Chapter 6

Your credit card company charges you 1.15 percent interest per month. What is the APR? 18.92% 13.80% 15.95% 17.25% 14.71%

13.80%

An annuity that pays $12,500 a year at an annual interest rate of 5.45 percent costs $150,000 today. What is the length of the annuity time period? 25 years 18 years 15 years 20 years 22 years

20 years

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy? 3.650% 3.100% 2.875% 3.125% 4.255%

3.125%

You want to buy a new sports car for $55,000. The contract is in the form of a 60-month annuity due at an APR of 5.6 percent compounded monthly. What will be your monthly payment? $1,047.90 $1,053.87 $1,048.21 $1,063.30 $1,072.11

$1,048.21

Sara wants to establish a trust fund to provide $75,000 in scholarships each year. She believes the fund can earn a fixed 6.15 percent annual rate of return. How much money must she contribute to establish the fund? $987,450 $1,478,023 $1,333,333 $1,219,512 Correct $1,500,000

$1,219,512

Vimal just purchased an annuity that will pay him $24,000 a year for 25 years. He will receive the first payment today. Given a discount rate is 8.5 percent, how much did Vimal pay for the annuity? $241,309 $245,621 $251,409 $258,319 $266,498

$266,498

What is the present value of $1,000 to be received in 12 years invested at a rate of 8%? $397 $837 $1,000 $1,386 $1,586

$397

Howell Corporation deposited $12,000 in an investment account one year ago for the purpose of buying new equipment. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today and plans to purchase the equipment four years from today. Assuming an interest rate of 5.5 percent, how much cash will be available when the company is ready to buy the equipment? $43,609.77 $45,208.61 $44,007.50 $46,008.30 $47,138.09

$46,008.30

A preferred stock pays an annual dividend of $5.20. What is one share of this stock worth today if the rate of return is 10.44 percent? $51.48 $41.18 $49.81 $39.87 $42.90

$49.81

You are considering two savings options. Both options offer a rate of return of 8.3 percent. The first option is to save $1,500, $1,250, and $6,400 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today? $7,203 $7,489 $8,449 $11,623 $11,428

$7,489

Your bank pays 1.2 percent compounded daily on its savings accounts. If you deposit $7,500 today, how much will you have in your account 15 years from now? $8,979.10 $9,714.06 $8,204.50 $9,336.81 $9,414.14

$8,979.10

What is the future value of $400 invested each year for 15 years at a rate of 6%? $959 $6,000 $9,310 $12,310 $14,959

$9,310

What is the EAR if a bank charges you an APR of 7.65 percent compounded quarterly? 7.91% 8.38% 8.02% 7.87% 8.11%

7.87%

The variables in a future value of a lump sum problem include all of the following, except: Future Value Payments Time period Interest rate

Payments

The variables in a present value of a lump sum problem include all of the following, except: Present Value Time period Interest rate Payments

Payments

The variables in a future value of a lump sum problem include all of the following, except: Future Value Time period Annuity Payments Interest rate

Annuity Payments

How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)? Increase the time needed to save. Increase the present value. Decrease the present value. Increase the future value. Decrease the future value.

Decrease the future value.

The variables in a present value of a lump sum problem include all of the following, except: Present Value Time period Interest rate Free Cash Flow

Free Cash Flow

The variable that you are solving for in a future value of a lump sum problem is: Future value Present value Time period Interest rate Payments

Future value

The variable that you are solving for in a future value of an annuity problem is: Present value Future value Time period Interest rate Payments

Future value

The variables in a future value of an annuity problem include all of the following, except: Usage Future Value Payments Time period Interest rate

Usage

The variables in a future value of an annuity problem include all of the following, except: Future Value Payments Time period Interest rate Volatility

Volatility

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate. effective annual annual percentage periodic interest compound interest episodic interest

annual percentage

How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)? Increase the time needed to save. Decrease the present value. Increase the present value. Change the future value.

Decrease the present value.

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate. stated discounted annual effective annual periodic monthly consolidated monthly

effective annual

What is the present value of $1,200 to be received in 18 years invested at a rate of 5%? $399 $499 $1,000 $1,399 $1,599

$499

What is the future value of $1,000 invested for 15 years at a rate of 5%? $750 $1,000 $1,500 $2,079 $2,790

$2,079

A relative will support your education by paying you $500 a month for 50 months. If you can earn 7 percent on your money, what is this gift worth to you today? $21,629.93 $18,411.06 $21,338.40 $20,333.33 $19,450.25

$21,629.93

What is the future value of $500 invested each year for 20 years at a rate of 10%? $3,364 $5,000 $10,000 $28,637 $33,735

$28,637

What is the present value of $400 invested each year for 12 years at a rate of 6%? $814 $2,861 $3,354 $6,748 $9,586

$3,354

What is the future value of $1,200 invested for 20 years at a rate of 6%? $1,200 $1,440 $1,849 $3,079 $3,849

$3,849

What is the present value of $500 invested each year for 10 years at a rate of 5%? $814 $3,861 $5,985 $6,289 $8,586

$3,861

Finn intends to save $2,000 per year, and expects to earn an annual rate of 6.9 percent. How much will he have in his account at the end of 37 years? $406,429.10 $338,369.09 $297,407.17 $313,274.38 $308,316.67

$313,274.38

Excellent Yachting is considering acquiring Turquoise Tours. Management believes Turquoise Tours can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Excellent Yachting should pay today to acquire Turquoise Coast? $519,799.59 $538,615.08 $545,920.61 $595,170.53 $538,407.71

$519,799.59

You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account? 15.61% 13.97% 14.98% 15.75% 16.35%

15.61%

How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)? Increase the time needed to save. Increase the present value. Change the future value. Decrease the present value.

Increase the present value.

A common error made when solving a future value of an annuity problem is Using factor tables to help solve the problem. Dividing the annual deposit by the number of years before calculating the problem. Using a financial calculator to help solve the problem. Multiplying the number of years and the interest rate before calculating the problem. Multiplying the annual deposit and the number of years before calculating the problem.

Multiplying the annual deposit and the number of years before calculating the problem.

The variable that you are solving for in a present value of a lump sum problem is: Present value Time period Interest rate Payments Future value

Present value

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed.)

Project X has both a higher present and a higher future value than Project Y.

The variables in a present value of an annuity problem include all of the following, except: Time period Risk Profile Interest rate Payments

Risk Profile

The variables in a present value of an annuity problem include all of the following, except: Time period Interest rate Source of funds Payments

Source of funds

The variable that you are solving for in a present value of an annuity problem is: The Present value Time period Interest rate Payments

The Present value

Which one of the following statements concerning interest rates is correct? Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. The effective annual rate decreases as the number of compounding periods per year increases. The effective annual rate equals the annual percentage rate when interest is compounded annually. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of the following statements related to loan interest rates is correct? The annual percentage rate considers the compounding of interest. When comparing loans you should compare the effective annual rates. Lenders are most apt to quote the effective annual rate. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

When comparing loans you should compare the effective annual rates.

The interest rate that is most commonly quoted by a lender is referred to as the: annual percentage rate. compound rate. effective annual rate. simple rate. common rate.

annual percentage rate.

A perpetuity is defined as: a limited number of equal payments paid in even time increments. payments of equal amounts that are paid irregularly but indefinitely. varying amounts that are paid at even intervals forever. unending equal payments paid at equal time intervals. unending equal payments paid at either equal or unequal time intervals.

unending equal payments paid at equal time intervals