FINA 320 Mock 2 quizzes

Which of the following statements is most correct?

All of the statements are correct.

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due? (Round to the nearest dollar).

An increase of $61

Which of the following CANNOT be calculated?

Future value of a perpetuity

Lisa is 58 years old and would like to retire at the age of 63. Based on her retirement plan, she assumes she will have $1.5 million in her 401(k) account at that time, which will earn interest at a rate of 6% annually. To supplement her monthly pension and social security checks, she plans to withdraw $7,000 every month from her 401 (k) plan. How long will her 401(k) last from the date of her retirement, if her assumptions are all correct? (Round to the nearest year)

Her funds will last forever and never run out of money

Which of the following statements is incorrect (least correct)?

If the discount (or interest) rate is positive, the future value of an annuity due will always be less than the future value of an equivalent regular annuity, and the present value of an annuity due will always be less than the present value of an equivalent regular annuity.

Chang Lee is going to receive $20,000 six years from now. Sao Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

In today's dollars, Chang Lee's money is worth more than Sao Lee's

Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually, and the first payment occurs 1 year from now? (Round to the nearest thousand dollar).

$1,067,000

What is the total future value, to the nearest dollar, six years from now of $80 received in one year, $300 received in two years, and $700 received in six years if the discount rate is 7%? (round to the nearest dollar)

$1,205

As the interest rate becomes lower and approaches zero, the future value of $100 today approaches

$100

John Doeber borrowed $150,000 to buy a house. His loan cost was 16% annually because of his bad credit score. He promised to repay the loan in 5 years on a quarterly basis. How much are the quarterly payments? (Round your answer to the nearest dollar).

$11,037

Jane Bryant has just purchased some equipment for her beauty salon, financed by the equipment maker. To pay off the equipment loan, Jane must make the following payments at the end of the next five years: $8,250, $8,500, $8,750, $9,000, and $10,500. If the loan interest rate is 10 percent, how much interest will Jane pay in total? (round your answer to the nearest dollar).

$11,234

The Corner Bar & Grill is in the process of taking a five-year loan of $50,000 at an annual interest rate of 8% with First Community Bank. The loan requires 5 equal payments at the end of each year inclusive of interest and part of the principal. Find the total interest payments over the life of the loan. (Round your answer to the nearest dollar)

$12,614

with $1.5 million in an account expected to earn 8% annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today? (Round to the nearest dollar).

$123,371

The monthly mortgage payment on your house is $821.69. It is a 30-year mortgage atl6.5% annual interest rate, compounded monthly. How much did you borrow? (round to the nearest dollar)

$130,000

You are going to withdraw $5,000 at the end of each year for the next four years from an account that pays interest at a rate of 9% compounded annually. How much must there be in the account today in order for the account to reduce to a balance of zero after the last withdrawal? (round to the nearest cent)

$16,198.60

An investment promises a payoff of $195 two and half years from today. At a discount rate of 7.5% per year, what is the present value of this investment?

$162.75

Your parents plan to spend $20,000 on a car for you upon graduation from college. If you will graduate in three years and your parents can earn 4.125% annually on their investment, how much money must they set aside today for your car?

$17,704

Your older sister deposited $2,500 today at an annual interest rate of 6.5% for 15 years, compounded annually. However, you can only earn a 6.25% annual interest rate. How much more money must you deposit today than your sister did if you are to have the same amount saved at the end of the 15 years?

$89.70

Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside at the end of each year? (Round your answer to the nearest dollar).

$924

Your grandfather placed $5,000 in a trust fund for you. In 12 years the fund will be worth $10,000. What is the rate of return on the trust fund? (round to the nearest one hundredth of 1% and do NOT use Rule of 72)

5.95%

An insurance company promises to pay Jane $1 million on her 65th birthday in return for a one-time payment of $125,000 today. (Jane just turned 30.) At what rate of interest would Jane be indifferent between accepting the company's offer and investing the premium on her own? (hint: there are 35 years between today and Jane's 65th birthday.)

6.12%

Assume that a 10-year regular annuity has a present value of $3,755.50 when evaluated at an interest rate of 0%. Determine the interest rate that would give this same annuity a future (compounded) value of $5,440.22 at Year 10.

8%

Dr. Stein has just invested $10,000 for his son (age 7). The money will be used for his son's college education when he is 17 years old. He calculates that he will need $21,598 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal? Choose the closest answer. (Round your answer to the nearest hundredth percentage).

8.00%

Nan and Neal are twins. Nan starts to invest $5,000 per year for retirement at age 25. Neal waits until age 30 to start saving for retirement. He also invests $5,000 per year. Nan chooses a relatively safe investment product that offers an annual interest rate of 7%. Both twins plan to retire at age 65 and do not withdraw funds prior to retirement. If Neal would like to have the same amount of money as Nan by their retirements, what annual interest rate must his investment earn?

8.66%

What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today) and earns 10% compounded annually? (Round to the nearest cent).

$25,657.91

If a 5-year ordinary annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment? (round to the nearest cent)

$263.80

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years, during which time the fund will earn 8% interest with monthly compounding? (round to the nearest hundred dollar).

$323,900.00

Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. The loan has an annual interest rate of 8.5% and requires annual installment payment. If the loan is to be completely paid off by the end of year five, what should be the annual payment? (round to the nearest dollar)

$380,649

You have a savings account valued at $1,500 today that earns an annual interest rate of 8.7 percent. How much more would this account be worth if you wait to spend the entire balance in 25 years rather than in 20 years?

$4,117.64

How much more would you be willing to pay today for an investment offering $10,000 in 4 years rather than the normally advertised 5-year period? Your discount rate is 8%. (Round to the nearest cent).

$544.47

Kevin would like to increase the balance of his savings account by 300%(for example, increase from $1 to $4). If the interest rate on the bank account is 12%, approximately how long would it take to achieve Kevin's goal? (round to the closest year)

12 years

you can earn 5.25% per year on your investments, how long, exactly, will it take to double your money? (hint: do not use the Rule of 72)

13.55 years

Your credit card has a balance of $3,000. The bank requires a minimum monthly payment of $64.90 and states that it will take 100 months to pay off the balance if you only make minimum payment every month and do NOT make additional charges on the card. What is the annual interest rate charged by your credit card?

21.60%

Your credit card has a balance of $1,000 and the bank requires a minimum monthly payment of $51.22. The annual interest rate on the credit card is 24%. If you only make minimum payment every month and do NOT make additional charges on the card, how long will it take to pay off the balance (round it to the whole month)?

25 months

As the interest rate increases, the present value of a future cash flow

Decreases

Nan and Neal are twins. Both start to invest $6,000 per year for retirement at age 25. Nan chooses to invest $500 per month at a savings account with an annual interest rate of 6%, compounded monthly. Neal decides to invest $6,000 at the end of each year at a savings account with an annual interest rate of 6%, compounded annually. Nan and Neal both retire at the age of 65, and neither will withdraw any funds before retirement. Which of the following statement is true?

Nan will have about $67,174 more than Neal by retirement.

What is the future value of the following set of cash flows 4 years from now? Assume an interest rate of 6.5% and you receive the cash flow at the end of the year. Year Cash flow

None of the above

Your subscription to Jogger's World Monthly is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate or of getting a lifetime subscription to the magazine by paying $100. Your cost of capital is 7 percent. How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year. (Round up if necessary to obtain a whole number of years.)

None of these are correct

An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment?

The interest earned in year one is $8.00 and the interest earned in year two is $8.64.

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?

This is not possible with positive interest rates

By the time Tom retires, the balance in his 401k plan is $1.5 million. He can choose to use the money to buy a fixed annuity of 30 years (Tom's expected life expectancy) with a guaranteed annual interest rate of 5%. On the other hand, Tom can leave the money in a stock index fund, which is expected (though not guaranteed) to earn an annual return of 8%. The advantage of the fixed annuity is its safety and certainty. On the other hand, the higher expected return of the stock fund means a higher expected annual withdrawal. Tom is risk-averse and decides to buy the fixed annuity. How much more could Tom expect to receive per year if he decides to leave the money in the stock index fund (in other words, what price does Tom pay for the safety of the fixed annuity)?

Tom could expect to receive about 36% more than the annuity payment.

You and your best friend are both 20 years old and recently graduated from NIU to start well-paid jobs in Chicago. Since you have taken Dr. Zhou's FINA 320, you decide to save for retirement as early as possible. You plan to contribute $10,000 to your retirement account every year until you are 45. After that, you will stop contribution and enjoy life. Your friend, on the other hand, would like to enjoy his life for the next 10 years after living like a pauper in college. However, he vows to start saving for retirement when he turns 30 and will contribute $10,000 to his retirement account every year until 67, when both of you will retire. Assume that both of you can earn an annual rate of return of 7%, who will have more money at retirement (i.e., when both of you are 67 years old) and by how much? Note that both of your annual contributions are made at the end of each year.

You will have $1,198,812.45 more than your friend.

An annuity may best be defined as

a series of consecutive payments of equal amounts

Skippy had been offered two alternative payment options to pay for his new speed boat. Alternative 1 involves an initial payment of $3,000 and monthly payments of $250 for 3 years. Alternative 2 involves $0 initial payment but monthly payment of $500 for 2 years. For both alternatives, the first monthly payment ($250 and $500) occurs at the end of month 1. Assume the discount rate is 9%, compounded monthly. In today's dollars, alternative 1 is:

cheaper by about $83.

A stream of equal cash payments lasting forever is termed

perpetuity

The main variables of the TVM equation are

present value, future value, time, interest rate, and payment