61 percent. What is the APR if interest is compounded monthly?
13.71%
Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education?
13.99%
Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education? Group of answer choices
13.99%
An amortized, 3-year loan has annual payments and an effective annual rate of 14.56 percent. What is the APR?
14.56%
You just won $17,500 and deposited your winnings into an account that pays 6.7 percent interest, compounded annually. How long will you have to wait until your winnings are worth $50,000?
16.19 years
Anne plans to save $40 a week, starting next week, for ten years and earn a rate of return of 4.6 percent, compounded weekly. After the ten years, she will discontinue saving and invest her account at 6.5 percent, compounded annually. How long from now will it be before she has accumulated a total of $50,000?
20.32 years
You have $300 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?
24.57%
Stephen claims that he invested $2,200 six years ago and that this investment is worth $10,500 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounded annually.
29.76%
You expect to receive $5,000 at graduation one year from now. Your plan is to invest this money at 6.5 percent, compounded annually, until you have $50,000. At that time, you plan to travel around the world. How long from now will it be until you can begin your travels? Group of answer choices
37.57 years
Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?
4 percent interest, compounded annually
You have been told that you need $15,000 today for every $50,000 you want when you retire 30 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually
4.09 %
Recently, you needed money and agreed to sell a car you had inherited at a price of $55,000, to be paid in monthly payments of $800 for 60 months. What interest rate did you charge for financing the sale?
5.38%
RB Farworth will pay you $2,500 a year for 15 years in exchange for $25,000 today. What interest rate will you earn on this annuity?
5.56%
Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?
6.5 percent simple interest
London Motors will sell a $24,000 car for $470 per month for 60 months. What is the interest rate?
6.54%
Suppose that in 2015, a $10 silver certificate from 1898 sold for $17,100. For this to have been true, what would the annual increase in the value of the certificate have been?
6.57%
When you were born, your parents opened an investment account in your name and deposited $1,500 into the account. The account has earned an average annual rate of return of 5.5 percent. Today, the account is valued at $42,856. How old are you?
62.61 years old
You have $2,000 today in your savings account. How long must you wait for your savings to be worth $4,500 if you are earning 1.25 percent interest, compounded annually?
65.28 years
Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?
8 percent interest for 9 years
You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 9 percent interest. Approximately how long must you wait for your investment to double in value?
8 years
At 12.5 percent interest, how long does it take to triple your money?
9.33 years
You owe $6,800 on a car loan that has an interest rate of 6.75 percent and monthly payments of $310. You lost your job and your new job pays less, so your lender just agreed to lower the monthly payments to $225 while keeping the interest rate at 6.75 percent. How much longer will it take you to repay this loan than you had originally planned?
9.74 months
Which one of the following will increase the present value of a lump-sum future amount to be received in 15 years?
A decrease in the interest rate
The present value of a lump-sum future amount:
increases as the interest rate decreases.
All else held constant, the future value of a lump-sum investment will decrease if the:
interest is changed to simple interest from compound interest.
Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:
interest on interest.
By definition, a bank that pays simple interest on a savings account will pay interest
only on the principal amount originally invested.
By definition, a bank that pays simple interest on a savings account will pay interest:
only on the principal amount originally invested.
Given an interest rate of zero percent, the future value of a lump sum invested today will always:
remain constant, regardless of the investment time period.
Ben invested $5,000 fifteen years ago with an insurance company that has paid him 4 percent simple interest on his funds. Charles invested $5,000 fifteen years ago in a fund that has paid him 4 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 15 years?
$1,004.72
You want to purchase a new condominium that costs $285,000. Your plan is to pay 30 percent down in cash and finance the balance over 30 years at 5.2 percent. What will be your monthly mortgage payment including principal and interest?
$1,095.48
Appalachian Bank offers you a $30,000, 2-year term loan at an APR of 5.5 percent, compounded monthly. What will be your monthly loan payment?
$1,322.87
You are due to receive a lump-sum payment of $1,650 in five years. Assuming a discount rate of 3.5 percent interest, what would be the value of the payment in Year 3?
$1,540.29
You are due to receive a lump-sum payment of $1,350 in five years. If you could invest that money at 4.5 percent interest for three years, how much would it be worth eight years from now?
$1,540.57
Adirondack Corporation will need $1.75 million 3 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 2.75 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?
$1,613,216.13
You want to purchase a new condominium that costs $325,000. Your plan is to pay 20 percent down in cash and finance the balance over 15 years at 4.1 percent. What will be your monthly mortgage payment including principal and interest?
$1,936.24
Today, you are borrowing money and must repay the lender one year from now with a lump-sum payment of $12,800. How much money are you borrowing if the interest rate is 8.45 percent, compounded monthly?
$11,766.32
Ten years ago, you deposited $5,500 into an account. Five years ago, you added an additional $2,500 to this account. You earned 6.5 percent, compounded annually, for the first 5 years and 5.0 percent, compounded annually, for the last 5 years. How much money do you have in your account today?
$12,808.09
Kristina started setting aside funds five years ago to save for a down payment on a house. She has saved $600 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved?
$13,471.72
Hometown Builders is borrowing $195,000 today for four years. The loan is an interest-only loan with an APR of 7.65 percent. Payments are to be made annually. What is the amount of the first annual payment?
$14,917.50
Bob can afford car payments of $365 per month for 5 years. If the interest rate is 4.9 percent, how much money can he afford to borrow?
$19,388.64
Roberto can afford car payments of $450 per month for 4 years. If the interest rate is 5.3 percent, how much money can he afford to borrow?
$19,425.49
You and your sister are planning a large anniversary party 3 years from today for your parents' 50th wedding anniversary. You have estimated that you will need $6,500 for this party. You can earn 1.5 percent compounded annually on your savings. How much would you and your sister have to deposit today in one lump sum to pay for the entire party?
$6,216.06
You are scheduled to receive $5,000 in two years. When you receive it, you will invest it at 6.5 percent per year. How much will your investment be worth eight years from now?
$7,295.71
Uptown Insurance offers an annuity due with semiannual payments for 20 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?
$8,400.46
You're trying to save to buy a new car valued at $42,650. You have $40,000 today that can be invested at your bank. The bank pays 4.2 percent annual interest on its accounts. How long will it be before you have enough to buy the car for cash? Assume the price of the car remains constant.
1.56 years
Isaac only has $2,300 today but needs $2,500 to buy a new computer and add a virus protection package, as he does not trust the base defender. How long will he have to wait to buy the computer if he earns 5 percent compounded annually on his savings? Assume the price of the computer remains constant.
1.71 years
How long will it take to double your savings if you earn 6.9 percent interest, compounded annually?
10.39 years
Which one of the following statements concerning annuities is correct? Group of answer choices
An annuity due has payments that occur at the beginning of each time period.
Which one of the following is the annuity present value formula?
C × ({1 − [1 ÷ (1 + r)traise to the power of t]} ÷ r)
Cindy is taking out a loan today. The cash amount that she is receiving is equal to the present value of the lump-sum payment that she will be required to pay two years from today. Which type of loan is this?
Pure discount
Jessica invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?
She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest.
Sixty years ago, your grandparents opened two savings accounts and deposited $250 in each account. The first account was with City Bank at 3.6 percent, compounded annually. The second account was with Country Bank at 3.65 percent, compounded annually. Which one of the following statements is true concerning these accounts?
The Country Bank account has paid $61.30 more in interest than the City Bank account.
Which one of the following statements is correct?
The EAR, rather than the APR, should be used to compare both investment and loan options
Today, Charity wants to invest less than $3,000 with the goal of receiving $3,000 back some time in the future. Which one of the following statements is correct?
The period of time she has to wait decreases as the amount she invests increases.
You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?
The present value of the perpetuity must be higher than the present value of either the ordinary annuity or the annuity due.
Which one of these is a perpetuity?
Trust income of $1,200 a year forever
Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
annual percentage rate.
Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:
compound interest.
Tomas earned $89 in interest on his savings account last year and has decided to leave the $89 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called:
compounding.
The future value of a lump-sum investment will increase if you:
increase the time period.
All else held constant, the present value of an annuity will decrease if you:
decrease the annuity payment.
The interest rate used to compute the present value of a future cash flow is called the:
discount rate.
Computing the present value of a future cash flow to determine what that cash flow is worth today is called:
discounted cash flow valuation.
Calculating the present value of a future cash flow to determine its worth today is commonly called:
discounting cash flow valuation.
calculating the present value of a future cash flow to determine its worth today is commonly called:
discounting cash flow valuation.
Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called:
discounting.
Lew has $3,600 that he wants to invest for 5 years. He can invest this amount at his credit union and earn 2.2 percent simple interest. Or, he can open an account at Compass Bank and earn 2.15 percent interest, compounded annually. If he decides to invest at Compass Bank for 5 years, he will:
earn $8 more than if he had invested with his credit union.
Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:
effective annual rate.
Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:
future value.
South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:
will be greater if you invest with Northern Bank.
