finance 3060 exam 2 conceptual questions
. Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value? A. 3 percent simple interest B. 3 percent interest, compounded annually C. 2 percent interest, compounded annually D. 4 percent simple interest E. 4 percent interest, compounded annually
4% interest, compounded annually
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? A. 6.5 percent simple interest B. 6.5 percent interest, compounded annually C. 6.6 percent simple interest D. 6.75 percent interest, compounded annually E. 6.80 percent interest, compounded annually
6.5% simple interest
Scott borrowed $2,500 today at an APR of 7.4 percent. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n): A. interest-only loan. B. pure discount loan. C. quoted rate loan. D. compound interest loan. E. amortized loan.
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Which one of the following is the annuity present value formula? A. C ×({1 - [1/(1 + r)t]}/r) B. C ×({1 - [1/(1 + r)t]} -r) C. C ×({1 - [r/(1 + r)t]}/r) D. C ×({1 - [1/(1 ×r)t]} ×r) E. C ×({1 - [r/(1 ×r)t]} ×r)
A. C ×({1 - [1/(1 + r)t]}/r)
Which one of these is a perpetuity? A. Trust income of $1,200 a year forever B. Retirement pay of $2,200 a month for 20 years C. Lottery winnings of $1,000 a month for life D. Car payment of $260 a month for 60 months E. Rental payment of $800 a month for one year
A. Trust income of $1,200 a year forever
Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have? A. Amortized B. Complex C. Pure discount D. Lump sum E. Interest-only
A. amortized
Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have? A. Amortized B. Blended discount C. Interest-only D. Pure discount
A. amortized
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: A. . annual percentage rate. B. compounded rate. C. effective annual rate. D. perpetual rate. E. simple rate
A. annual percentage 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? A. Interest-only B. Pure discount C. Compound D. Amortized E. Complex
A. interest only
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain? A. Interest-only B. Amortized C. Perpetual D. Pure discount E. Lump sum
A. interest only
Which one of the following statements concerning annuities is correct? A. The present value of an annuity is equal to the cash flow amount divided by the discount rate. B. An annuity due has payments that occur at the beginning of each time period. C. The future value of an annuity decreases as the interest rate increases. D. If unspecified, you should assume an annuity is an annuity due. E. An annuity is an unending stream of equal payments occurring at equal intervals of time
B. An annuity due has payments that occur at the beginning of each time period
A 30-year home mortgage is a classic example of: A. a set of unequal cash flows. B. an ordinary annuity. C. a perpetuity. D. an annuity due. E. a consol.
B. an ordinary annuity
Perpetuities have: A. irregular payments but constant payment periods. B. equal payments and an infinite life. C. equal payments and a set number of equal payment periods. D. less value than comparable annuities. E. no application in today?s world
B. equal payments and an infinite life
All else held constant, the future value of an annuity will increase if you: A. decrease both the interest rate and the time period. B. increase the time period. C. decrease the present value. D. decrease the payment amount. E. decrease the interest rate.
B. increase the time period
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? A. She will earn the same amount of interest each year. B. She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest. C. She will earn an increasing amount of interest each and every year even if she should decide to withdraw the interest annually rather than reinvesting the interest. D. Her interest for Year 2 will be equal to $2,000×.065 ×2. E. She will be earning simple interest.
B. she could have the same future value and invest less than $2000 initially if she could earn more than 6.5% interest
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? A. To be the perpetuity, the payments must occur on the first day of each monthly period. B. The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years. C. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due. D. The future value of all three investments must be equal. E. The present value of all three investments must be equal
C. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.
A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must: A. have a one-year term. B. have a zero percent interest rate. C. charge interest annually. D. must be partially amortized with each loan payment. E. require the accrued interest be paid in full with each monthly payment
C. changer interest annually
You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value? A. 6 years B. 7 years C. 8 years D. 12 years E. 14 years
D. 12 years
Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semiannually C. 6 percent compounded quarterly D. 6 percent compounded daily E. 6 percent compounded every 2 years
D. 6% compounded daily
Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money? A. 6 percent interest for 3 years B. 12 percent interest for 5 years C. 7 percent interest for 9 years D. 8 percent interest for 9 years E. 6 percent interest for 10 years
D. 8 percent interest for 9 years
Which one of the following will increase the present value of a lump sum future amount to be received in 15 years? A. An increase in the time period B. An increase in the interest rate C. A decrease in the future value D. A decrease in the interest rate E. Changing to compound interest from simple interest
D. A decrease in the interest rate
Which one of the following is an ordinary annuity, but not a perpetuity? A. $75 paid at the beginning of each monthly period for 50 years B. $15 paid at the end of each monthly period for an infinite period of time C. $40 paid quarterly for 5 years, starting today D. $50 paid every year for ten years, starting today E. $25 paid weekly for 1 year, starting one week from today
E. $25 paid weekly for 1 year, starting one week from today
Which one of the following statements is correct? A. The APR is equal to the EAR for a loan that charges interest monthly. B. The EAR is always greater than the APR. C. The APR on a monthly loan is equal to (1 + monthly interest rate)12- 1. D. The APR is the best measure of the actual rate you are paying on a loan. E. The EAR, rather than the APR, should be used to compare both investment and loan options
E. The EAR, rather than the APR, should be used to compare both investment and loan options
Which one of the following is a correct statement, all else held constant? A. The present value is inversely related to the future value. B. The future value is inversely related to the period of time. C. The period of time is directly related to the interest rate. D. The present value is directly related to the interest rate. E. The future value is directly related to the interest rate
E. The future value is directly related to the interest rate
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? A. The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest. B. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal. C. She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest. D. The length of time she has to wait to reach her goal is directly related to the interest rate she earns. E. The period of time she has to wait decreases as the amount she invests increases.
E. The period of time she has to wait decreases as the amount she invests increases.
All else held constant, the present value of an annuity will decrease if you: A. increase the annuity's future value. B. increase the payment amount. C. increase the time period. D. decrease the discount rate. E. decrease the annuity payment
E. decrease the annuity payment
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: A. annual percentage rate. B. simplified rate. C. quoted rate. D. stated rate. E. effective annual rate.
E. effective annual rate
Assume all else is equal. When comparing savings accounts, you should select the account that has the: A. lowest annual percentage rate. B. highest annual percent rate. C. highest stated rate. D. lowest effective annual rate. E. highest effective annual rate
E. highest effective annual rate
All else held constant, the future value of a lump sum investment will decrease if the A. amount of the lump sum investment increases. B. time period is increased. C. interest is left in the investment. D. interest rate increases. E. interest is changed to simple interest from compound interest.
E. interest is changed to simple interest from compound interest.
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? A. Principal-only B. Amortized C . Interest-only D. Compound E. Pure discount
E. pure discount
Which one of the following features distinguishes an ordinary annuity from an annuity due? A. Number of equal payments B. Amount of each payment C. Frequency of the payments D. Annuity interest rate E. Timing of the annuity payments
E. timing of the annuity payments
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: A. simple interest. B. interest on interest. C. discounted interest. D. complex interest. E. compound interest.
compound interest
Tomas earned $89 in interest on his savings account last year and has decided to leave the $86 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called: A. discounting. B. compounding. C. duplicating. D. multiplying. E. indexing.
compounding
A perpetuity in Canada is frequently referred to as: A. a consul. B. an infinity. C. forever cash. D. a dowry. E. a forevermore.
consul
The interest rate used to compute the present value of a future cash flow is called the: A. prime rate. B. current rate. C. discount rate. D. compound rate. E. simple rate.
discount rate
Computing the present value of a future cash flow to determine what that cash flow is worth today is called: A. compounding. B. factoring. C. time valuation. D. simple cash flow valuation. E. discounted cash flow valuation.
discounted cash flow validation
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: A. aggregating. B. discounting. C. simplifying. D. compounding. E. extrapolating.
discounting
marcos is investing $5 today at 7% interest so he can have $35 later. this $35 is referred to as the A. true value. B. future value. C. present value. D. discounted value. E. complex value.
future value
The future value of a lump sum investment will increase if you A. decrease the interest rate. B. decrease the number of compounding periods. C. increase the time period. D. decrease the time period. E. decrease the lump sum amount.
increase the time period
The present value of a lump sum future amount: A. increases as the interest rate decreases. B. decreases as the time period decreases. C. is inversely related to the future value. D. is directly related to the interest rate. E. is directly related to the time period.
increases as the interest rate decreases
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? A. Shortening the investment time period B. Paying interest only on the principal amount C. Paying simple interest rather than compound interest D. Paying interest only at the end of the investment period rather than throughout the investment period E. Increasing the interest rate
increasing the interest rate
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 years interest earnings is called: A. simple interest. B. complex interest. C. accrued interest. D. interest on interest. E. discounted interest.
interest on interest
The relationship between the present value and the investment time period is best described as: A. direct. B. inverse. C. unrelated. D. ambiguous. E. parallel.
inverse
Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms? A. Perpetuity B. Annuity C. Consol D. Lump sum E. Present value
annuity
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments? A. Ordinary annuity B. Annuity due C. Consol D. Ordinary perpetuity E. Perpetuity due
annuity due
Which statement is true? A. All else equal, an ordinary annuity is more valuable than an annuity due. B. All else equal, a decrease in the number of payments increases the future value of an annuity due. C. An annuity with payments at the beginning of each period is called an ordinary annuity. D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. E. ..All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.
D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information? A. The present value of Annuity A is equal to the present value of Annuity B. B. Annuity B will pay one more payment than Annuity A will. C. The future value of Annuity A is greater than the future value of Annuity B. D. Annuity B has both a higher present value and a higher future value than Annuity A. E. Annuity A has a higher future value but a lower present value than Annuity B.
D. Annuity B has both a higher present value and a higher future value than Annuity A.
Which one of the following can be classified as an annuity but not as a perpetuity? A. Increasing monthly payments forever B. Increasing quarterly payments for six years C. Unequal payments each year for nine years D. Equal annual payments for life E. Equal weekly payments forever
D. Equal annual payments for life
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: A. Both Stacey and Kurt will have accounts of equal value. B. Kurt will have twice the money saved that Stacey does. C. Kurt will earn exactly twice the amount of interest that Stacey earns. D. Kurt will have a larger account value than Stacey will. E. Stacey will have more money saved than Kurt.
D. 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. A. PV = $600 (1 + .06)^7 B. PV = $600 (1 + .07)^6 C. PV = $600 × (.07 ×6) D. PV = $600/(1 + .07)^6 E. PV = $600/(1 + 6)^.07
D. PV = $600/(1 + .07)^6
Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? A. The present value of the car is equal to $500 + (36 ×$450). B. The $500 is the present value of the purchase. C. The car loan is an annuity due. D. To compute the initial loan amount, you must use a monthly interest rate. E. The future value of the loan is equal to 36 ×$450.
D. To compute the initial loan amount, you must use a monthly interest rate.
Which one of the following qualifies as an annuity payment? A. Weekly grocery bill B. Clothing purchases C. Car repairs D. Auto loan payment E. Medical bills
D. auto loan payment
The stated interest rate is the interest rate expressed: A. as if it were compounded one time per year. B. as the quoted rate compounded by 12 periods per year. C. in terms of the rate charged per day. D. in terms of the interest payment made each period. E. in terms of an effective rate.
D. in terms of the interest payment made each period
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: A. is the same regardless of which bank you choose because they both pay the same rate of interest. B. is the same regardless of which bank you choose because they both pay simple interest. C. is the same regardless of which bank you choose because the time period is the same for both banks. D. will be greater if you invest with South Central Bank. E. will be greater if you invest with Northern Bank.
E. will be greater if you invest with Northern Bank.
A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: A. will be less than 12.9 percent. B. can either be less than or equal to 12.9 percent. C. is 12.9 percent. D. can either be greater than or equal to 12.9 percent. E. will be greater than 12.9 percent.
E. will be greater than 12.9%
Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years? A. PV = $600/ [(1 + .06) ×5] B. PV = $600/ [(1 +.05) ×6] C. PV = $600/ (.06×5) D. PV = $600/ (1 + .05)^6 E. PV = $600/ (1 + .06)^5
PV = $600/ (1 + .05)^6
By definition, a bank that pays simple interest on a savings account will pay interest: A. only at the beginning of the investment period. B. on interest. C. only on the principal amount originally invested. D. on both the principal amount and the reinvested interest. E. only if all previous interest payments are reinvested
only on the principal amount originally invested
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are: A. an ordinary annuity. B. an annuity due. C. amortized payments. D. a perpetuity. E. a perpetuity due.
perpetuity
Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318? A. Present value B. Compound value C. Future value D. Complex value E. Factor value
present value
Given an interest rate of zero percent, the future value of a lump sum invested today will always: A. remain constant, regardless of the investment time period. B. decrease if the investment time period is shortened. C. decrease if the investment time period is lengthened. D. be equal to $0. E. be infinite in value.
remain constant, regardless of investment time period
