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Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

A) True
B) False

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Your uncle has $1,015,000 and wants to retire.He expects to live for another 25 years,and he also expects to earn 7.5% on his invested funds.How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?


A) $84,703.56
B) $82,162.46
C) $98,256.13
D) $105,032.42
E) $77,080.24

F) A) and E)
G) All of the above

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You want to buy a new ski boat 2 years from now,and you plan to save $6,400 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?


A) $10,821
B) $13,197
C) $13,461
D) $11,481
E) $12,933

F) A) and B)
G) D) and E)

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Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?


A) The monthly payments will decline over time.
B) A smaller proportion of the last monthly payment will be interest,and a larger proportion will be principal,than for the first monthly payment.
C) The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
D) The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.
E) Exactly 10% of the first monthly payment represents interest.

F) C) and E)
G) A) and D)

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Which of the following statements is CORRECT?


A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
D) Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.
E) Some of the cash flows shown on a time line can be in the form of annuity payments,but none can be uneven amounts.

F) B) and E)
G) A) and B)

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Which of the following statements is CORRECT?


A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
D) Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
E) Some of the cash flows shown on a time line can be in the form of annuity payments,but none can be uneven amounts.

F) A) and B)
G) A) and C)

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What is the PV of an ordinary annuity with 5 payments of $16,200 if the appropriate interest rate is 4.5%?


A) $56,182.92
B) $81,785.27
C) $63,294.68
D) $71,117.62
E) $70,406.45

F) A) and B)
G) B) and D)

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You just deposited $2,000 in a bank account that pays a 4.0% nominal interest rate,compounded quarterly.If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now,how much will be in the account three years (12 quarters) from now?


A) $15,472.46
B) $19,340.58
C) $11,604.35
D) $18,566.96
E) $14,234.67

F) A) and C)
G) A) and B)

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Suppose you are buying your first condo for $160,000,and you will make a $15,000 down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?


A) $971.49
B) $962.32
C) $925.66
D) $769.86
E) $916.50

F) None of the above
G) B) and E)

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What's the rate of return you would earn if you paid $1,780 for a perpetuity that pays $85 per year?


A) 5.92%
B) 4.25%
C) 4.92%
D) 4.63%
E) 4.78%

F) B) and E)
G) A) and B)

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Suppose the U.S.Treasury offers to sell you a bond for $687.25.No payments will be made until the bond matures 5 years from now,at which time it will be redeemed for $1,000.What interest rate would you earn if you bought this bond at the offer price?


A) 6.00%
B) 8.96%
C) 7.24%
D) 6.39%
E) 7.79%

F) B) and C)
G) B) and E)

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Your subscription to Investing Wisely Weekly is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $620,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?


A) 6.95
B) 8.86
C) 9.14
D) 11.15
E) 10.60

F) C) and E)
G) A) and C)

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Your uncle has $795,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?


A) $72,033.18
B) $79,878.38
C) $77,025.58
D) $71,319.98
E) $59,908.79

F) B) and C)
G) A) and D)

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A $150,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is CORRECT?


A) The annual payments would be larger if the interest rate were lower.
B) If the loan were amortized over 10 years rather than 7 years,and if the interest rate were the same in either case,the first payment would include more dollars of interest under the 7-year amortization plan.
C) The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.
D) The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
E) The proportion of interest versus principal repayment would be the same for each of the 7 payments.

F) A) and D)
G) A) and C)

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A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is CORRECT?


A) The periodic interest rate is greater than 3%.
B) The periodic rate is less than 3%.
C) The present value would be greater if the lump sum were discounted back for more periods.
D) The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.
E) The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year,$333.33 ordinary annuity.

F) A) and C)
G) B) and C)

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What is the PV of an ordinary annuity with 10 payments of $7,700 if the appropriate interest rate is 5.5%?


A) $52,816.14
B) $61,522.10
C) $51,655.35
D) $67,326.07
E) $58,039.72

F) A) and D)
G) A) and E)

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The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

A) True
B) False

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How much would $1,growing at 13.7% per year,be worth after 75 years?


A) $18,248.03
B) $15,206.70
C) $15,358.76
D) $13,533.96
E) $18,704.24

F) C) and D)
G) A) and D)

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Which of the following statements is CORRECT?


A) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
B) If a series of unequal cash flows occurs at regular intervals,such as once a year,then the series is by definition an annuity.
C) The cash flows for an annuity due must all occur at the ends of the periods.
D) The cash flows for an annuity must all be equal,and they must occur at regular intervals,such as once a year or once a month.
E) If some cash flows occur at the beginning of the periods while others occur at the ends,then we have what the textbook defines as a variable annuity.

F) A) and C)
G) A) and E)

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Your bank account pays a 6% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?


A) The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
B) The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
C) The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
D) The periodic rate of interest is 3% and the effective rate of interest is 6%.
E) The periodic rate of interest is 6% and the effective rate of interest is also 6%.

F) B) and E)
G) A) and D)

Correct Answer

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