Fin 125 Ch 6
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1.
An annuity that pays $12,500 a year at an annual
interest rate of 5.45% costs $150,000 today. What is the
length of the annuity time period?
D
b) 18 years
The Distribution Point plans to save $2,000 a month for
the next 3 years for future emergencies. The interest
rate is 4.5% compounded monthly. The first monthly
deposit will be made today. What would today's deposit
amount 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?
c) 15 years
a) $70,459.07
d) 20 years
b) $67,485.97
e) 22 years
c) $69,068.18
4.
a) 25 years
2.
Assume you work for an employer who will contribute
$60 a week for the next 20 years into a retirement plan
for your benefit. At a discount rate of 9%, what is this
employee benefit worth to you today?
A
B
d) $69,333.33
e) $67,233.84
5.
a) $28,927.38
b) $27,618.46
Marcus is scheduled to receive annual payments of
$3,600 for each of the next 12 years. The discount rate
is 8%. What is the difference in the present value if
these payments are paid at the beginning of each year
rather than at the end of each year?
A
c) $29, 211.11
a) $2,170.39
d) $25,306.16
b) $2,511.07
e) $25,987.74
3.
Chris has three options for settling an insurance claim.
Option A will provide $1,500 a month for 6 years.
Option B will pay $1,025 a month for 10 years. Option C
offers $85,000 as a lump sum payment today. The
applicable discount rate is 6.8%, compounded monthly.
Which option should Chris select, and why, if he is only
concerned with the financial aspects of the offers?
c) $2,021.18
E
d) $2,027.94
e) $2,304.96
6.
A preferred stock pays an annual dividend of $5.20.
What is one share of this stock worth today if the rate
of return is 10.44%?
a) Option A: It provides the largest monthly payment.
a) $51.48
b) Option B: It pays the largest total amount.
b) $41.18
c) Option C: It is all paid today.
c) $49.81
d) Option B: It pays the greatest number of payments.
d) $39.87
e) Option B: It has the largest value today.
e) $42.90
C
7.
8.
Sara wants to establish a trust fund to provide $75,000
in scholarships each year and earn a fixed 6.15% rate of
return. How much money must she contribute to the
fund assuming that only the interest income is
distributed?
D
10.
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 6 if the interest
rate is 8%?
a) $987,450
a) $38,418.80
b) $1,478,023
b) $32,907.67
c) $1,333,333
c) $36,121.08
d) $1,219,512
d) $39,010.77
e) $1,500,000
e) $33,445.44
Southern Tours is considering acquiring Holiday
Vacations. Management believes Holiday Vacations can
generate cash flows of $218,000, $224,000, and
$238,000 over the next three years, respectively. After
that time, they feel the business will be worthless. If the
desired rate of return is 14.5%, what is the maximum
Southern Tours should pay today to acquire Holiday
Vacations?
A
11.
Waldo expects to save the following amounts: Year 1 =
$50,000; Year 2 = $28,000; Year 3 = $12,000. If he can
earn an average annual return of 10.5%, how much will
he have saved in this account exactly 25 years from the
time of the first deposit?
C
E
a) $1,172,373
b) $935,334
a) $519,799.59
c) $806,311
b) $538,615.08
d) $947,509
c) $545,920.61
e) $1,033,545
d) $595,170.53
12.
e) $538,407.71
9.
Sue just purchased an annuity that will pay $24,000 a
year for 25 years, starting today. What was the purchase
price if the discount rate is 8.5%?
What is the EAR of 14.9% compounded continuously?
a) 15.59%
E
b) 15.62%
c) 15.69%
a) $241,309
d) 15.84%
b) $245,621
e) 16.07%
c) $251,409
d) $258,319
e) $266,498
E
13.
You are considering a project with cash flows 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 7.9%?
B
16.
Your broker is offering 1.2% 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?
A
a) $8,979.10
a) $54,877.02
b) $9,714.06
b) $51,695.15
c) $8,204.50
c) $55,429.08
d) $9,336.81
d) $46,388.78
e) $9,414.14
e) $53,566.67
14.
You are paying an EAR of 16.78% on your credit card.
The interest is compounded monthly. What is the
annual percentage rate on this account?
17.
A
a) 15.61%
b) 13.80%
b) 13.97%
c) 15.95%
c) 14.98%
d) 17.25%
d) 15.75%
e) 14.71%
a) $387.71
Your grandfather left you an inheritance that will
provide and annual income for the next 20 years. You
will receive the first payment one year from now in the
amount of $2,500. Every year after that, the payment
amount will increase by 5%. What is your inheritance
worth to you today if you can earn 7.5% on your
investments?
b) $391.40
a) $37,537.88
c) $401.12
b) $28,667.40
d) $419.76
c) $23,211.00
e) $394.89
d) $35,612.20
You just obtained a loan of $16,700 with monthly
payments for four years at 6.35% interest, compounded
monthly. What is the amount of each payment?
B
a) 18.92%
18.
e) 16.35%
15.
Your credit card company charges you 1.15% interest
per month. What is the APR?
E
e) $30,974.92
A
19.
You want to borrow $27,500 and can afford monthly payments of $650 for 48 months, but no more. Assume monthly
compounding. What is the highest APR rate you can afford?
A
a) 6.33%
b) 6.67%
c) 5.82%
d) 7.01%
e) 7.18%
20.
You would like to provide $125,000 a year forever for your heirs. How much money must you deposit today to fund this goal
if you can earn a guaranteed 4.5% rate of return?
a) $2,777,778
b) $2,521,212
c) $2,666,667
d) $2,858,122
e) $2,850,000
A