FIN3403 Chapter 6 Quiz

What is the effective annual rate of 11.9 percent compounded continuously? 12.89 percent 12.64 percent 13.43 percent 12.72 percent 12.68 percent

12.64 percent EAR = e.119 - 1 = .1264, or 12.64 percent

On the day you entered college, you borrowed $25,000 on an interest-only, four-year loan at 4.75 percent from your local bank. Payments are to be paid annually. What is the amount of your loan payment in Year 2? $7,009.40 $5,106.67 $1,187.50 $6,250.00 $1,890.00

$1,187.50 PaymentYear 2 = $25,000 × .0475 = $1,187.50

Goods Guys Foods established a trust fund that provides $125,000 in scholarships each year for needy students. The trust fund earns a fixed 7.25 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest income is distributed? $1,478,023 $1,600,000 $1,724,138 $1,333,333 $1,687,450

$1,724,138 PV = $125,000 / .0725 = $1,724,138

You have your choice of two investment accounts. Investment A is a five-year annuity that features end-of-month $2,500 payments and has an interest rate of 11.5 percent compounded monthly. Investment B is a 10.5 percent continuously compounded lump sum investment, also good for five years. How much would you need to invest in B today for it to be worth as much as investment A five years from now? $131,008.15 $108,206.67 $124,318.08 $129,407.17 $119,176.06

$119,176.06 FVA = $2,500 × ({[1 + (.115 / 12)](5 × 12) - 1} / (.115 / 12)) = $201,462.23 PV = $201,462.23 × e-1 × .105 × 5 = $119,176.06

Beginning three months from now, you want to be able to withdraw $1,700 each quarter from your bank account to cover college expenses. The account pays .45 percent interest per quarter. How much do you need to have in your account today to meet your expense needs over the next four years? $26,187.10 $26,847.15 $26,069.79 $25,068.00 $27,319.54

$26,187.10 PV = $1,700 × ({1 - [1 / (1 + .0045)(4 × 4)]} / .0045) = $26,187.10

John's Auto Repair just took out a $52,000, 10-year, 8 percent, interest-only loan from the bank. Payments are made annually. What is the amount of the loan payment in year 10? $41,600 $7,750 $52,000 $56,160 $4,160

$56,160 PaymentYear 10 = $52,000 + ($52,000 × .08) = $56,160

You have been purchasing $9,000 worth of stock annually for the past 5 years and now have a portfolio valued at $45,881. What is your annual rate of return? 9.32 percent .97 percent 6.24 percent 1.29 percent 13.13 percent

.97 percent FVA = $45,881 = $9,000 × {[(1 + r)5 - 1] / r} r = .97 percent

Today, you are retiring. You have a total of $289,416 in your retirement savings. You want to withdraw $2,500 at the beginning of every month, starting today and expect to earn 4.6 percent, compounded monthly. How long will it be until you run out of money? 8.56 years 18.99 years 22.03 years 12.71 years 29.97 years

12.71 years PVADue = $289,416 = $2,500 × [(1 - {1 / [1 + (.046 / 12)]t }) / (.046 / 12)] × [1 + (.046 / 12)] t = 152.518 months, or 12.71 years

Your credit card company charges you 1.65 percent interest per month. What is the annual percentage rate on your account? 18.95 percent 21.25 percent 20.90 percent 19.80 percent 21.70 percent

19.80 percent APR = .0165 × 12 = 19.80 percent

Your local pawn shop loans money at an annual rate of 23 percent and compounds interest weekly. What is the actual rate being charged on these loans? 26.56 percent 25.80 percent 26.49 percent 26.64 percent 25.16 percent

25.80 percent EAR = [1 + (.23 / 52)]52 - 1 = .2580, or 25.80 percent

MBM estimates its expansion cost at $18.63 million and wants it fully funded upfront. Management has decided to save $1.1 million a quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on its savings. How long does the firm have to wait before expanding its operations? 4.82 years 3.09 years 3.79 years 4.46 years 4.91 years

3.79 years FVA = $18.63m = $1.1m × ({[1 + (.0625 / 4)]t - 1} / (.0625 / 4)) t = 15.143 quarters, or 3.79 years

You have just purchased a new warehouse. To finance the purchase, you arranged for a 30-year mortgage loan for 65 percent of the $2.5 million purchase price. The monthly payment on this loan will be $10,400. What is the effective annual rate on this loan? 6.25 percent 6.82 percent 7.01 percent 6.46 percent 7.27 percent

6.82 percent Loan amount = $2,500,000 × .65 = $1,625,000 PVA = $1,625,000 = $10,400 × PVIFA(r / 12), (30 × 12) r = 6.62 percent EAR = [1 + (.0662 / 12)]12 - 1 = .0682, or 6.82 percent

On this date last year, you borrowed $3,400. You have to repay the loan principal plus all of the interest six years from today. The payment that is required at that time is $6,000. What is the interest rate on this loan? 8.78 percent 8.01 percent 8.45 percent 9.93 percent 9.47 percent

8.45 percent r = ($6,000 / $3,400)1/7 - 1 = .0845, or 8.45%

What is the effective annual rate if a bank charges you an APR of 8.25 percent, compounded quarterly? 8.38 percent 8.32 percent 8.61 percent 8.42 percent 8.51 percent

8.51 percent EAR = [1 + (.0825 / 4)]4 - 1 = .0851, or 8.51 percent

You have been investing $250 a month for the last 13 years. Today, your investment account is worth $73,262. What is your average rate of return on your investments? 9.23 percent 9.41 percent 9.36 percent 9.78 percent 8.94 percent

8.94 percent FVA = $73,262 = $250 × ({[1 + (r / 12)](13 × 12) - 1} / (r / 12)) r = 8.94%

Which one of the following statements related to annuities and perpetuities is correct? The present value of a perpetuity cannot be computed but the future value can. A perpetuity composed of $100 monthly payments is worth more than an annuity of $100 monthly payments; given equal discount rates. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. Perpetuities are finite but annuities are not. Most loans are a form of a perpetuity.

A perpetuity composed of $100 monthly payments is worth more than an annuity of $100 monthly payments; given equal discount rates.

You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis. Balloon loan where 50 percent of the principal is repaid as a balloon payment. Discount loan. Interest-only loan. Amortized loan with equal principal payments. Amortized loan with equal loan payments.

Amortized loan with equal principal payments.

Amortized loans must have which one of these characteristics? Equal interest payments over the life of the loan. Increasing payments over the life of the loan. Either equal or unequal principal payments over the life of the loan. One lump-sum principal payment. Declining periodic payments.

Either equal or unequal principal payments over the life of the loan.

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment? Interest-only loan. Pure discount loan. Balloon loan. Amortized loan. Modified loan.

Interest-only loan.

Which one of these statements related to growing annuities and perpetuities is correct? The present value of a growing perpetuity will decrease if the discount rate is increased. An increase in the rate of growth will decrease the present value of an annuity. The future value of an annuity will decrease if the growth rate is increased. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. You can compute the present value of a growing annuity but not a growing perpetuity.

The present value of a growing perpetuity will decrease if the discount rate is increased.