Question 1

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Accepted Answer

A)   23
B)   27
C)   32
D)   38
E)   44F) B) and C)
G) C) and E)

Question 2

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Accepted Answer

A)   exactly 8% of the first monthly payment represents interest.
B)   the monthly payments will decline over time.
C)   a smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
D)   the total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
E)   the amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.F) B) and E)
G) A) and D)

Question 3

A $150,000 loan is to be amortized over 6 years, with annual end-of-year payments. Which of these statements is CORRECT?

Accepted Answer

A)   the proportion of interest versus principal repayment would be the same for each of the 7 payments.
B)   the annual payments would be larger if the interest rate were lower.
C)   if the loan were amortized over 10 years rather than 6 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 6-year amortization plan.
D)   the proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.
E)   the proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.F) A) and E)
G) A) and D) E

Question 4

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Accepted Answer

A)   7.62%
B)   8.00%
C)   8.40%
D)   8.82%
E)   9.26%F) C) and D)
G) A) and B)

Question 5

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)   $969
B)   $1,020
C)   $1,074
D)   $1,131
E)   $1,187F) A) and C)
G) C) and E)

Question 6

Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings, which is invested to earn a guaranteed 5% rate of return. If inflation averages 2% per year, how much can she withdraw (to the nearest dollar)  at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

Accepted Answer

A)   $65,632
B)   $72,925
C)   $81,027
D)   $89,130
E)   $98,043F) C) and E)
G) A) and D)

Question 7

How much would $1, growing at 3.5% per year, be worth after 75 years?

Accepted Answer

A)   $12.54
B)   $13.20
C)   $13.86
D)   $14.55
E)   $15.28F) A) and B)
G) A) and C)

Question 8

At the end of 10 years, which of the following investments would have the highest future value?Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)   investment a pays $250 at the beginning of every year for the next 10 years (a total of 10 payments) .
B)   investment b pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments) .
C)   investment c pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments) .
D)   investment d pays $2,500 at the end of 10 years (just one payment) .
E)   investment e pays $250 at the end of every year for the next 10 years (a total of 10 payments) .F) A) and B)
G) All of the above

Question 9

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

A)   banks a and b offer the same nominal annual rate of interest, but a pays interest quarterly and b pays semiannually. deposits in bank b will provide the higher future value if you leave your funds on deposit.
B)   the present value of a 5-year, $250 annuity due will be lower than the pv of a similar ordinary annuity.
C)   a 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
D)   a bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.
E)   if an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.F) C) and E)
G) D) and E)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   an investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
B)   the present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
C)   if a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.
D)   if a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
E)   the proportion of the payment that goes toward interest on a fully amortized loan increases over time.F) A) and C)
G) B) and C) C

Question 11

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Accepted Answer

A)   $11,262.88
B)   $11,826.02
C)   $12,417.32
D)   $13,038.19
E)   $13,690.10F) A) and D)
G) D) and E)

Question 12

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

Accepted Answer

A) True 
 B)False

Question 13

Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)   investment a pays $250 at the end of every year for the next 10 years (a total of 10 payments) .
B)   investment b pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments) .
C)   investment c pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments) .
D)   investment d pays $2,500 at the end of 10 years (just one payment) .
E)   investment e pays $250 at the beginning of every year for the next 10 years (a total of 10 payments) .F) A) and B)
G) All of the above

Question 14

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Accepted Answer

A)   $1,200.33
B)   $1,263.50
C)   $1,330.00
D)   $1,400.00
E)   $1,470.00F) A) and D)
G) None of the above

Question 15

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Accepted Answer

A) True 
 B)False

Question 16

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)   $1,994.49
B)   $2,099.46
C)   $2,209.96
D)   $2,326.27
E)   $2,442.59F) A) and E)
G) A) and D)

Question 17

You have $5,000 invested in a bank that pays 3.8% annually. How long will it take for your funds to triple?

Accepted Answer

A)   23.99
B)   25.26
C)   26.58
D)   27.98
E)   29.46F) A) and B)
G) A) and C)

Question 18

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?

Accepted Answer

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

Question 19

Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, beginning at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. What is the maximum number of $35,000 withdrawals that he can make and still have at least $25,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

Accepted Answer

A)   12
B)   13
C)   14
D)   15
E)   16F) A) and E)
G) A) and C)

Question 20

You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?

Accepted Answer

A)   $1,067.95
B)   $1,124.16
C)   $1,183.33
D)   $1,245.61
E)   $1,311.17F) All of the above
G) C) and D)

Exam 28: Time Value of Money

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Correct Answer
verified

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Correct Answer
verified

A $150,000 loan is to be amortized over 6 years, with annual end-of-year payments. Which of these statements is CORRECT?

Correct Answer
verified
E

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Correct Answer
verified

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Correct Answer
verified

Correct Answer
verified

How much would $1, growing at 3.5% per year, be worth after 75 years?

Correct Answer
verified

At the end of 10 years, which of the following investments would have the highest future value?Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct Answer
verified

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified
C

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Correct Answer
verified

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

Correct Answer
verified

Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct Answer
verified

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Correct Answer
verified

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Correct Answer
verified

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Correct Answer
verified

You have $5,000 invested in a bank that pays 3.8% annually. How long will it take for your funds to triple?

Correct Answer
verified

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?

Correct Answer
verified
A

Correct Answer
verified

You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?

Correct Answer
verified

Exam 28: Time Value of Money

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Correct AnswerverifiedShow Answer

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Correct AnswerverifiedShow Answer

A $150,000 loan is to be amortized over 6 years, with annual end-of-year payments. Which of these statements is CORRECT?

Correct AnswerverifiedE

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Correct AnswerverifiedShow Answer

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

How much would $1, growing at 3.5% per year, be worth after 75 years?

Correct AnswerverifiedShow Answer

At the end of 10 years, which of the following investments would have the highest future value?Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedC

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Correct AnswerverifiedShow Answer

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

Correct AnswerverifiedShow Answer

Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct AnswerverifiedShow Answer

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Correct AnswerverifiedShow Answer

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Correct AnswerverifiedShow Answer

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Correct AnswerverifiedShow Answer

You have $5,000 invested in a bank that pays 3.8% annually. How long will it take for your funds to triple?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedA

Correct AnswerverifiedShow Answer

You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
E

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A

Correct Answer
verified

Correct Answer
verified