Test Bank For Fundamentals of Corporate Finance 11th Edition Ross Westerfield Jordan

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Chapter 06 Discounted Cash Flow Valuation
Student:
______________________________________________________________________
_____
An ordinary annuity is best defined by which one of the following?
1.
A. Increasing payments paid for a definitive period of time.
B. Increasing payments paid forever.
C. Equal payments paid at the end of regular intervals over a stated time period.
D. Equal payments paid at the beginning of regular intervals for a limited time period.
E. Equal payments that occur at set intervals for an unlimited period of time.
Which one of the following accurately defines a perpetuity?
2.
A. A limited number of equal payments paid in even time increments.
B. Payments of equal amounts that are paid irregularly but indefinitely.
C. Varying amounts that are paid at even intervals forever.
D. Unending equal payments paid at equal time intervals.
E. Unending equal payments paid at either equal or unequal time intervals.
A Canadian consol is best categorized as:
3.
A. An ordinary annuity.
B. An amortized cash flow.
C. An annuity due.
D. A discounted loan.
E. A perpetuity.
The interest rate that is most commonly quoted by a lender is referred to as which one of the
following?
4. A. Annual percentage rate.
B. Compound rate.
C. Effective annual rate.
D. Simple rate.
E. Common rate.
An interest rate on a loan that is compounded monthly but expressed as an annual rate would
be an example of which one of the following rates?
5.
A. Stated rate.
B. Discounted annual rate.
C. Effective annual rate.
D. Periodic monthly rate.
E. Consolidated monthly rate.
Your credit card charges you 1.5 percent interest per month. This rate when multiplied by 12
is called the:
6. A. Effective annual rate.
B. Annual percentage rate.
C. Periodic interest rate.
D. Compound interest rate.
E. Period interest rate.
A loan where the borrower receives money today and repays a single lump sum on a future
date is called a(n) _____ loan.
7. A. Amortized.
B. Continuous.
C. Balloon.
D. Pure discount.
E. Interest-only.
Which one of the following terms is used to describe a loan that calls for periodic interest
payments and a lump sum principal payment?
8.
A. Amortized loan.
B. Modified loan.
C. Balloon loan.
D. Pure discount loan.
E. Interest-only loan.
Amortized loans must have which one of these characteristics?
9.
A. Either equal or unequal principal payments over the life of the loan.
B. One lump-sum principal payment.
C. Increasing payments over the life of the loan.
D. Equal interest payments over the life of the loan.
E. Declining periodic payments.
Which one of the following terms is defined as a loan wherein the regular payments,
including both interest and principal amounts, are insufficient to retire the entire loan
amount, which then must be repaid in one lump sum?
10.
A. Amortized loan.
B. Continuing loan.
C. Balloon loan.
D. Pure discount loan.
E. Interest-only loan.
You are comparing two annuities that offer quarterly payments of $2,500 for five years and
pay .75 percent interest per month. You will purchase one of these today with a single lump
sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay
monthly, starting one month from today. Which one of the following statements is correct
concerning these two annuities?
11.
A. These annuities have equal present values but unequal future values.
B. These two annuities have both equal present and future values.
C. Annuity B is an annuity due.
D. Annuity A has a smaller future value than annuity B.
E. Annuity B has a smaller present value than annuity A.
You are comparing two investment options that each pay 6 percent interest, compounded
annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the
first year followed by two annual payments of $5,000 each. Option B pays three annual
payments of $4,000 each. Which one of the following statements is correct given these two
investment options? Assume a positive discount rate.
12.
A. Both options are of equal value since they both provide $12,000 of income.
B. Option A has the higher future value at the end of year three.
C. Option B has a higher present value at time zero.
D. Option B is a perpetuity.
E. Option A is an annuity.
You are considering two projects with the following cash flows:
Project X
Project Y
Year 1
$8,500
$7,000
Year 2
8,000
7,500
Year 3
7,500
8,000
Year 4
7,000
8,500
Which one of the following statements is true concerning these two projects given a positive
discount rate?
13.
A.
B.
C.
D.
Both projects have the same future value at the end of Year 4.
Both projects have the same value at Time 0.
Both projects are ordinary annuities.
Project Y has a higher present value than Project X.
Project X has both a higher present and a higher future value than Project Y.
E.
Which one of the following statements is correct given the following two sets of project cash
flows? Assume a positive discount rate.
Project A
Project B
14.
Year 1
$4,000
$2,000
Year 2
3,000
3,000
Year 3
Year 4
0
3,000
2,000
3,000
A. The cash flows for Project B are an annuity, but those of Project A are not.
B. Both sets of cash flows have equal present values as of time zero.
The present value at time zero of the final cash flow for Project A will be discounted
C.
using an exponent of three.
Both projects have equal values at any point in time since they both pay the same amount
D.
in total.
E. Project B is worth less today than Project A.
Which one of the following statements related to annuities and perpetuities is correct?
An ordinary annuity is worth more than an annuity due given equal annual cash flows for
10 years at 7 percent interest, compounded annually.
15.
A perpetuity composed of $100 monthly payments is worth more than an annuity of
B.
$100 monthly payments given equal discount rates.
C. Most loans are a form of a perpetuity.
D. The present value of a perpetuity cannot be computed but the future value can.
E. Perpetuities are finite but annuities are not.
A.
Which one of the following statements related to loan interest rates is correct?
A. The annual percentage rate considers the compounding of interest.
B. When comparing loans you should compare the effective annual rates.
16.
C. Lenders are most apt to quote the effective annual rate.
Regardless of the compounding period, the effective annual rate will always be higher
D.
than the annual percentage rate.
The more frequent the compounding period, the lower the effective annual rate given a
E.
fixed annual percentage rate.
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
B.
increases.
17.
The effective annual rate equals the annual percentage rate when interest is compounded
C.
annually.
Borrowers would prefer monthly compounding over annual compounding given the
D.
same annual percentage rate.
For any positive rate of interest, the annual percentage rate will always exceed the
E.
effective annual rate.
A.
Which one of these statements related to growing annuities and perpetuities is correct?
A. You can compute the present value of a growing annuity but not a growing perpetuity.
18.
In computing the present value of a growing annuity, you discount the cash flows using
B.
the growth rate as the discount rate.
C. The future value of an annuity will decrease if the growth rate is increased.
D. An increase in the rate of growth will decrease the present value of an annuity.
E. The present value of a growing perpetuity will decrease if the discount rate is increased.
Which one of the following statements correctly defines a time value of money relationship?
19.
A. Time and future values are inversely related, all else held constant.
B. Interest rates and time are positively related, all else held constant.
C. An increase in a positive discount rate increases the present value.
D. An increase in time increases the future value given a zero rate of interest.
E. Time and present value are inversely related, all else held constant.
Which one of the following compounding periods will yield the lowest effective annual rate
given a stated future value at year 5 and an annual percentage rate of 10 percent?
20. A. Annual.
B. Semiannual.
C. Monthly.
D. Daily.
E. Continuous.
The entire repayment of which one of the following loans is computed simply by computing
one single future value?
21. A. Interest-only loan.
B. Balloon loan.
C. Amortized loan.
D. Pure discount loan.
E. Bullet loan.
How is the principal amount of an interest-only loan repaid?
22.
A. The principal is forgiven over the loan period; thus it does not have to be repaid.
B. The principal is repaid in decreasing increments and included in each loan payment.
C. The principal is repaid in one lump sum at the end of the loan period.
D. The principal is repaid in equal annual payments.
E. The principal is repaid in increasing increments through regular monthly payments.
An amortized loan:
23.
A. Requires the principal amount to be repaid in even increments over the life of the loan.
B. May have equal or increasing amounts applied to the principal from each loan payment.
Requires that all interest be repaid on a monthly basis while the principal is repaid at the
C.
end of the loan term.
D. Requires that all payments be equal in amount and include both principal and interest.
E. Repays both the principal and the interest in one lump sum at the end of the loan term.
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.
24.
A. Interest-only loan.
B. Amortized loan with equal principal payments.
C. Amortized loan with equal loan payments.
D. Discount loan.
E. Balloon loan where 50 percent of the principal is repaid as a balloon payment.
Your grandmother is gifting you $150 a month for four years while you attend college to
earn your bachelor’s degree. At a 4.8 percent discount rate, what are these payments worth
to you on the day you enter college?
25.
A. $6,201.16
B. $6,539.14
C. $5,589.19
D. $6,608.87
E. $6,870.23
You just won the grand prize in a national writing contest! As your prize, you will receive
$1,000 a month for 10 years. If you can earn 7 percent on your money, what is this prize
worth to you today?
26.
A. $86,126.35
B. $78,411.06
C. $81,338.40
D. $85,333.33
E. $90,450.25
Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent,
how much can he afford to borrow to purchase a car?
27. A. $11,750.00
B. $12,348.03
C. $11,697.88
D. $10,266.67
E. $10,400.00
As the beneficiary of a life insurance policy, you have two options for receiving the
insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of
$1,400 a month for 20 years. If you can earn 6 percent on your money, which option should
you take and why?
28. A. You should accept the payments because they are worth $209,414 to you today.
B. You should accept the payments because they are worth $247,800 to you today.
C. You should accept the payments because they are worth $336,000 to you today.
You should accept the $200,000 because the payments are only worth $189,311 to you
D.
today.
You should accept the $200,000 because the payments are only worth $195,413 to you
E.
today.
29.
Your employer contributes $60 a week to your retirement plan. Assume you work for your
employer for another 20 years and the applicable discount rate is 9 percent. Given these
assumptions, what is this employee benefit worth to you today?
A. $28,927.38
B. $27,618.46
C. $29,211.11
D. $25,306.16
E. $25,987.74
The Distribution Point plans to save $2,000 a month for the next 3 years for future
emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit
will be made today. What would today’s deposit amount have to be if the firm opted for one
lump sum deposit that would yield the same amount of savings as the monthly deposits after
3 years?
30.
A. $70,459.07
B. $67,485.97
C. $69,068.18
D. $69,333.33
E. $67,233.84
You need some money today and the only friend you have that has any is your miserly
friend. He agrees to loan you the money you need, if you make payments of $30 a month for
the next six months. In keeping with his reputation, he requires that the first payment be paid
today. He also charges you 2 percent interest per month. How much money are you
borrowing?
31.
A. $164.09
B. $168.22
C. $169.50
D. $170.68
E. $171.40
32.
You just purchased an annuity that will pay you $24,000 a year for 25 years, starting today.
What was the purchase price if the discount rate is 8.5 percent?
A. $241,309
B. $245,621
C. $251,409
D. $258,319
E. $266,498
You are scheduled to receive annual payments of $3,600 for each of the next 12 years. The
discount rate is 8 percent. What is the difference in the present value if you receive these
payments at the beginning of each year rather than at the end of each year?
33.
A. $2,170.39
B. $2,511.07
C. $2,021.18
D. $2,027.94
E. $2,304.96
You are comparing two annuities with equal present values. The applicable discount rate is
7.25 percent. One annuity pays $2,500 on the first day of each year for 15 years. How much
does the second annuity pay each year for 15 years if it pays at the end of each year?
34.
A. $2,331.00
B. $2,266.67
C. $2,500.00
D. $2,390.50
E. $2,681.25
Trish receives $450 on the first of each month. Josh receives $450 on the last day of each
35. month. Both Trish and Josh will receive payments for next four years. At a discount rate of
9.5 percent, what is the difference in the present value of these two sets of payments?
A. $141.80
B. $151.06
C. $154.30
D. $159.08
E. $162.50
What is the future value of $1,400 a year for 35 years at 6 percent interest? Assume annual
compounding.
36. A. $164,200
B. $138,714
C. $156,009
D. $142,908
E. $147,267
What is the future value of $12,000 a year for 40 years at 11.5 percent interest?
37.
A. $8,278,406
B. $8,014,195
C. $7,711,414
D. $7,989,476
E. $8,021,223
Rosina plans on saving $2,000 a year and expects to earn an annual rate of 8.8 percent. How
much will she have in her account at the end of 43 years?
38.
A. $806,429
B. $838,369
C. $997,407
D. $831,532
E. $908,316
Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds
$1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual
interest. What is the difference in their savings account balances at the end of 35 years?
39.
A. $12,093
B. $12,113
C. $12,127
D. $12,211
E. $12,219
You are borrowing $21,800 to buy a car. The terms of the loan call for monthly payments
for five years at 8.25 percent interest. What is the amount of each payment?
40. A. $387.71
B. $391.40
C. $401.12
D. $439.76
E. $444.64
You borrow $230,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is
25 years. Payments are made monthly. If you pay the mortgage according to the loan
agreement, how much total interest will you pay?
41.
A.
B.
C.
D.
$160,408
$147,027
$153,524
$164,319
E. $141,406
Travis International has a one-time expense of $2.86 million that must be paid three years
from now. Since the firm cannot raise that amount in one day, it wants to save an equal
amount each month over the next three years to fund this expense. If the firm can earn 2.1
percent on its savings, how much must it save each month?
42.
A. $78,416.20
B. $77,037.69
C. $91,300.05
D. $87,411.08
E. $73,901.15
Nadine is retiring today at age 66 and expects to live to age 82. She has $136,000 in her
retirement savings account. She is somewhat conservative with her money and expects to
earn 6 percent during her retirement years. How much can she withdraw from her retirement
savings each month if she plans to spend her last penny on the morning of her death?
43.
A. $909.92
B. $847.78
C. $919.46
D. $1,416.08
E. $1,103.56
Island News purchased a piece of property for $1.36 million. The firm paid a down payment
of 12 percent in cash and financed the balance. The loan terms require monthly payments for
10 years at an annual percentage rate of 4.75 percent, compounded monthly. What is the
amount of each mortgage payment?
44.
A. $12,548.18
B. $13,419.97
C. $13,607.11
D. $14,878.15
E. $12,301.16
You estimate that you will owe $39,950 in student loans by the time you graduate. The
interest rate is 3.75 percent. If you want to have this debt paid in full within 10 years, how
much must you pay each month?
45.
A. $411.09
B. $399.74
C. $414.28
D. $436.05
E. $442.50
You are buying a pre-owned car today at a price of $8,500. You are paying $300 down in
cash and financing the balance for 36 months at 7.75 percent. What is the amount of each
monthly loan payment?
46.
A. $256.01
B. $312.23
C. $318.47
D. $265.37
E. $284.40
An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a
rate of return of 6.5 percent, what is the most you are willing to pay as a lump sum today to
buy this annuity?
47.
A. $32,008.24
B. $34,208.16
C. $44,591.11
D. $43,008.80
E. $38,927.59
Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments
are due on the first day of each month starting with the day you sign the lease contract. If
your cost of money is 6.5 percent, what is the current value of the lease?
48.
A. $10,331.03
B. $6,232.80
C. $9,197.74
D. $7,203.14
E. $11,008.31
Your great aunt left you an inheritance in the form of a trust. The trust agreement states that
you are to receive $2,400 on the first day of each year, starting immediately and continuing
for 20 years. What is the value of this inheritance today if the applicable discount rate is 6.75
percent?
49.
A. $24,890.88
B. $26,311.16
C. $27,677.34
D. $28,909.29
E. $29,333.33
You just received an insurance settlement offer related to an accident you had three years
ago. The offer provides you with three choices:
50.
Option A: $1,500 a month for 6 years
Option B: $1,025 a month for 10 years
Option C: $85,000 as a lump sum payment today
You can earn 7.5 percent on your investments and do not care if you personally receive the
funds or if they are paid to your heirs should you die within the settlement period. Which
option should you select and why is that option justified?
A. Option A: It provides the largest monthly payment.
B. Option B: It pays the largest total amount.
C. Option C: It is all paid today.
D. Option B: It pays the greatest number of payments.
E. Option A: It has the greatest value today.
Racing Engines wants to save $750,000 to buy some new equipment four years from now.
The plan is to set aside an equal amount of money on the first day of each quarter starting
today. The firm can earn 4.75 percent on its savings. How much does the firm have to save
each quarter to achieve its goal?
51.
A. $42,337.00
B. $42,969.70
C. $43,192.05
D. $43,419.29
E. $43,911.08
Stephanie is going to contribute $250 on the first of each month, starting today, to her
retirement account. Her employer will provide a 50 percent match. In other words, her
employer will add $125 to the amount Stephanie saves. If both Stephanie and her employer
continue to do this and she can earn a monthly interest rate of .5 percent, how much will she
have in her retirement account 25 years from now?
52.
A.
B.
C.
D.
$336,264
$204,286
$199,312
$268,418
E. $261,172
You are considering an annuity that costs $160,000 today. The annuity pays $17,500 a year
at an annual interest rate of 7.5 percent. What is the length of the annuity time period?
53. A. 13 years
B. 14 years
C. 15 years
D. 16 years
E. 17 years
Today, you borrowed $6,200 on your credit card to purchase some furniture. The interest
rate is 14.9 percent, compounded monthly. How long will it take you to pay off this debt
assuming that you do not charge anything else and make regular monthly payments of $120?
54.
A. 5.87 years
B. 6.40 years
C. 6.93 years
D. 7.23 years
E. 7.31 years
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?
55.
A. 3.09 years
B. 3.79 years
C. 4.46 years
D. 4.82 years
E. 4.91 years
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?
56.
A. 29.97 years
B. 8.56 years
C. 22.03 years
D. 12.71 years
E. 18.99 years
The Art Gallery is notoriously known as a slow-payer. The firm currently needs to borrow
$25,000 and only one company will loan to them. The terms of the loan call for weekly
payments of $500 at a weekly interest rate of .45 percent. What is the loan term?
57.
A. 42.5 weeks
B. 45.00 weeks
C. 56.77 weeks
D. 31.65 weeks
E. 43.33 weeks
Jogging Gear is considering a project with an initial cash requirement of $238,400. The
project will yield cash flows of $4,930 monthly for 65 months. What is the rate of return on
this project?
58.
A. 9.97 percent
B. 11.38 percent
14.28
C.
percent
13.41
D.
percent
10.56 percent
E.
Your insurance agent is trying to sell you an annuity that costs $50,000 today. By buying
this annuity, your agent promises that you will receive payments of $250 a month for the
next 20 years. What is the rate of return on this investment?
59.
A. 3.75 percent
B. 2.47 percent
C. 1.88 percent
D. 2.45 percent
E. 3.67 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?
60. A. 8.94 percent
B. 9.23 percent
C. 9.36 percent
D. 9.41 percent
E. 9.78 percent
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?
61.
A. 13.13 percent
B. 6.24 percent
C. 1.29 percent
D. 9.32 percent
E. .97 percent
Your father helped you start saving $20 a month beginning on your fifth birthday. He always
made you deposit the money into your savings account on the first day of each month just to
“start the month out right.” Today completes your 17th year of saving and you now have
$6,528.91 in this account. What is the rate of return on your savings?
62.
A. 5.15 percent
B. 5.30 percent
C. 5.47 percent
D. 5.98 percent
E. 6.12 percent
Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40th
birthday. In an attempt to reach this goal, you decide to save $75 a day, every day, until you
turn 40. You open an investment account and deposit your first $75 today. What rate of
return must you earn to achieve your goal?
63.
A. 7.67 percent
B. 8.09 percent
C. 9.90 percent
D. 10.06 percent
E. 10.54 percent
You just settled an insurance claim. The settlement calls for increasing payments over a fiveyear period. The first payment will be paid one year from now in the amount of $7,000. The
following payments will increase by 3.5 percent annually. What is the value of this
settlement to you today if you can earn 6.5 percent on your investments?
64.
A. $36,408.28
B. $31,063.79
C. $42,023.05
D. $34,141.14
E. $28,008.16
Your grandfather left you an inheritance that will provide an annual income for the next 20
years. You will receive the first payment one year from now in the amount of $16,500.
Every year after that, the payment amount will increase by 5 percent. What is your
inheritance worth to you today if you can earn 7.5 percent on your investments?
65.
A. $247,750
B. $286,667
C. $231,211
D. $354,612
E. $308,974
You just won the magazine sweepstakes and opted to take unending payments. The first
payment will be $21,500 and will be paid one year from today. Every year thereafter, the
payments will increase by 2.5 percent annually. What is the present value of your prize at a
discount rate of 7.9 percent?
66.
A. $350,000
B. $348,409
C. $398,148
D. $291,006
E. $346,900
A wealthy benefactor just contributed to your college’s scholarship program. This gift will
provide $20,000 in scholarships next year with that amount increasing by 2 percent annually
thereafter.. If the discount rate is 6.5 percent, what is the current value of this perpetual gift?
67.
A. $307,700
B. $350,000
C. $525,000
D. $444,444
E. $550,750
Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday
Vacations can generate cash flows of $187,000, $220,000, and $245,000 over the next three
years, respectively. After that time, they feel the business will be worthless. If the desired
rate of return is 13.5 percent, what is the maximum Southern Tours should pay today to
acquire Holiday Vacations?
68.
A. $503,098
B. $538,615
C. $545,920
D. $601,226
E. $638,407
You are considering two savings options. Both options offer a rate of return of 11 percent.
The first option is to save $2,500, $1,500, and $3,000 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?
69.
A. $5,405.41
B. $6,289.74
C. $6,660.00
D. $5,663.26
E. $4,784.20
Your parents have made you two offers. The first offer includes annual gifts of $10,000,
70. $11,000, and $12,000 at the end of each of the next three years, respectively. The other offer
is the payment of one lump sum amount today. You are trying to decide which offer to
accept given the fact that your discount rate is 8 percent. What is the minimum amount that
you will accept today if you are to select the lump sum offer?
A. $28,216
B. $29,407
C. $29,367
D. $30,439
E. $30,691
You want to start your own consulting business and believe it could produce cash flows of
$5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the
end of three years you think you can sell the business for $450,000. At a 14 percent discount
rate, what is this business idea worth today?
71.
A. $311,406
B. $514,545
C. $430,109
D. $345,738
E. $478,901
You are considering a project that will provide annual cash inflows of $16,500, $25,700, and
$18,000 at the end of each year for the next three years, respectively. What is the present
value of these cash flows, given a discount rate of 12.5 percent?
72.
A. $54,877
B. $47,615
C. $55,429
D. $46,388
E. $53,567
You just signed a consulting contract that will pay you $38,000, $52,000, and $85,000
annually at the end of the next three years, respectively. What is the present value of these
cash flows given a discount rate of 10.5?
73.
A. $139,975
B. $148,307
C. $154,880
D. $157,131
E. $162,910
You have some property for sale and have received two offers. The first offer is for $89,500
today in cash. The second offer is the payment of $35,000 today and an additional
guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent,
which offer should you accept and why?
74.
A. You should accept the $89,500 today because it has the higher net present value.
B. You should accept the $89,500 today because it has the lower future value.
C. You should accept the first offer as it is a lump sum payment.
D. You should accept the second offer because it has the larger net present value.
E. It does not matter which offer you accept as they are equally valuable.
You are planning a special wedding three years from today. You don’t know who your
spouse will be but you do know that you are saving $25,000 today and $35,000 one year
from today for this purpose. You also plan to pay the final $45,000 of costs on your wedding
day. At a discount rate of 7 percent, what is the current cost of your special wedding?
75.
A. $94,444
B. $88, 800
C. $105,000
D. $85,711
E. $101,667
One year ago, JK Mfg. deposited $20,500 in an investment account for the purpose of
buying new equipment four years from today. 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. How much will be available when it is ready to buy the equipment, assuming
the account pays 3.5 interest?
76.
A. $53,408
B. $53,919
C. $56,211
D. $52,648
E. $58,021
Troy will receive $7,500 at the end of year 2. At the end of the following two years, he will
receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the
end of year 5 if the interest rate is 8 percent?
77.
A. $38,418
B. $32,907
C. $33,445
D. $36,411
E. $35,255
Sue plans to save $4,500, $0, and $5,500 at the end of each of the next three years,
respectively. What will her investment account be worth at the end of the third year if she
earns an annual rate of 4.15 percent?
78.
A. $10,528.12
B. $10,381.25
C. $9,907.11
D. $11,526.50
E. $10,812.07
Waldo expects to receive the following payments: year 1 = $50,000; year 2 = $28,000; year
3 = $12,000. All of this money will be saved for his retirement. If he can earn an average
annual return of 10.5 percent, how much will he have in his account 25 years after making
the first deposit?
79.
A. $1,172,373
B. $935,334
C. $806,311
D. $947,509
E. $1,033,545
Jones Stoneware has a $65,000 liability it must pay four years from today. The company is
opening a savings account so that the entire amount will be available when this debt comes
due. The plan is to make an initial deposit today and then deposit an additional $10,000 at
the end of each of the four years. The account pays a 4.5 percent rate of return. How much
does the firm need to deposit today?
80.
A. $18,299.95
B. $19,469.64
C. $21,400.33
D. $18,631.23
E. $22,218.09
The government has imposed a fine on JJ’s Place. The fine calls for annual payments of
$60,000, $70,000, $75,000, and $50,000, respectively, over the next four years. The first
payment is due one year from today. The government plans to invest the funds until the final
payment is collected and then donate the entire amount, including the investment earnings,
to help the local community shelter. The government will earn 5.5 percent on the funds held.
How much will the community shelter receive four years from today?
81.
A.
B.
C.
D.
$263,025
$236,875
$277,491
$328,572
E. $285,737
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?
82.
A. $1,687,450
B. $1,478,023
C. $1,333,333
D. $1,724,138
E. $1,600,000
A preferred stock pays an annual dividend of $4.10. What is one share of this stock worth
today if the rate of return is 9.68 percent?
83. A. $41.48
B. $41.18
C. $42.36
D. $39.87
E. $42.90
You would like to establish a trust fund to provide $140,000 a year forever for your heirs.
The expected rate of return is 5.45 percent. How much money must you deposit today to
fund this gift?
84.
A. $2,568,807
B. $2,521,212
C. $2,600,000
D. $2,458,122
E. $2,500,000
You just paid $750,000 for an annuity that will pay you and your heirs $36,000 a year
forever. What rate of return are you earning on this policy?
85. A. 4.75 percent
B. 5.10 percent
C. 5.33 percent
D. 4.80 percent
E. 4.72 percent
You grandfather invested $20,000 years ago to provide annual payments of $750 a year to
his heirs forever. What is the rate of return?
A.
86. B.
C.
D.
4.75 percent
3.75 percent
4.10 percent
4.25 percent
4.33 percent
E.
DLM preferred stock has a 5.8 percent dividend yield. The stock is currently priced at
$36.20 per share. What is the amount of the annual dividend?
87. A. $2.30
B. $2.35
C. $2.40
D. $2.10
E. $1.90
Your credit card company charges you 1.65 percent interest per month. What is the annual
percentage rate on your account?
88. A. 18.95 percent
B. 19.80 percent
C. 20.90 percent
D. 21.25 percent
E. 21.70 percent
What is the annual percentage rate on a loan with a stated rate of 2.75 percent per quarter?
89.
A. 11.00 percent
B. 11.09 percent
C. 11.18 percent
D. 11.27 percent
E. 11.31 percent
You are paying an effective annual rate of 15.33 percent on your credit card. The interest is
compounded monthly. What is the annual percentage rate on this account?
90. A. 14.35 percent
B. 13.90 percent
C. 14.10 percent
D. 13.75 percent
E. 14.00 percent
91.
What is the effective annual rate if a bank charges you an APR of 8.25 percent, compounded
quarterly?
A. 8.32 percent
B. 8.38 percent
C. 8.42 percent
D. 8.51 percent
E. 8.61 percent
Your credit card company quotes you an interest rate of 21.9 percent based on annual
compounding. Interest is billed monthly. What is the actual rate of interest you are paying?
92. A. 21.90 percent
B. 19.21 percent
C. 24.24 percent
D. 22.57 percent
E. 23.72 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?
93. A. 25.16 percent
B. 25.80 percent
C. 26.49 percent
D. 26.56 percent
E. 26.64 percent
94.
You are considering five loan offers. The only significant difference between them is their
interest rates. Given the following information, which offer should you accept? (Assume a
365-day year.)
Offer A: 6.75 percent APR with daily compounding.
Offer B: 6.8 percent APR with monthly compounding.
Offer C: 7 percent APR with annual compounding.
Offer D: 6.825 percent APR with quarterly compounding.
Offer E: 6.85 percent APR with semiannual compounding.
A.
B.
C.
D.
Offer A
Offer B
Offer C
Offer D
Offer E
E.
The banks in your area offer the following rates of interest on their savings accounts. If you
want to open one of these accounts, which bank should you select?
Bank A: .75 percent APR with daily compounding.
Bank B: .85 percent APR with monthly compounding.
Bank C: .8725 percent APR with annual compounding.
Bank D: .87 percent APR with quarterly compounding.
Bank E: .775 percent APR with semiannual compounding.
95.
A.
B.
C.
D.
Bank A
Bank B
Bank C
Bank D
Bank E
E.
96. What is the effective annual rate of 14.9 percent compounded continuously?
A. 15.59 percent
B. 15.62 percent
C. 15.69 percent
D. 15.84 percent
E. 16.07 percent
What is the effective annual rate of 11.9 percent compounded continuously?
97.
A. 12.72 percent
B. 12.64 percent
C. 13.43 percent
D. 12.89 percent
E. 12.68 percent
First City Bank wants to appear competitive based on quoted loan rates and thus must offer a
7.65 percent annual percentage rate on its loans. What is the maximum rate the bank can
actually earn based on the quoted rate?
98.
99.
A. 7.95 percent
B. 8.14 percent
C. 8.21 percent
D. 7.78 percent
E. 7.87 percent
You are going to loan a friend $6,000 for one year at an interest rate of 4.5 percent,
compounded annually. How much additional interest could you have earned if you had
compounded the rate continuously rather than annually?
A. $5.84
B. $.6.17
C. $6.10
D. $5.93
E. $6.28
You are borrowing money today at 8.48 percent, compounded annually. You will repay the
principal plus all the interest in one lump sum of $12,800 two years from today. How much
are you borrowing?
100.
A. $9,900.00
B. $10,211.16
C. $10,877.04
D. $11,401.16
E. $11,250.00
This morning, you borrowed $13,400 at a 6.9 percent annual interest rate. You are to repay
the loan principal plus all of the loan interest in one lump sum three years from today. How
much will you have to repay?
101.
A. $16,369.59
B. $17,808.13
C. $15,313.00
D. $15,324.60
E. $16,441.20
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?
102.
A. 8.01 percent
B. 8.45 percent
C. 8.78 percent
D. 9.47 percent
E. 9.93 percent
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?
103.A. $7,750
B. $41,600
C. $4,160
D. $52,000
E. $56,160
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?
104.
A. $1,187.50
B. $1,890.00
C. $7,009.40
D. $5,106.67
E. $6,250.00
On the day you entered college, you borrowed $30,000 from your local bank. The terms of
the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due
in full one year after you graduate. Interest is to be paid annually at the end of each year.
Assume that you complete college in four years. How much total interest will you pay on
105.this loan assuming you paid as agreed?
A. $7,267
B. $7,400
C. $7,125
D. $1,500
E. $1,425
You just acquired a 30-year mortgage in the amount of $179,500 at 4.75 percent interest,
compounded monthly. Payments will be equal over the life of the loan with the first
payment due one month after the date of the loan. How much of the first payment will be
interest?
106.
A. $925.20
B. $806.16
C. $710.52
D. $936.36
E. $548.60
On June 1, you borrowed $195,000 to buy a house. The mortgage rate is 5.25 percent. The
loan is to be repaid in equal monthly payments over 15 years. All taxes and insurance
premiums are to be paid separately. The first payment is due on July 1. How much of the
first payment applies to the principal balance?
107.
A. $714.43
B. $721.14
C. $658.56
D. $743.38
E. $756.70
This morning, you borrowed $162,000 to buy a house. The mortgage rate is 4.35 percent.
The loan is to be repaid in equal monthly payments over 20 years with the first payment due
108.one month from today. Assume each month is equal to 1/12 of a year and all taxes and
insurance premiums are paid separately. How much of the second payment applies to the
principal balance?
A. $568.84
B. $426.11
C. $424.57
D. $587.25
E. $585.71
Western Bank offers you a $10,000, 6-year term loan at 7 percent annual interest. What is
the amount of your annual loan payment?
109.A. $1,883.33
B. $2,097.96
C. $2,066.67
D. $1,901.18
E. $1,811.07
The Friendly Bank wants to earn an effective annual return on its consumer loans of 12
percent per year. The bank uses daily compounding. What rate is the bank most apt to quote
on these loans?
110.
A. 11.76 percent
B. 11.38 percent
C. 11.33 percent
D. 12.12 percent
E. 12.00 percent
Your broker is offering 1.2 percent compounded daily on its money market account. If you
deposit $7,500 today, how much will you have in your account 15 years from now?
111.
A. $8,979.10
B. $9,714.06
C. $8,204.50
D. $9,336.81
E. $9,414.14
You want to buy a new sports coupe for $41,750 and the finance office at the dealership has
quoted you an APR of 7.6, compounded monthly for 48 months. What is the effective
interest rate on this loan?
112.
A. 8.28 percent
B. 8.41 percent
C. 7.94 percent
D. 8.13 percent
E. 7.87 percent
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?
113.
A. $26,187.10
B. $26,847.15
C. $25,068.00
D. $27,319.54
E. $26,069.79
You are planning to save for retirement over the next 15 years. To do this, you will invest
$1,100 a month in a stock account and $500 a month in a bond account. The return on the
114.stock account is expected to be 7 percent, and the bond account will pay 4 percent. When
you retire, you will combine your money into an account with a 5 percent return. How much
can you withdraw each month during retirement assuming a 20-year withdrawal period?
A. $2,636.19
B. $2,904.11
C. $3,008.21
D. $3,113.04
E. $3,406.97
You want to be a millionaire when you retire in 40 years and can earn an annual return of
12.5 percent. How much more will you have to save each month if you wait 15 years to start
saving versus if you start saving at the end of this month?
115.
A. $489.22
B. $354.13
C. $308.47
D. $441.15
E. $414.34
You are the recipient of a gift that will pay you $25,000 one year from now and every year
thereafter for the following 24 years. The payments will increase in value by 2.5 percent
each year. If the appropriate discount rate is 8.5 percent, what is the present value of this
gift?
116.
A. $416,667
B. $316,172
C. $409,613
D. $311,406
E. $386,101
You are preparing to make monthly payments of $75, beginning at the end of this month,
117.into an account that pays 6 percent interest compounded monthly. How many payments will
you have made when your account balance reaches $10,000?
A. 97
B. 102
C. 89
D. 102
E. 91
You want to borrow $38,400 and can afford monthly payments of $960 for 48 months, but
no more. Assume monthly compounding. What is the highest APR rate you can afford?
118.A. 9.24 percent
B. 8.67 percent
C. 8.82 percent
D. 9.01 percent
E. 9.18 percent
You need a 30-year, fixed-rate mortgage to buy a new home for $225,000. Your bank will
lend you the money at an APR of 5.5 percent with monthly compounding. You can only
afford monthly payments of $1,000 for principal and interest, so you offer to pay off any
remaining loan balance at the end of the loan term in the form of a single balloon payment.
What will be the amount of the balloon payment?
119.
A. $232,191
B. $213,316
C. $254,480
D. $253,550
E. $226,315
The present value of the following cash flow stream is $5,933.86 when discounted at 11
120.percent annually. What is the value of the missing cash flow?
Year Cash Flow
1
2
3
4
$2,000
?
1,750
1,250
A. $1,500
B. $1,750
C. $2,250
D. $2,250
E. $2,500
You have just purchased a new warehouse. To finance the purchase, you arranged for a 30year 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?
121.
A. 6.82 percent
B. 6.25 percent
C. 6.46 percent
D. 7.01 percent
E. 7.27 percent
Al’s obtained a discount loan of $71,000 today that requires a repayment of $90,000, 3
years from today. What is the APR on this loan?
122.A. 7.87 percent
B. 8.01 percent
C. 8.23 percent
D. 8.57 percent
E. 8.90 percent
What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment
is received 7 years from now and you receive a total of 23 annual payments?
123.A. $9,149.74
B. $9,238.87
C. $9,333.33
D. $9,420.12
E. $9,881.72
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?
124.
A. $108,206.67
B. $119,176.06
C. $124,318.08
D. $129,407.17
E. $131,008.15
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 6 percent, compounded monthly. What will be your monthly
payment?
125.
A. $1,047.90
B. $1,053.87
C. $1,058.01
D. $1,063.30
E. $1,072.11
You are considering a one-year discount loan of $16,000. The interest rate is quoted as 7
percent plus 4 points. What is the actual rate you are paying on this loan?
126.A. 11.00 percent
B. 11.67 percent
C. 12.55 percent
D. 11.46 percent
E. 10.84 percent
You just received an offer in the mail to transfer your $5,000 balance from your current
credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a
rate of 5.9 percent. You plan to make payments of $250 a month on this debt. How many
fewer payments will you have to make to pay off this debt if you transfer the balance to the
new card?
127.
A. 2.36 payments
B. 3.05 payments
C. 3.10 payments
D. 2.79 payments
E. 2.86 payments
Chapter 06 Discounted Cash Flow Valuation Key
An ordinary annuity is best defined by which one of the following?
1.
A.
B.
C.
D.
E.
Increasing payments paid for a definitive period of time.
Increasing payments paid forever.
Equal payments paid at the end of regular intervals over a stated time period.
Equal payments paid at the beginning of regular intervals for a limited time period.
Equal payments that occur at set intervals for an unlimited period of time.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Annuities
Which one of the following accurately defines a perpetuity?
2.
A.
B.
C.
D.
E.
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.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
A Canadian consol is best categorized as:
3.
A.
B.
C.
D.
E.
An ordinary annuity.
An amortized cash flow.
An annuity due.
A discounted loan.
A perpetuity.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
The interest rate that is most commonly quoted by a lender is referred to as which one of
the following?
4.
A.
B.
C.
D.
E.
Annual percentage rate.
Compound rate.
Effective annual rate.
Simple rate.
Common rate.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Loan interest and rates
An interest rate on a loan that is compounded monthly but expressed as an annual rate
would be an example of which one of the following rates?
5.
A.
B.
C.
D.
E.
Stated rate.
Discounted annual rate.
Effective annual rate.
Periodic monthly rate.
Consolidated monthly rate.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Loan interest and rates
Your credit card charges you 1.5 percent interest per month. This rate when multiplied by
12 is called the:
6.
A.
B.
C.
D.
E.
Effective annual rate.
Annual percentage rate.
Periodic interest rate.
Compound interest rate.
Period interest rate.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Loan interest and rates
A loan where the borrower receives money today and repays a single lump sum on a
future date is called a(n) _____ loan.
7.
A.
B.
C.
D.
E.
Amortized.
Continuous.
Balloon.
Pure discount.
Interest-only.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
Which one of the following terms is used to describe a loan that calls for periodic interest
payments and a lump sum principal payment?
8.
A.
B.
C.
D.
E.
Amortized loan.
Modified loan.
Balloon loan.
Pure discount loan.
Interest-only loan.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
Amortized loans must have which one of these characteristics?
9.
A.
B.
C.
D.
E.
Either equal or unequal principal payments over the life of the loan.
One lump-sum principal payment.
Increasing payments over the life of the loan.
Equal interest payments over the life of the loan.
Declining periodic payments.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Amortization
Which one of the following terms is defined as a loan wherein the regular payments,
including both interest and principal amounts, are insufficient to retire the entire loan
amount, which then must be repaid in one lump sum?
10.
A.
B.
C.
D.
E.
Amortized loan.
Continuing loan.
Balloon loan.
Pure discount loan.
Interest-only loan.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
You are comparing two annuities that offer quarterly payments of $2,500 for five years
and pay .75 percent interest per month. You will purchase one of these today with a single
lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will
pay monthly, starting one month from today. Which one of the following statements is
correct concerning these two annuities?
11.
A.
B.
C.
D.
E.
These annuities have equal present values but unequal future values.
These two annuities have both equal present and future values.
Annuity B is an annuity due.
Annuity A has a smaller future value than annuity B.
Annuity B has a smaller present value than annuity A.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Annuities
You are comparing two investment options that each pay 6 percent interest, compounded
annually. Both options will provide you with $12,000 of income. Option A pays $2,000
the first year followed by two annual payments of $5,000 each. Option B pays three
annual payments of $4,000 each. Which one of the following statements is correct given
these two investment options? Assume a positive discount rate.
12.
A.
B.
C.
D.
E.
Both options are of equal value since they both provide $12,000 of income.
Option A has the higher future value at the end of year three.
Option B has a higher present value at time zero.
Option B is a perpetuity.
Option A is an annuity.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – multiple cash flows
13.
You are considering two projects with the following cash flows:
Project X
Project Y
Year 1
$8,500
$7,000
Year 2
8,000
7,500
Year 3
7,500
8,000
Year 4
7,000
8,500
Which one of the following statements is true concerning these two projects given a
positive discount rate?
A. Both projects have the same future value at the end of Year 4.
B. Both projects have the same value at Time 0.
C. Both projects are ordinary annuities.
D. Project Y has a higher present value than Project X.
Project X has both a higher present and a higher future value than Project Y.
E.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Time value of money
Which one of the following statements is correct given the following two sets of project
cash flows? Assume a positive discount rate.
Project A
Project B
Year 1
$4,000
$2,000
Year 2
3,000
3,000
Year 3
0
2,000
Year 4
3,000
3,000
14.
A. The cash flows for Project B are an annuity, but those of Project A are not.
B. Both sets of cash flows have equal present values as of time zero.
The present value at time zero of the final cash flow for Project A will be discounted
C.
using an exponent of three.
Both projects have equal values at any point in time since they both pay the same
D.
amount in total.
E. Project B is worth less today than Project A.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
Which one of the following statements related to annuities and perpetuities is correct?
15.
A.
B.
C.
D.
E.
An ordinary annuity is worth more than an annuity due given equal annual cash flows
for 10 years at 7 percent interest, compounded annually.
A perpetuity composed of $100 monthly payments is worth more than an annuity of
$100 monthly payments given equal discount rates.
Most loans are a form of a perpetuity.
The present value of a perpetuity cannot be computed but the future value can.
Perpetuities are finite but annuities are not.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
Which one of the following statements related to loan interest rates is correct?
16.
A. The annual percentage rate considers the compounding of interest.
B. When comparing loans you should compare the effective annual rates.
C. Lenders are most apt to quote the effective annual rate.
Regardless of the compounding period, the effective annual rate will always be higher
D.
than the annual percentage rate.
The more frequent the compounding period, the lower the effective annual rate given a
E.
fixed annual percentage rate.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Loan interest and rates
Which one of the following statements concerning interest rates is correct?
A.
17.
B.
C.
D.
E.
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.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
Which one of these statements related to growing annuities and perpetuities is correct?
18.
A. You can compute the present value of a growing annuity but not a growing perpetuity.
In computing the present value of a growing annuity, you discount the cash flows
B.
using the growth rate as the discount rate.
C. The future value of an annuity will decrease if the growth rate is increased.
D. An increase in the rate of growth will decrease the present value of an annuity.
The present value of a growing perpetuity will decrease if the discount rate is
E.
increased.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Annuities
Which one of the following statements correctly defines a time value of money
relationship?
19.
A.
B.
C.
D.
E.
Time and future values are inversely related, all else held constant.
Interest rates and time are positively related, all else held constant.
An increase in a positive discount rate increases the present value.
An increase in time increases the future value given a zero rate of interest.
Time and present value are inversely related, all else held constant.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Time value of money
Which one of the following compounding periods will yield the lowest effective annual
rate given a stated future value at year 5 and an annual percentage rate of 10 percent?
20.
A.
B.
C.
D.
E.
Annual.
Semiannual.
Monthly.
Daily.
Continuous.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
The entire repayment of which one of the following loans is computed simply by
computing one single future value?
21.
A.
B.
C.
D.
E.
Interest-only loan.
Balloon loan.
Amortized loan.
Pure discount loan.
Bullet loan.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
How is the principal amount of an interest-only loan repaid?
22.
A.
B.
C.
D.
E.
The principal is forgiven over the loan period; thus it does not have to be repaid.
The principal is repaid in decreasing increments and included in each loan payment.
The principal is repaid in one lump sum at the end of the loan period.
The principal is repaid in equal annual payments.
The principal is repaid in increasing increments through regular monthly payments.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
An amortized loan:
23.
A. Requires the principal amount to be repaid in even increments over the life of the loan.
May have equal or increasing amounts applied to the principal from each loan
B.
payment.
Requires that all interest be repaid on a monthly basis while the principal is repaid at
C.
the end of the loan term.
D. Requires that all payments be equal in amount and include both principal and interest.
E. Repays both the principal and the interest in one lump sum at the end of the loan term.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
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.
24.
A.
B.
C.
D.
E.
Interest-only loan.
Amortized loan with equal principal payments.
Amortized loan with equal loan payments.
Discount loan.
Balloon loan where 50 percent of the principal is repaid as a balloon payment.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Intermediate
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
Your grandmother is gifting you $150 a month for four years while you attend college to
earn your bachelor’s degree. At a 4.8 percent discount rate, what are these payments
worth to you on the day you enter college?
25.
A.
B.
C.
D.
E.
$6,201.16
$6,539.14
$5,589.19
$6,608.87
$6,870.23
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
You just won the grand prize in a national writing contest! As your prize, you will receive
$1,000 a month for 10 years. If you can earn 7 percent on your money, what is this prize
worth to you today?
26.
A.
B.
C.
D.
E.
$86,126.35
$78,411.06
$81,338.40
$85,333.33
$90,450.25
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5
percent, how much can he afford to borrow to purchase a car?
27.
A.
B.
C.
D.
E.
$11,750.00
$12,348.03
$11,697.88
$10,266.67
$10,400.00
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
As the beneficiary of a life insurance policy, you have two options for receiving the
insurance proceeds. You can receive a lump sum of $200,000 today or receive payments
of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option
should you take and why?
28.
A. You should accept the payments because they are worth $209,414 to you today.
B. You should accept the payments because they are worth $247,800 to you today.
C. You should accept the payments because they are worth $336,000 to you today.
You should accept the $200,000 because the payments are only worth $189,311 to you
D.
today.
You should accept the $200,000 because the payments are only worth $195,413 to you
E.
today.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
Your employer contributes $60 a week to your retirement plan. Assume you work for
your employer for another 20 years and the applicable discount rate is 9 percent. Given
these assumptions, what is this employee benefit worth to you today?
29.
A.
B.
C.
D.
E.
$28,927.38
$27,618.46
$29,211.11
$25,306.16
$25,987.74
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
The Distribution Point plans to save $2,000 a month for the next 3 years for future
emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly
deposit will be made today. What would today’s deposit amount have to be if the firm
opted for one lump sum deposit that would yield the same amount of savings as the
monthly deposits after 3 years?
30.
A.
B.
C.
D.
E.
$70,459.07
$67,485.97
$69,068.18
$69,333.33
$67,233.84
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
You need some money today and the only friend you have that has any is your miserly
friend. He agrees to loan you the money you need, if you make payments of $30 a month
for the next six months. In keeping with his reputation, he requires that the first payment
be paid today. He also charges you 2 percent interest per month. How much money are
you borrowing?
31.
A.
B.
C.
D.
E.
$164.09
$168.22
$169.50
$170.68
$171.40
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
You just purchased an annuity that will pay you $24,000 a year for 25 years, starting
today. What was the purchase price if the discount rate is 8.5 percent?
32.
A. $241,309
B. $245,621
C. $251,409
D. $258,319
E. $266,498
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
You are scheduled to receive annual payments of $3,600 for each of the next 12 years.
The discount rate is 8 percent. What is the difference in the present value if you receive
these payments at the beginning of each year rather than at the end of each year?
33.
A.
B.
C.
D.
E.
$2,170.39
$2,511.07
$2,021.18
$2,027.94
$2,304.96
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
34.
You are comparing two annuities with equal present values. The applicable discount rate
is 7.25 percent. One annuity pays $2,500 on the first day of each year for 15 years. How
much does the second annuity pay each year for 15 years if it pays at the end of each
year?
A.
B.
C.
D.
E.
$2,331.00
$2,266.67
$2,500.00
$2,390.50
$2,681.25
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Annuities
Trish receives $450 on the first of each month. Josh receives $450 on the last day of each
month. Both Trish and Josh will receive payments for next four years. At a discount rate
of 9.5 percent, what is the difference in the present value of these two sets of payments?
35.
A.
B.
C.
D.
E.
$141.80
$151.06
$154.30
$159.08
$162.50
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
What is the future value of $1,400 a year for 35 years at 6 percent interest? Assume
annual compounding.
36.
A.
B.
C.
D.
E.
$164,200
$138,714
$156,009
$142,908
$147,267
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
What is the future value of $12,000 a year for 40 years at 11.5 percent interest?
37.
A.
B.
C.
D.
E.
$8,278,406
$8,014,195
$7,711,414
$7,989,476
$8,021,223
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
Rosina plans on saving $2,000 a year and expects to earn an annual rate of 8.8 percent.
How much will she have in her account at the end of 43 years?
38.
A.
B.
C.
D.
E.
$806,429
$838,369
$997,407
$831,532
$908,316
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds
$1,500 to his savings account on the last day of each year. They both earn 6.5 percent
annual interest. What is the difference in their savings account balances at the end of 35
years?
39.
A.
B.
C.
D.
E.
$12,093
$12,113
$12,127
$12,211
$12,219
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
You are borrowing $21,800 to buy a car. The terms of the loan call for monthly payments
for five years at 8.25 percent interest. What is the amount of each payment?
40.
A.
B.
C.
D.
E.
$387.71
$391.40
$401.12
$439.76
$444.64
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Loan payments
You borrow $230,000 to buy a house. The mortgage rate is 4.5 percent and the loan
period is 25 years. Payments are made monthly. If you pay the mortgage according to the
loan agreement, how much total interest will you pay?
41.
A.
B.
C.
D.
E.
$160,408
$147,027
$153,524
$164,319
$141,406
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Loan interest and rates
Travis International has a one-time expense of $2.86 million that must be paid three years
from now. Since the firm cannot raise that amount in one day, it wants to save an equal
amount each month over the next three years to fund this expense. If the firm can earn 2.1
percent on its savings, how much must it save each month?
42.
A.
B.
C.
D.
E.
$78,416.20
$77,037.69
$91,300.05
$87,411.08
$73,901.15
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
Nadine is retiring today at age 66 and expects to live to age 82. She has $136,000 in her
retirement savings account. She is somewhat conservative with her money and expects to
earn 6 percent during her retirement years. How much can she withdraw from her
retirement savings each month if she plans to spend her last penny on the morning of her
death?
43.
A.
B.
C.
D.
E.
$909.92
$847.78
$919.46
$1,416.08
$1,103.56
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
Island News purchased a piece of property for $1.36 million. The firm paid a down
payment of 12 percent in cash and financed the balance. The loan terms require monthly
payments for 10 years at an annual percentage rate of 4.75 percent, compounded monthly.
What is the amount of each mortgage payment?
44.
A.
B.
C.
D.
E.
$12,548.18
$13,419.97
$13,607.11
$14,878.15
$12,301.16
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Loan payments
You estimate that you will owe $39,950 in student loans by the time you graduate. The
interest rate is 3.75 percent. If you want to have this debt paid in full within 10 years, how
much must you pay each month?
45.
A.
B.
C.
D.
E.
$411.09
$399.74
$414.28
$436.05
$442.50
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Loan payments
You are buying a pre-owned car today at a price of $8,500. You are paying $300 down in
cash and financing the balance for 36 months at 7.75 percent. What is the amount of each
monthly loan payment?
46.
A.
B.
C.
D.
E.
$256.01
$312.23
$318.47
$265.37
$284.40
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Loan payments
An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to
earn a rate of return of 6.5 percent, what is the most you are willing to pay as a lump sum
today to buy this annuity?
47.
A.
B.
C.
D.
E.
$32,008.24
$34,208.16
$44,591.11
$43,008.80
$38,927.59
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
Your car dealer is willing to lease you a new car for $190 a month for 36 months.
Payments are due on the first day of each month starting with the day you sign the lease
contract. If your cost of money is 6.5 percent, what is the current value of the lease?
48.
A.
B.
C.
D.
E.
$10,331.03
$6,232.80
$9,197.74
$7,203.14
$11,008.31
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
Your great aunt left you an inheritance in the form of a trust. The trust agreement states
that you are to receive $2,400 on the first day of each year, starting immediately and
continuing for 20 years. What is the value of this inheritance today if the applicable
discount rate is 6.75 percent?
49.
A. $24,890.88
B. $26,311.16
C. $27,677.34
D. $28,909.29
E. $29,333.33
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
You just received an insurance settlement offer related to an accident you had three years
ago. The offer provides you with three choices:
Option A: $1,500 a month for 6 years
Option B: $1,025 a month for 10 years
Option C: $85,000 as a lump sum payment today
50.
You can earn 7.5 percent on your investments and do not care if you personally receive
the funds or if they are paid to your heirs should you die within the settlement period.
Which option should you select and why is that option justified?
A.
B.
C.
D.
E.
Option A: It provides the largest monthly payment.
Option B: It pays the largest total amount.
Option C: It is all paid today.
Option B: It pays the greatest number of payments.
Option A: It has the greatest value today.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
Racing Engines wants to save $750,000 to buy some new equipment four years from now.
The plan is to set aside an equal amount of money on the first day of each quarter starting
today. The firm can earn 4.75 percent on its savings. How much does the firm have to
save each quarter to achieve its goal?
51.
A.
B.
C.
D.
E.
$42,337.00
$42,969.70
$43,192.05
$43,419.29
$43,911.08
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
Stephanie is going to contribute $250 on the first of each month, starting today, to her
retirement account. Her employer will provide a 50 percent match. In other words, her
employer will add $125 to the amount Stephanie saves. If both Stephanie and her
employer continue to do this and she can earn a monthly interest rate of .5 percent, how
much will she have in her retirement account 25 years from now?
52.
A.
B.
C.
D.
E.
$336,264
$204,286
$199,312
$268,418
$261,172
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
You are considering an annuity that costs $160,000 today. The annuity pays $17,500 a
year at an annual interest rate of 7.5 percent. What is the length of the annuity time
period?
53.
A.
B.
C.
D.
E.
13 years
14 years
15 years
16 years
17 years
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
Today, you borrowed $6,200 on your credit card to purchase some furniture. The interest
rate is 14.9 percent, compounded monthly. How long will it take you to pay off this debt
assuming that you do not charge anything else and make regular monthly payments of
$120?
54.
A.
B.
C.
D.
E.
5.87 years
6.40 years
6.93 years
7.23 years
7.31 years
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
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?
55.
A.
B.
C.
D.
E.
3.09 years
3.79 years
4.46 years
4.82 years
4.91 years
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
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?
56.
A.
B.
C.
D.
29.97 years
8.56 years
22.03 years
12.71 years
E. 18.99 years
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
The Art Gallery is notoriously known as a slow-payer. The firm currently needs to borrow
$25,000 and only one company will loan to them. The terms of the loan call for weekly
payments of $500 at a weekly interest rate of .45 percent. What is the loan term?
57.
A.
B.
C.
D.
E.
42.5 weeks
45.00 weeks
56.77 weeks
31.65 weeks
43.33 weeks
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
Jogging Gear is considering a project with an initial cash requirement of $238,400. The
project will yield cash flows of $4,930 monthly for 65 months. What is the rate of return
on this project?
58.
A. 9.97 percent
B. 11.38 percent
14.28
percent
13.41
D.
percent
10.56 percent
E.
C.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
Your insurance agent is trying to sell you an annuity that costs $50,000 today. By buying
this annuity, your agent promises that you will receive payments of $250 a month for the
next 20 years. What is the rate of return on this investment?
59.
A.
B.
C.
D.
E.
3.75 percent
2.47 percent
1.88 percent
2.45 percent
3.67 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
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?
60.
A.
B.
C.
D.
E.
8.94 percent
9.23 percent
9.36 percent
9.41 percent
9.78 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
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?
61.
A.
B.
C.
D.
E.
13.13 percent
6.24 percent
1.29 percent
9.32 percent
.97 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
Your father helped you start saving $20 a month beginning on your fifth birthday. He
always made you deposit the money into your savings account on the first day of each
month just to “start the month out right.” Today completes your 17th year of saving and
you now have $6,528.91 in this account. What is the rate of return on your savings?
62.
A.
B.
C.
D.
E.
5.15 percent
5.30 percent
5.47 percent
5.98 percent
6.12 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40th
birthday. In an attempt to reach this goal, you decide to save $75 a day, every day, until
you turn 40. You open an investment account and deposit your first $75 today. What rate
of return must you earn to achieve your goal?
63.
A.
B.
C.
D.
E.
7.67 percent
8.09 percent
9.90 percent
10.06 percent
10.54 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
You just settled an insurance claim. The settlement calls for increasing payments over a
five-year period. The first payment will be paid one year from now in the amount of
$7,000. The following payments will increase by 3.5 percent annually. What is the value
of this settlement to you today if you can earn 6.5 percent on your investments?
64.
A.
B.
C.
D.
E.
$36,408.28
$31,063.79
$42,023.05
$34,141.14
$28,008.16
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
Your grandfather left you an inheritance that will provide an annual income for the next
20 years. You will receive the first payment one year from now in the amount of $16,500.
Every year after that, the payment amount will increase by 5 percent. What is your
inheritance worth to you today if you can earn 7.5 percent on your investments?
65.
A.
B.
C.
D.
E.
$247,750
$286,667
$231,211
$354,612
$308,974
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
You just won the magazine sweepstakes and opted to take unending payments. The first
payment will be $21,500 and will be paid one year from today. Every year thereafter, the
payments will increase by 2.5 percent annually. What is the present value of your prize at
a discount rate of 7.9 percent?
66.
A.
B.
C.
D.
E.
$350,000
$348,409
$398,148
$291,006
$346,900
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
A wealthy benefactor just contributed to your college’s scholarship program. This gift
will provide $20,000 in scholarships next year with that amount increasing by 2 percent
annually thereafter.. If the discount rate is 6.5 percent, what is the current value of this
perpetual gift?
67.
A.
B.
C.
D.
E.
$307,700
$350,000
$525,000
$444,444
$550,750
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
Southern Tours is considering acquiring Holiday Vacations. Management believes
Holiday Vacations can generate cash flows of $187,000, $220,000, and $245,000 over the
next three years, respectively. After that time, they feel the business will be worthless. If
the desired rate of return is 13.5 percent, what is the maximum Southern Tours should pay
today to acquire Holiday Vacations?
68.
A.
B.
C.
D.
E.
$503,098
$538,615
$545,920
$601,226
$638,407
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
69.
You are considering two savings options. Both options offer a rate of return of 11 percent.
The first option is to save $2,500, $1,500, and $3,000 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?
A.
B.
C.
D.
E.
$5,405.41
$6,289.74
$6,660.00
$5,663.26
$4,784.20
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
Your parents have made you two offers. The first offer includes annual gifts of $10,000,
$11,000, and $12,000 at the end of each of the next three years, respectively. The other
offer is the payment of one lump sum amount today. You are trying to decide which offer
to accept given the fact that your discount rate is 8 percent. What is the minimum amount
that you will accept today if you are to select the lump sum offer?
70.
A.
B.
C.
D.
E.
$28,216
$29,407
$29,367
$30,439
$30,691
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
You want to start your own consulting business and believe it could produce cash flows of
$5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At
the end of three years you think you can sell the business for $450,000. At a 14 percent
discount rate, what is this business idea worth today?
71.
A.
B.
C.
D.
E.
$311,406
$514,545
$430,109
$345,738
$478,901
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
You are considering a project that will provide annual cash inflows of $16,500, $25,700,
and $18,000 at the end of each year for the next three years, respectively. What is the
present value of these cash flows, given a discount rate of 12.5 percent?
72.
A.
B.
C.
D.
E.
$54,877
$47,615
$55,429
$46,388
$53,567
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
You just signed a consulting contract that will pay you $38,000, $52,000, and $85,000
annually at the end of the next three years, respectively. What is the present value of these
cash flows given a discount rate of 10.5?
73.
A.
B.
C.
D.
E.
$139,975
$148,307
$154,880
$157,131
$162,910
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
You have some property for sale and have received two offers. The first offer is for
$89,500 today in cash. The second offer is the payment of $35,000 today and an
additional guaranteed $70,000 two years from today. If the applicable discount rate is
11.5 percent, which offer should you accept and why?
74.
A.
B.
C.
D.
E.
You should accept the $89,500 today because it has the higher net present value.
You should accept the $89,500 today because it has the lower future value.
You should accept the first offer as it is a lump sum payment.
You should accept the second offer because it has the larger net present value.
It does not matter which offer you accept as they are equally valuable.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
You are planning a special wedding three years from today. You don’t know who your
spouse will be but you do know that you are saving $25,000 today and $35,000 one year
from today for this purpose. You also plan to pay the final $45,000 of costs on your
wedding day. At a discount rate of 7 percent, what is the current cost of your special
wedding?
75.
A.
B.
C.
D.
E.
$94,444
$88, 800
$105,000
$85,711
$101,667
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
One year ago, JK Mfg. deposited $20,500 in an investment account for the purpose of
buying new equipment four years from today. 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. How much will be available when it is ready to buy the equipment, assuming
the account pays 3.5 interest?
76.
A. $53,408
B. $53,919
C. $56,211
D. $52,648
E. $58,021
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Future value – multiple cash flows
Troy will receive $7,500 at the end of year 2. At the end of the following two years, he
will receive $9,000 and $12,500, respectively. What is the future value of these cash
flows at the end of year 5 if the interest rate is 8 percent?
77.
A.
B.
C.
D.
E.
$38,418
$32,907
$33,445
$36,411
$35,255
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Future value – multiple cash flows
Sue plans to save $4,500, $0, and $5,500 at the end of each of the next three years,
respectively. What will her investment account be worth at the end of the third year if she
earns an annual rate of 4.15 percent?
78.
A. $10,528.12
B.
C.
D.
E.
$10,381.25
$9,907.11
$11,526.50
$10,812.07
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Future value – multiple cash flows
Waldo expects to receive the following payments: year 1 = $50,000; year 2 = $28,000;
year 3 = $12,000. All of this money will be saved for his retirement. If he can earn an
average annual return of 10.5 percent, how much will he have in his account 25 years
after making the first deposit?
79.
A.
B.
C.
D.
E.
$1,172,373
$935,334
$806,311
$947,509
$1,033,545
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Future value – multiple cash flows
80.
Jones Stoneware has a $65,000 liability it must pay four years from today. The company
is opening a savings account so that the entire amount will be available when this debt
comes due. The plan is to make an initial deposit today and then deposit an additional
$10,000 at the end of each of the four years. The account pays a 4.5 percent rate of return.
How much does the firm need to deposit today?
A.
B.
C.
D.
E.
$18,299.95
$19,469.64
$21,400.33
$18,631.23
$22,218.09
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Future value – annuity
The government has imposed a fine on JJ’s Place. The fine calls for annual payments of
$60,000, $70,000, $75,000, and $50,000, respectively, over the next four years. The first
payment is due one year from today. The government plans to invest the funds until the
final payment is collected and then donate the entire amount, including the investment
earnings, to help the local community shelter. The government will earn 5.5 percent on
the funds held. How much will the community shelter receive four years from today?
81.
A.
B.
C.
D.
E.
$263,025
$236,875
$277,491
$328,572
$285,737
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Future value – multiple cash flows
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?
82.
A.
B.
C.
D.
E.
$1,687,450
$1,478,023
$1,333,333
$1,724,138
$1,600,000
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
A preferred stock pays an annual dividend of $4.10. What is one share of this stock worth
today if the rate of return is 9.68 percent?
83.
A.
B.
C.
D.
E.
$41.48
$41.18
$42.36
$39.87
$42.90
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
You would like to establish a trust fund to provide $140,000 a year forever for your heirs.
The expected rate of return is 5.45 percent. How much money must you deposit today to
fund this gift?
84.
A.
B.
C.
D.
E.
$2,568,807
$2,521,212
$2,600,000
$2,458,122
$2,500,000
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
You just paid $750,000 for an annuity that will pay you and your heirs $36,000 a year
forever. What rate of return are you earning on this policy?
85.
A.
B.
C.
D.
E.
4.75 percent
5.10 percent
5.33 percent
4.80 percent
4.72 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
You grandfather invested $20,000 years ago to provide annual payments of $750 a year to
his heirs forever. What is the rate of return?
86.
A.
B.
C.
D.
4.75 percent
3.75 percent
4.10 percent
4.25 percent
4.33 percent
E.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
DLM preferred stock has a 5.8 percent dividend yield. The stock is currently priced at
$36.20 per share. What is the amount of the annual dividend?
87.
A.
B.
C.
D.
E.
$2.30
$2.35
$2.40
$2.10
$1.90
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Perpetuities
Your credit card company charges you 1.65 percent interest per month. What is the
annual percentage rate on your account?
88.
A.
B.
C.
D.
E.
18.95 percent
19.80 percent
20.90 percent
21.25 percent
21.70 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
What is the annual percentage rate on a loan with a stated rate of 2.75 percent per quarter?
89.
A.
B.
C.
D.
E.
11.00 percent
11.09 percent
11.18 percent
11.27 percent
11.31 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
You are paying an effective annual rate of 15.33 percent on your credit card. The interest
is compounded monthly. What is the annual percentage rate on this account?
90.
A.
B.
C.
D.
E.
14.35 percent
13.90 percent
14.10 percent
13.75 percent
14.00 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
What is the effective annual rate if a bank charges you an APR of 8.25 percent,
compounded quarterly?
91.
A.
B.
C.
D.
E.
8.32 percent
8.38 percent
8.42 percent
8.51 percent
8.61 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
Your credit card company quotes you an interest rate of 21.9 percent based on annual
compounding. Interest is billed monthly. What is the actual rate of interest you are
paying?
92.
A.
B.
C.
D.
E.
21.90 percent
19.21 percent
24.24 percent
22.57 percent
23.72 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
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?
93.
A.
B.
C.
D.
E.
25.16 percent
25.80 percent
26.49 percent
26.56 percent
26.64 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
You are considering five loan offers. The only significant difference between them is their
interest rates. Given the following information, which offer should you accept? (Assume a
365-day year.)
94.
Offer A: 6.75 percent APR with daily compounding.
Offer B: 6.8 percent APR with monthly compounding.
Offer C: 7 percent APR with annual compounding.
Offer D: 6.825 percent APR with quarterly compounding.
Offer E: 6.85 percent APR with semiannual compounding.
A.
B.
C.
D.
Offer A
Offer B
Offer C
Offer D
Offer E
E.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
The banks in your area offer the following rates of interest on their savings accounts. If
you want to open one of these accounts, which bank should you select?
95.
Bank A: .75 percent APR with daily compounding.
Bank B: .85 percent APR with monthly compounding.
Bank C: .8725 percent APR with annual compounding.
Bank D: .87 percent APR with quarterly compounding.
Bank E: .775 percent APR with semiannual compounding.
A.
B.
C.
D.
Bank A
Bank B
Bank C
Bank D
Bank E
E.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
What is the effective annual rate of 14.9 percent compounded continuously?
96.
A.
B.
C.
D.
E.
15.59 percent
15.62 percent
15.69 percent
15.84 percent
16.07 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Continuous compounding
97.
What is the effective annual rate of 11.9 percent compounded continuously?
A.
B.
C.
D.
E.
12.72 percent
12.64 percent
13.43 percent
12.89 percent
12.68 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Continuous compounding
First City Bank wants to appear competitive based on quoted loan rates and thus must
offer a 7.65 percent annual percentage rate on its loans. What is the maximum rate the
bank can actually earn based on the quoted rate?
98.
A.
B.
C.
D.
E.
7.95 percent
8.14 percent
8.21 percent
7.78 percent
7.87 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Continuous compounding
99.
You are going to loan a friend $6,000 for one year at an interest rate of 4.5 percent,
compounded annually. How much additional interest could you have earned if you had
compounded the rate continuously rather than annually?
A.
B.
C.
D.
E.
$5.84
$.6.17
$6.10
$5.93
$6.28
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Continuous compounding
You are borrowing money today at 8.48 percent, compounded annually. You will repay
the principal plus all the interest in one lump sum of $12,800 two years from today. How
much are you borrowing?
100.
A.
B.
C.
D.
E.
$9,900.00
$10,211.16
$10,877.04
$11,401.16
$11,250.00
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
This morning, you borrowed $13,400 at a 6.9 percent annual interest rate. You are to
repay the loan principal plus all of the loan interest in one lump sum three years from
today. How much will you have to repay?
101.
A.
B.
C.
D.
E.
$16,369.59
$17,808.13
$15,313.00
$15,324.60
$16,441.20
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
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?
102.
A.
B.
C.
D.
E.
8.01 percent
8.45 percent
8.78 percent
9.47 percent
9.93 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
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?
103.
A.
B.
C.
D.
E.
$7,750
$41,600
$4,160
$52,000
$56,160
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
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?
104.
A.
B.
C.
D.
E.
$1,187.50
$1,890.00
$7,009.40
$5,106.67
$6,250.00
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
On the day you entered college, you borrowed $30,000 from your local bank. The terms
of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is
due in full one year after you graduate. Interest is to be paid annually at the end of each
year. Assume that you complete college in four years. How much total interest will you
pay on this loan assuming you paid as agreed?
105.
A.
B.
C.
D.
E.
$7,267
$7,400
$7,125
$1,500
$1,425
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
You just acquired a 30-year mortgage in the amount of $179,500 at 4.75 percent interest,
compounded monthly. Payments will be equal over the life of the loan with the first
payment due one month after the date of the loan. How much of the first payment will be
interest?
106.
A.
B.
C.
D.
E.
$925.20
$806.16
$710.52
$936.36
$548.60
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Amortization
On June 1, you borrowed $195,000 to buy a house. The mortgage rate is 5.25 percent.
The loan is to be repaid in equal monthly payments over 15 years. All taxes and insurance
premiums are to be paid separately. The first payment is due on July 1. How much of the
first payment applies to the principal balance?
107.
A.
B.
C.
D.
E.
$714.43
$721.14
$658.56
$743.38
$756.70
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Amortization
This morning, you borrowed $162,000 to buy a house. The mortgage rate is 4.35 percent.
The loan is to be repaid in equal monthly payments over 20 years with the first payment
due one month from today. Assume each month is equal to 1/12 of a year and all taxes
and insurance premiums are paid separately. How much of the second payment applies to
the principal balance?
108.
A.
B.
C.
D.
E.
$568.84
$426.11
$424.57
$587.25
$585.71
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Amortization
Western Bank offers you a $10,000, 6-year term loan at 7 percent annual interest. What is
the amount of your annual loan payment?
109.
A.
B.
C.
D.
E.
$1,883.33
$2,097.96
$2,066.67
$1,901.18
$1,811.07
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
EOC: 6-09
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Loan payments
The Friendly Bank wants to earn an effective annual return on its consumer loans of 12
percent per year. The bank uses daily compounding. What rate is the bank most apt to
quote on these loans?
110.
A.
B.
C.
D.
E.
11.76 percent
11.38 percent
11.33 percent
12.12 percent
12.00 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 6-15
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
Your broker is offering 1.2 percent compounded daily on its money market account. If
you deposit $7,500 today, how much will you have in your account 15 years from now?
111.
A.
B.
C.
D.
E.
$8,979.10
$9,714.06
$8,204.50
$9,336.81
$9,414.14
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
EOC: 6-17
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Future value – single cash flow
You want to buy a new sports coupe for $41,750 and the finance office at the dealership
has quoted you an APR of 7.6, compounded monthly for 48 months. What is the effective
interest rate on this loan?
112.
A.
B.
C.
D.
E.
8.28 percent
8.41 percent
7.94 percent
8.13 percent
7.87 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
EOC: 6-20
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
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?
113.
A.
B.
C.
D.
E.
$26,187.10
$26,847.15
$25,068.00
$27,319.54
$26,069.79
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Basic
EOC: 6-26
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
You are planning to save for retirement over the next 15 years. To do this, you will invest
$1,100 a month in a stock account and $500 a month in a bond account. The return on the
stock account is expected to be 7 percent, and the bond account will pay 4 percent. When
you retire, you will combine your money into an account with a 5 percent return. How
114. much can you withdraw each month during retirement assuming a 20-year withdrawal
period?
A.
B.
C.
D.
E.
$2,636.19
$2,904.11
$3,008.21
$3,113.04
$3,406.97
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
EOC: 6-32
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Annuities
You want to be a millionaire when you retire in 40 years and can earn an annual return of
12.5 percent. How much more will you have to save each month if you wait 15 years to
start saving versus if you start saving at the end of this month?
115.
A.
B.
C.
D.
E.
$489.22
$354.13
$308.47
$441.15
$414.34
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
EOC: 6-34
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Annuities
116.
You are the recipient of a gift that will pay you $25,000 one year from now and every
year thereafter for the following 24 years. The payments will increase in value by 2.5
percent each year. If the appropriate discount rate is 8.5 percent, what is the present value
of this gift?
A.
B.
C.
D.
E.
$416,667
$316,172
$409,613
$311,406
$386,101
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 6-37
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Annuities
You are preparing to make monthly payments of $75, beginning at the end of this month,
into an account that pays 6 percent interest compounded monthly. How many payments
will you have made when your account balance reaches $10,000?
117.
A.
B.
C.
D.
E.
97
102
89
102
91
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 6-40
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time value of money
You want to borrow $38,400 and can afford monthly payments of $960 for 48 months,
but no more. Assume monthly compounding. What is the highest APR rate you can
afford?
118.
A.
B.
C.
D.
E.
9.24 percent
8.67 percent
8.82 percent
9.01 percent
9.18 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 6-41
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Loan interest and rates
You need a 30-year, fixed-rate mortgage to buy a new home for $225,000. Your bank will
lend you the money at an APR of 5.5 percent with monthly compounding. You can only
afford monthly payments of $1,000 for principal and interest, so you offer to pay off any
remaining loan balance at the end of the loan term in the form of a single balloon
payment. What will be the amount of the balloon payment?
119.
A.
B.
C.
D.
E.
$232,191
$213,316
$254,480
$253,550
$226,315
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
EOC: 6-42
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4 Loan Types and Loan Amortization
Topic: Types of loans
The present value of the following cash flow stream is $5,933.86 when discounted at 11
percent annually. What is the value of the missing cash flow?
Year Cash Flow
1
$2,000
2
?
3
1,750
4
1,250
120.
A.
B.
C.
D.
E.
$1,500
$1,750
$2,250
$2,250
$2,500
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 6-43
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.1 Future and Present Values of Multiple Cash Flows
Topic: Present value – multiple cash flows
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?
121.
A. 6.82 percent
B.
C.
D.
E.
6.25 percent
6.46 percent
7.01 percent
7.27 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
EOC: 6-45
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Interest rates
Al’s obtained a discount loan of $71,000 today that requires a repayment of $90,000, 3
years from today. What is the APR on this loan?
122.
A.
B.
C.
D.
E.
7.87 percent
8.01 percent
8.23 percent
8.57 percent
8.90 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.4 Loan Types and Loan Amortization
Topic: Loan interest and rates
What is the present value of $1,400 a year at a discount rate of 8 percent if the first
payment is received 7 years from now and you receive a total of 23 annual payments?
123.
A. $9,149.74
B.
C.
D.
E.
$9,238.87
$9,333.33
$9,420.12
$9,881.72
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 6-47
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
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?
124.
A.
B.
C.
D.
E.
$108,206.67
$119,176.06
$124,318.08
$129,407.17
$131,008.15
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 6-49
Learning Objective: 06-01 How to determine the future and present value of
investments with multiple cash flows.
Section: 6.3 Comparing Rates: The Effect of Compounding
Topic: Continuous compounding
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 6 percent, compounded monthly. What will be your monthly
payment?
125.
A.
B.
C.
D.
E.
$1,047.90
$1,053.87
$1,058.01
$1,063.30
$1,072.11
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Intermediate
EOC: 6-54
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Present value – annuity
You are considering a one-year discount loan of $16,000. The interest rate is quoted as 7
percent plus 4 points. What is the actual rate you are paying on this loan?
126.
A.
B.
C.
D.
E.
11.00 percent
11.67 percent
12.55 percent
11.46 percent
10.84 percent
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Create
Difficulty: Challenge
EOC: 6-62
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.4 Loan Types and Loan Amortization
Topic: Loan interest and rates
You just received an offer in the mail to transfer your $5,000 balance from your current
credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a
rate of 5.9 percent. You plan to make payments of $250 a month on this debt. How many
fewer payments will you have to make to pay off this debt if you transfer the balance to
the new card?
127.
A.
B.
C.
D.
E.
2.36 payments
3.05 payments
3.10 payments
2.79 payments
2.86 payments
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Intermediate
Learning Objective: 06-02 How loan payments are calculated and how to find the
interest rate on a loan.
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Topic: Time to maturity
Chapter 06 Discounted Cash Flow Valuation Summary
Category
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Blooms: Create
Blooms: Remember
Blooms: Understand
Difficulty: Basic
# of Questio
ns
127
127
21
81
1
13
11
92
Difficulty: Challenge
Difficulty: Intermediate
EOC: 6-09
EOC: 6-15
EOC: 6-17
EOC: 6-20
EOC: 6-26
EOC: 6-32
EOC: 6-34
EOC: 6-37
EOC: 6-40
EOC: 6-41
EOC: 6-42
EOC: 6-43
EOC: 6-45
EOC: 6-47
EOC: 6-49
EOC: 6-54
EOC: 6-62
Learning Objective: 0601 How to determine the future and present value of investments with multi
ple cash flows.
Learning Objective: 0602 How loan payments are calculated and how to find the interest rate on a
loan.
Learning Objective: 06-03 How loans are amortized or paid off.
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.1 Future and Present Values of Multiple Cash Flows
Section: 6.2 Valuing Level Cash Flows: Annuities and Perpetuities
Section: 6.3 Comparing Rates: The Effect of Compounding
Section: 6.4 Loan Types and Loan Amortization
Topic: Amortization
Topic: Annuities
Topic: Continuous compounding
Topic: Future value – annuity
Topic: Future value – multiple cash flows
Topic: Future value – single cash flow
Topic: Interest rates
Topic: Loan interest and rates
Topic: Loan payments
Topic: Perpetuities
Topic: Present value – annuity
Topic: Present value – multiple cash flows
Topic: Time to maturity
Topic: Time value of money
Topic: Types of loans
1
34
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
36
54
16
21
19
68
22
19
4
7
5
9
5
1
13
8
5
11
19
11
1
14
14
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