Questions in Chapter 6 concept.qz 1) A given rate is quoted as 12 percent, but has an effective annual rate of 12.55 percent.

What is the rate of compounding during the year? [A] annually [B] semi-annually [C] quarterly [D] monthly [E] continuously [A] :If interest is compounded annually, the effective and annual rates are equal. Review section 6.3. [B] :Twelve percent compounded semi-annually has an effective annual rate of 12.36 percent. Review section 6.3. [C] :You are correct! [D] :Twelve percent compounded monthly has an effective annual rate of 12.68 percent. Review section 6.3. [E] :Twelve percent compounded continuously has an effective annual rate of 12.75 percent. Review section 6.3.

2) You own a bond issued by the Canadian Pacific railroad that promises to pay the holder $100 annually forever. You plan to sell the bond five years from now. If similar investments yield 8 percent at that time, how much will your bond be worth? [A] $918.79 [B] $1,014.28 [C] $1,250.00 [D] $1,489.42 [E] $1,958.20 [A] :Did you use the perpetuity formula? Review section 6.2. [B] :Did you use the perpetuity formula? Review section 6.2. [C] :You are correct! [D] :Did you use the perpetuity formula? Review section 6.2. [E] :Did you use the perpetuity formula? Review section 6.2.

3) The stated interest rate is the same thing as the effective annual rate. [A] True [B] False [A] :You need to review these definitions in section 6.3. [B] :You are correct!

4) You can find the future value of a set of cash flows by finding the future value of each cash flow individually and then summing these future values. [A] True [B] False [A] :You are correct! [B] :This is just one of the ways to find the future value of a stream of cash flows. Review section 6.1.

5) You win the lottery and are given the option of receiving $250,000 now or an annuity of $25,000 at the end of each year for 30 years. Ignoring taxes, which one of the following statements is correct? [A] You cannot choose between the two options without first computing their future values. [B] You will always choose the lump regardless of the interest rate applied. [C] You will choose the annuity payment if the interest rate is 7 percent. [D] You will always choose the annuity. [E] Comparing the future value of each option will lead to a different decision than comparing the present values. [A] :You can compare the two by computing either their future values or their present values. Review section 6.2. [B] :Which option do you prefer at 10 percent? What about 5 percent? Review section 6.2. [C] :You are correct! [D] :This is not true. Verify that for interest rates above 9.31 percent you would prefer the lump sum to the annuity. Review section 6.2. [E] :You will reach the same conclusion whether comparing future values or present values. Review section 6.2.

6) At the end of each year for the next ten years you will receive cash flows of $50. The initial investment is $320. What rate of return are you expecting from this investment? [A] 9.06 percent [B] 10.43 percent [C] 12.01 percent [D] 12.28 percent [E] 13.21 percent [A] :You are correct! [B] :Is the $320 a present value or a future value? Review section 6.2. [C] :This is a present value of an annuity problem. Review section 6.2. [D] :This is a present value of an annuity problem. Review section 6.2. [E] :This is a present value of an annuity problem. Review section 6.2.

7) What annual percentage rate of return allows you to triple your money in 20 years? [A] 5.65 percent [B] 5.98 percent [C] 6.86 percent [D] 6.92 percent [E] 8.99 percent [A] :You are correct! [B] :Can you use a present value of $1 and a future value of $3 to solve this problem? Review section 6.3. [C] :Can you use a present value of $1 and a future value of $3 to solve this problem? Review section 6.3. [D] :Can you use a present value of $1 and a future value of $3 to solve this problem? Review section 6.3. [E] :Can you use a present value of $1 and a future value of $3 to solve this problem? Review section 6.3.

8) You just borrowed $26,000 for five years. The loan is an interest-only loan for five years at 8 percent compounded annually. How much of the first payment is used to reduce the loan principal? [A] $0 [B] $2,080.00 [C] $4,431.87 [D] $5,416.00 [E] $6,511.87 [A] :You are correct! [B] :What type of loan is this? Review section 6.4. [C] :What type of loan is this? Review section 6.4. [D] :What type of loan is this? Review section 6.4. [E] :What type of loan is this? Review section 6.4.

9) You agree to loan your parents $22,000 to buy a new van. They agree to pay you $450 a month for 5 years. The: [A] interest rate is 0.75 percent per month. [B] annual percentage rate is 8.17 percent. [C] effective annual rate is 8.37 percent. [D] annual percentage rate is 8.68 percent. [E] effective annual rate is 8.70 percent. [A] :Is the annual percentage rate 9 percent? Review section 6.3. [B] :You need to review this computation in section 6.3. [C] :The annual percentage rate is 8.37 percent. Review section 6.3. [D] :Try again. Review section 6.3. [E] :You are correct!

10) You hold a winning ticket from your state lottery. It entitles the bearer to receive payments of $50,000 at the end of each of the next 20 years. Given what you know about the time value of money, you should be able to sell this ticket for no less than $1 million in the open market. [A] True [B] False [A] :If the interest rate is greater than zero, what is the present value of your winnings? Review section 6.2. [B] :You are correct!

11) At the end of each year for the next ten years you will receive cash flows of $50. If the appropriate discount rate is 5.5 percent, how much would you pay for this annuity? [A] $259.82 [B] $299.02 [C] $338.99 [D] $376.88 [E] $379.16 [A] :This is a present value of an annuity problem. Review section 6.2. [B] :This is a present value of an annuity problem. Review section 6.2. [C] :This is a present value of an annuity problem. Review section 6.2. [D] :You are correct!

[E] :This is a present value of an annuity problem. Review section 6.2.

12) What is the future value in 10 years of $1,000 payments received at the beginning of each year for the next 10 years? Assume an interest rate of 5.625 percent. [A] $12,259.63 [B] $12,950.96 [C] $13,679.45 [D] $14,495.48 [E] $14,782.15 [A] :Did you find the present value of an annuity due? Review section 6.2. [B] :Did you compute the value of an ordinary annuity rather than an annuity due? Review section 6.2. [C] :You are correct! [D] :What is an annuity due? Review section 6.2. [E] :What is an annuity due? Review section 6.2.

13) The company you work for will deposit $600 at the end of each month into your retirement fund. Interest is compounded monthly. You plan to retire 15 years from now and estimate that you will need $2,000 per month out of the account for the next 20 years. If the account pays 8.0 percent compounded monthly, how much do you need to put into the account in addition to your company deposit in order to meet your objective? [A] $0.00 [B] $57.59 [C] $90.99 [D] $95.88 [E] $104.49 [A] :Based on what you plan to withdraw in retirement, you must have $239,108.58 in the account when you retire at the end of 15 years from now. How much must be deposited each month to reach that goal? Review section 6.2. [B] :Based on what you plan to withdraw in retirement, you must have $239,108.58 in the account when you retire at the end of 15 years from now. How much must be deposited each month to reach that goal? Review section 6.2. [C] :You are correct! [D] :Based on what you plan to withdraw in retirement, you must have $239,108.58 in the account when you retire at the end of 15 years from now. How much must be deposited each month to reach that goal? Review section 6.2. [E] :Based on what you plan to withdraw in retirement, you must have $239,108.58 in the account when you retire at the end of 15 years from now. How much must be deposited each month to reach that goal? Review section 6.2.

14) An example of an annuity is a stream of payments of $4,000 at the end of each year for 20 years. [A] True [B] False [A] :You are correct! [B] :This is a level stream of cash flows for a fixed period of time. Review section 6.2.

15) Vito will loan you money on a "five-for-six" arrangement. That is, for every $5 he gives you today, you give him $6 one week from now. What is the APR of this loan? [A] 410 percent [B] 540 percent [C] 860 percent [D] 1,040 percent [E] 1,310 percent [A] :Did you get an interest rate per week of 20 percent? Review section 6.3. [B] :Did you get an interest rate per week of 20 percent? Review section 6.3. [C] :Did you get an interest rate per week of 20 percent? Review section 6.3. [D] :You are correct! [E] :Did you get an interest rate per week of 20 percent? Review section 6.3.

16) Suppose you are evaluating two annuities. They are identical in every way, except that one is an ordinary annuity and one is an annuity due. Assuming an interest rate of 10 percent, which one of the following is true? [A] The ordinary annuity must have a higher present value than the annuity due. [B] The annuity due must have the same present value as the ordinary annuity. [C] The ordinary annuity must have a lower future value than the annuity due. [D] The two annuities will differ in present value by the amount of exactly one of the annuity payments. [E] The annuity due will be larger than the ordinary annuity by an amount equal to the present value of the last annuity payment. [A] :The reverse of this statement is true. Can you explain why? Review section 6.2. [B] :The timing of the cash flows is different so they cannot have the same present value. Review section 6.2. [C] :You are correct! [D] :This is incorrect. Prove it by constructing an example where the annuity amount is $100 per year and the number of years is 5. Review section 6.2. [E] :This is incorrect. Prove it by constructing an example where the annuity amount is $100 per year and the number of years is 5. Review section 6.2.

17) Your monthly mortgage payment on your house is $593.90. It is a 30-year mortgage at 7.8 percent compounded monthly. How much did you borrow? [A] $75,000 [B] $77,500 [C] $80,000 [D] $82,500 [E] $85,000 [A] :This is a present value of an annuity problem. Review section 6.2. [B] :This is a present value of an annuity problem. Review section 6.2. [C] :This is a present value of an annuity problem. Review section 6.2. [D] :You are correct! [E] :This is a present value of an annuity problem. Review section 6.2.

18) You can afford to pay $125 a month on a car loan. You are willing to make monthly payments for four years at 7.9 percent. How much can you afford to borrow to buy a car?

[A] $4,849.53 [B] $5,130.10 [C] $5,150.00 [D] $5,163.75 [E] $5,200.00 [A] :This is a present value of an annuity problem. Review section 6.2. [B] :You are correct! [C] :This is a present value of an annuity problem. Review section 6.2. [D] :This is a present value of an annuity problem. Review section 6.2. [E] :This is a present value of an annuity problem. Review section 6.2.

19) Which of the following can be computed? I. present value of a perpetuity II. future value of a perpetuity III. present value of an annuity due IV. future value of an annuity due [A] I and III only [B] II and III only [C] II, III, and IV only [D] I, III, and IV only [E] I, II, III, and IV [A] :These are not the only ones that can be computed. Review section 6.2. [B] :One of these can not be computed. Review section 6.2. [C] :One of these can not be computed. Review section 6.2. [D] :You are correct! [E] :One of these can not be computed. Review section 6.2.

20) You deposit $100,000 into an account today. How much can you withdraw monthly for ten years if you can earn a 5 percent rate of return? You make your first withdrawal today. [A] $1,056.25 [B] $1,058.73 [C] $1,060.66 [D] $1,061.03 [E] $1,061.87 [A] :You are correct! [B] :You need to review section 6.2. [C] :Did you confuse this with an ordinary annuity? Review section 6.2. [D] :You need to review section 6.2. [E] :You need to review section 6.2.

21) You just borrowed $5,000 to buy a car. The loan will be amortized over 36 months at a 3.9 discount rate. What is the amount of each payment? [A] $146.92 [B] $147.03 [C] $147.40 [D] $147.99 [E] $148.13

[A] :Did you confuse this with an annuity due? Review section 6.2. [B] :This is a present value of an annuity problem. Review section 6.2. [C] :You are correct! [D] :This is a present value of an annuity problem. Review section 6.2. [E] :This is a present value of an annuity problem. Review section 6.2.

22) You need to borrow $18,000 to buy a truck. The current loan rate is 9.9 percent compounded monthly and you want to pay the loan off in equal monthly payments over 5 years. What is your monthly payment? [A] $363.39 [B] $374.04 [C] $381.56 [D] $394.69 [E] $455.66 [A] :You need to review this computation in section 6.2. [B] :You need to review this computation in section 6.2. [C] :You are correct! [D] :You do not get the right answer when you compute an annual payment and then divide that amount by 12. Why not? Review section 6.2. [E] :You need to review this computation in section 6.2.

23) You are considering five different loan offers. The terms of all five loans are equivalent with the exception of the interest rate. Of the rates offered, which one should you accept? [A] 8.60 percent compounded annually [B] 8.40 percent compounded semi-annually [C] 8.38 percent compounded monthly [D] 8.35 percent compounded continuously [E] 8.40 percent compounded daily [A] :Which loan has the lowest effective annual rate? Review section 6.3. [B] :You are correct! [C] :Which loan has the lowest effective annual rate? Review section 6.3. [D] :Which loan has the lowest effective annual rate? Review section 6.3. [E] :Which loan has the lowest effective annual rate? Review section 6.3.

24) You are considering investing $750 in a 10-year annuity. The rate of return you feel you require is 6.5 percent. What annual cash flow from the annuity will provide the required return? [A] $70.77 [B] $102.96 [C] $104.33 [D] $114.31 [E] $129.27 [A] :This is a present value of an annuity problem. Review section 6.2. [B] :This is a present value of an annuity problem. Review section 6.2. [C] :You are correct! [D] :This is a present value of an annuity problem. Review section 6.2. [E] :This is a present value of an annuity problem. Review section 6.2.

25) You and your spouse have found your dream home in Rapid City, South Dakota. The selling price is $120,000. You will pay $20,000 down and obtain a 30-year fixed-rate mortgage at 8.25 percent for the balance. Assume that monthly payments begin in one month. What is the amount of each payment? [A] $725.01 [B] $751.27 [C] $757.76 [D] $825.45 [E] $901.52 [A] :This is a present value of an annuity problem where the present value is $100,000. Review section 6.2. [B] :You are correct! [C] :This is a present value of an annuity problem where the present value is $100,000. Review section 6.2. [D] :This is a present value of an annuity problem where the present value is $100,000. Review section 6.2. [E] :This is a present value of an annuity problem where the present value is $100,000. Review section 6.2.

26) You make deposits of $500, $200, $300, and $400 respectively on the last day of each year for four years. The account earns 6 percent interest. How much money do you have in your account at the end of the four years? [A] $1,460.12 [B] $1,511.89 [C] $1,538.23 [D] $1,548.02 [E] $1,551.09 [A] :You need to review section 6.1. [B] :You need to review section 6.1. [C] :You are correct! [D] :You need to review section 6.1. [E] :You need to review section 6.1.

27) You just paid $10,000 for an annuity. The annuity will pay you $1,000 a year for 12 years. What is the rate of return on this annuity? [A] 2.92% [B] 3.01% [C] 3.23% [D] 3.50% [E] 3.68% [A] :You are correct! [B] :This is a present value of an annuity problem. Review section 6.2. [C] :This is a present value of an annuity problem. Review section 6.2. [D] :This is a present value of an annuity problem. Review section 6.2. [E] :This is a present value of an annuity problem. Review section 6.2.

28) Suppose you invest $10 for one year, and at the end of the year you receive back $12. Which of the following statements must be true concerning your investment? I. The quoted rate must have been greater than 20 percent. II. To figure the quoted rate, you would need to know how often the investment was compounded. III. The effective annual rate was 20 percent. IV. The continuously compounded effective annual rate has to be 20 percent. [A] I and III only. [B] II and III only [C] I and IV only [D] II, III, and IV only [E] I, II, and III only [A] :Can an effective rate be less than a quoted rate? Review section 6.3. [B] :You are correct! [C] :At least one of these is incorrect. Review section 6.3. [D] :How do you know the investment used continuous compounding? [E] :Can an effective rate be less than a quoted rate? Review section 6.3.

29) You and your spouse have found your dream home in Rapid City, South Dakota. The selling price is $120,000; you will put $20,000 down and obtain a 30-year fixed-rate mortgage at 8.25 percent for the rest. How much interest will you pay over the life of the loan? [A] $135,101 [B] $145,583 [C] $170,457 [D] $190,457 [E] $270,457 [A] :Did you get a monthly payment of $751.27? If you make 360 payments, how much will you pay in total? Review section 6.4. [B] :Did you get a monthly payment of $751.27? If you make 360 payments, how much will you pay in total? Review section 6.4. [C] :You are correct! [D] :Did you get a monthly payment of $751.27? If you make 360 payments, how much will you pay in total? Review section 6.4. [E] :Did you get a monthly payment of $751.27? If you make 360 payments, how much will you pay in total? Review section 6.4.

30) You are in the process of buying a car and are trying to decide which one of three financing options you should select. The amount you are borrowing is $8,500. The first option is 24 monthly payments of $368.73 each. The second option is 36 monthly payments of $252.09 each. The third option is 48 monthly payments of $191.92. If your only concern is selecting the option with the lowest rate of interest, you: [A] can select either the 24 or the 36 monthly payments as their effective annual rates are equal. [B] can select either the 24 or the 48 monthly payments as their effective annual rates are equal. [C] should select the 24 monthly payments. [D] should select the 36 monthly payments. [E] should select the 48 monthly payments. [A] :The effective rates on these two options are different. Review section 6.3. [B] :The effective rates on these two options are different. Review section 6.3. [C] :You are correct! [D] :This option does not have the lowest effective annual rate. Review section 6.3. [E] :This option does not have the lowest effective annual rate. Review section 6.3.

31) A Treasury bill is an example of a pure discount loan. [A] True [B] False [A] :You are correct! [B] :A Treasury bill is a loan on which the borrower, the U.S. government in this case, receives money today and repays a single lump sum at some time in the future. Review section 6.4.

32) You deposit $25,000 in your bank account today. Starting next year, you plan to withdraw equal amounts from the account at the end of each of the next four years. What is the most you can withdraw annually? [A] $ 6,125.43 [B] $ 6,988.91 [C] $ 7,133.84 [D] $ 7,548.02 [E] $ 8,154.71 [A] :This is a present value of an annuity problem. Review section 6.2. [B] :Did you confuse this with an annuity due? Review section 6.2. [C] :This is a present value of an annuity problem. Review section 6.2. [D] :You are correct! [E] :This is a present value of an annuity problem. Review section 6.2.

33) You have $500 that you would like to invest. ABC Co. offers an account which pays 8 percent compounded annually. XYZ Co. has an account which pays 7.75 percent compounded semi-annually. Which account should you choose and why? [A] ABC because it has a higher effective annual rate [B] ABC because the annual percentage rate is higher [C] XYZ because it has a higher effective annual rate [D] XYZ because the stated rate is higher [E] XYZ because it compounds more frequently [A] :You are correct! [B] :Is the annual percentage rate what you actually receive? Review section 6.3. [C] :The effective annual rate of XYZ is only 7.9 percent. Review section 6.3. [D] :You need to review the various types of rates in section 6.3. [E] :XYZ may compound more frequently, but its effective annual rate is only 7.9 percent. Review section 6.3.

34) You ask your banker to loan you $100,000 as a 30-year fixed-rate mortgage at 8.25 percent compounded monthly. Your banker suggests you consider a 15-year loan at 7.75 percent compounded monthly. What is the difference in the monthly payment between these two loans? [A] $9.26 [B] $54.72 [C] $111.57 [D] $190.01 [E] $194.59

[A] :Be sure to take into account both the difference in interest rates and the number of payments. Review section 6.4. [B] :Be sure to take into account both the difference in interest rates and the number of payments. Review section 6.4. [C] :Be sure to take into account both the difference in interest rates and the number of payments. Review section 6.4. [D] :You are correct! [E] :Be sure to take into account both the difference in interest rates and the number of payments. Review section 6.4.

35) A local consumer finance company is offering loans at an annual percentage rate of 20 percent. The interest on the loan is compounded continuously. What is the effective annual rate? [A] 21.21 percent [B] 22.14 percent [C] 23.61 percent [D] 24.97 percent [E] 25.83 percent [A] :Did you use a formula containing eq to solve this problem? Review section 6.3. [B] :You are correct! [C] :Did you use a formula containing eq to solve this problem? Review section 6.3. [D] :Did you use a formula containing eq to solve this problem? Review section 6.3. [E] :Did you use a formula containing eq to solve this problem? Review section 6.3.

36) You want to save $100,000 for five years. You are considering different investments that are equivalent except for the interest rate. Which one of the following rates should you choose? [A] 8.9 percent compounded annually [B] 8.80 percent compounded quarterly [C] 8.75 percent compounded monthly [D] 8.70 percent compounded continuously [E] 8.85 percent compounded semi-annually [A] :Is this the highest effective annual rate? Review section 6.3. [B] :Is this the highest effective annual rate? Review section 6.3. [C] :You are correct! [D] :Is this the highest effective annual rate? Review section 6.3. [E] :Is this the highest effective annual rate? Review section 6.3.

37) You have $1,398.16 in your savings account today. You plan on adding $130 a month to this account for the next five years. The account pays 2.5 percent interest compounded monthly. How much money will you have in your savings account at the end of the five years? [A] $8,003.09 [B] $8,299.27 [C] $8,671.54 [D] $9,883.39 [E] $10,123.92 [A] :You need to review sections 6.1.and 6.2. [B] :Did you forget about the balance in the account today? Review sections 6.1 and 6.2. [C] :You need to review sections 6.1 and 6.2.

[D] :You are correct! [E] :You need to review sections 6.1.and 6.2.

38) Charlies Used Cars will sell you a pre-owned truck for $3,000 with no money down. You agree to make weekly payments of $40.00 for 2 years, beginning one week after you buy the car. What is the EAR of this loan? [A] 34.43 percent [B] 36.55 percent [C] 40.94 percent [D] 42.34 percent [E] 53.01 percent [A] :This is the annual percentage rate, not the effective annual rate. Review section 6.3. [B] :Did you get an annual percentage rate of 34.43 percent? Review section 6.3. [C] :You are correct! [D] :Did you get an annual percentage rate of 34.43 percent? Review section 6.3. [E] :Did you get an annual percentage rate of 34.43 percent? Review section 6.3.

39) You just borrowed $18,500 at 6.5 percent compounded monthly. The loan is to be amortized over five years. What is the amount of each payment? [A] $357.24 [B] $360.02 [C] $360.57 [D] $361.97 [E] $362.03 [A] :You need to review sections 6.2 and 6.4. [B] :Did you confuse this with an annuity due? Review sections 6.2 and 6.4. [C] :You need to review sections 6.2 and 6.4. [D] :You are correct! [E] :You need to review sections 6.2 and 6.4.

40) What would your payment be on a 10-year, $150,000 loan at 10 percent compounded semiannually assuming payments are made annually? [A] $19,716.67 [B] $20,743.77 [C] $24,411.81 [D] $24,674.60 [E] $25,366.63 [A] :To compute this payment, first calculate the effective annual rate and then use that rate to find the annuity payment. Review section 6.3. [B] :To compute this payment, first calculate the effective annual rate and then use that rate to find the annuity payment. Review section 6.3. [C] :To compute this payment, first calculate the effective annual rate and then use that rate to find the annuity payment. Review section 6.3. [D] :You are correct! [E] :To compute this payment, first calculate the effective annual rate and then use that rate to find the annuity payment. Review section 6.3.

41) You work for a furniture store. You normally sell a living room set for $2,500 and finance the full purchase price for 30 monthly payments at an annual percentage rate of 24 percent. You are planning to run a zero-interest financing sale during which you will finance the set over 30 months at 0 percent interest. How much do you need to charge for the living room set during the sale in order to earn your usual rate of return on the set including the financing income? [A] $2,500.00 [B] $2,827.40 [C] $3,348.60 [D] $3,437.20 [E] $3,784.80 [A] :In this case, you need to adjust the price so that the payment per month at 0 percent interest is the same as the payment per month at 24 percent interest and a price of $2,500. Review section 6.2. [B] :In this case, you need to adjust the price so that the payment per month at 0 percent interest is the same as the payment per month at 24 percent interest and a price of $2,500. Review section 6.2. [C] :You are correct! [D] :In this case, you need to adjust the price so that the payment per month at 0 percent interest is the same as the payment per month at 24 percent interest and a price of $2,500. Review section 6.2. [E] :In this case, you need to adjust the price so that the payment per month at 0 percent interest is the same as the payment per month at 24 percent interest and a price of $2,500. Review section 6.2.

42) A stated interest rate is a rate expressed as if it were compounded once per year. [A] True [B] False [A] :This is the definition of an effective annual rate. Review section 6.3. [B] :You are correct!

43) You are considering an investment with a quoted return of 10 percent per year. If interest is compounded daily, what is the effective return on this investment? [A] 9.91 percent [B] 10.00 percent [C] 10.25 percent [D] 10.47 percent [E] 10.52 percent [A] :The effective annual rate cannot be lower than the quoted rate. Review section 6.3. [B] :Since compounding occurs more than once during the year, the effective annual rate must exceed the quoted rate. Review section 6.3. [C] :This effective annual rate corresponds to semi-annual, not daily, compounding. Review section 6.3. [D] :This effective annual rate corresponds to monthly, not daily, compounding. Review section 6.3. [E] :You are correct!

44) The process of providing for a loan to be paid off by making regular principal reductions is called amortizing the loan. [A] True [B] False

[A] :You are correct! [B] :This is a correct definition. Review section 6.4.

45) You obtain a $100,000, 30-year fixed-rate mortgage at 8.25 percent compounded monthly. Although you get a 30-year mortgage, you plan to prepay the loan by making an additional payment each month along with your regular payment. How much extra must you pay each month if you wish to pay off the loan in 20 years? [A] $24.56 [B] $54.88 [C] $100.80 [D] $103.28 [E] $106.86 [A] :Did you get a payment of $751.27 for 30 years? How much is the payment for 20 years? Review section 6.4. [B] :Did you get a payment of $751.27 for 30 years? How much is the payment for 20 years? Review section 6.4. [C] :You are correct! [D] :Did you get a payment of $751.27 for 30 years? How much is the payment for 20 years? Review section 6.4. [E] :Did you get a payment of $751.27 for 30 years? How much is the payment for 20 years? Review section 6.4.

46) You are going to withdraw $1,000 at the end of each year for the next three years from an account that pays interest at a rate of 8 percent compounded annually. How much must be in the account today in order for the account to reduce to a balance of zero after the last withdrawal? [A] $793.83 [B] $2,577.10 [C] $2,602.29 [D] $2,713.75 [E] $2,775.67 [A] :This is a present value of an annuity problem. Review section 6.2. [B] :You are correct! [C] :This is a present value of an annuity problem. Review section 6.2. [D] :This is a present value of an annuity problem. Review section 6.2. [E] :This is a present value of an annuity problem. Review section 6.2.

47) You are going to withdraw $1,000 at the end of each year for the next three years from an account that pays interest at a rate of 8 percent compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much money will be in the account immediately after the second withdrawal is made? [A] $925.93 [B] $977.10 [C] $982.29 [D] $1,000.00 [E] $2,000.00 [A] :You are correct! [B] :What is the present value of $1,000 received one year from today? Review section 6.2. [C] :What is the present value of $1,000 received one year from today? Review section 6.2.

[D] :What is the present value of $1,000 received one year from today? Review section 6.2. [E] :What is the present value of $1,000 received one year from today? Review section 6.2.

48) You receive $100 at the end of each year for ten years. This is an example of an annuity due. [A] True [B] False [A] :What is the difference between an ordinary annuity and an annuity due? Review section 6.2. [B] :You are correct!

49) Which one of the following is a true statement? [A] It is best not to rely solely on quoted rates when comparing investments. [B] The quoted rate is equivalent to the effective rate regardless of the compounding frequency. [C] The annual percentage rate quoted on a loan requiring monthly payments is the interest rate you actually pay. [D] The annual percentage rate is the interest rate per period divided by the number of periods per year. [E] The annual percentage rate will be larger than the effective annual rate when interest is compounded monthly. [A] :You are correct! [B] :Which rate considers interest on interest? Review section 6.3. [C] :The annual percentage rate is not the interest rate you actually pay. Review section 6.3. [D] :Does the interest rate per period multiplied by the number of periods per year equate to the rate you actually pay? Review section 6.3. [E] :The effective annual rate will be the larger of the two. Review section 6.3.

50) In order to help you through college, your parents just deposited $25,000 into a bank account paying 8 percent interest. Starting tomorrow, you plan to withdraw equal amounts from the account at the beginning of each of the next four years. What is the most you can withdraw annually? [A] $ 6,125.43 [B] $ 6,988.91 [C] $ 7,133.84 [D] $ 7,548.02 [E] $ 8,154.71 [A] :This is a present value of an annuity due problem. Review section 6.2. [B] :You are correct! [C] :This is a present value of an annuity due problem. Review section 6.2. [D] :You are ignoring the fact that this is an annuity due. Review section 6.2. [E] :This is a present value of an annuity due problem. Review section 6.2.

51) Rob and Laura wish to buy a new home. The price is $187,500 and they plan to put 20 percent down. The bank will lend them the remainder at a 10 percent fixed rate for 30 years, with monthly payments to begin in one month. Assuming they pay off the loan over the 30 year period as planned, what will the total cost (principal + interest + down payment) of the house be? [A] $187,500 [B] $271,996

[C] $354,234 [D] $473,760 [E] $511,390 [A] :You must first find the monthly payment. Did you get $1,316.36? Be sure to incorporate the down payment into your computation and work with a 360-month loan. Review section 6.4. [B] :You must first find the monthly payment. Did you get $1,316.36? Be sure to incorporate the down payment into your computation and work with a 360-month loan. Review section 6.4. [C] :You must first find the monthly payment. Did you get $1,316.36? Be sure to incorporate the down payment into your computation and work with a 360-month loan. Review section 6.4. [D] :You must first find the monthly payment. Did you get $1,316.36? Be sure to incorporate the down payment into your computation and work with a 360-month loan. Review section 6.4. [E] :You are correct!

52) Loan A requires fixed principal payments each year for five years. Loan B is amortized over five years with the payment amount remaining constant. In year one, the required payment on loan A will exceed the required payment on loan B. [A] True [B] False [A] :You are correct! [B] :In year one, loan A requires a payment equal to 20 percent of the principal plus the first years interest. How does this vary from the payment required by loan B? Review section 6.4.

53) You have won a prize which will pay you or your heirs $25,000 a year for fifty years. The first payment is due immediately. What is the present value of this prize given an 8 percent discount rate? [A] $300,000 [B] $305,837 [C] $309,650 [D] $312,500 [E] $330,304 [A] :How do you calculate the present value of an annuity due? Review section 6.2. [B] :How do you calculate the present value of an annuity due? Review section 6.2. [C] :How do you calculate the present value of an annuity due? Review section 6.2. [D] :Is this an annuity due or a perpetuity? Review section 6.2. [E] :You are correct!

54) There is no upper limit to an effective annual rate. That is, as the frequency of compounding increases, the effective annual rate also increases without limit. [A] True [B] False [A] :The highest effective annual rate is derived from continuous compounding. Review section 6.3. [B] :You are correct!

55) What is the effective annual rate of 12 percent compounded continuously? [A] 12.12 percent

[B] 12.36 percent [C] 12.55 percent [D] 12.75 percent [E] 12.89 percent [A] :Did you use eq-1 to solve this problem? Review section 6.3. [B] :Did you use eq-1 to solve this problem? Review section 6.3. [C] :Did you use eq-1 to solve this problem? Review section 6.3. [D] :You are correct! [E] :Did you use eq-1 to solve this problem? Review section 6.3.

56) You have just won a lottery prize. You can choose to receive $750,000 today or an annual payment of $50,411.78 at the end of each year for the next twenty years. At any rate higher than 3 percent, you should take the lump sum. [A] True [B] False [A] :You are correct! [B] :Three percent is the rate that makes the present value of the annuity and the lump sum payment equivalent. What happens to the present value as the interest rate increases? Review section 6.2.

57) Bernie just won a contest with a grand prize of $250,000. The contest stipulates that the winner will receive $100,000 immediately plus $15,000 at the end of each of the next 10 years. If Bernie can earn 5 percent on his money, how much is this prize worth to him today? [A] $114,285.71 [B] $166,175.62 [C] $189,345.45 [D] $215,826.02 [E] $250,000.00 [A] :How many $15,000 payments will Bernie receive? Review section 6.2. [B] :This is a present value of an annuity problem. Review section 6.2. [C] :This is a present value of an annuity problem. Review section 6.2. [D] :You are correct! [E] :Since interest compounds at 5 percent, the present value has to be lower than this amount. Review section 6.2.

58) Moe purchases a 30-year annuity that pays $100 per year. Larry purchases a perpetuity that pays $100 a year. In both cases, payments begin one year from today. The appropriate interest rate is 10 percent. What is the present value today of Larrys payments occurring from year 31 on? [A] $51.15 [B] $57.31 [C] $58.11 [D] $81.21 [E] More than $100 [A] :What is the difference in the present value of these two payment streams? Review section 6.2. [B] :You are correct! [C] :Did you get $942.69 as the present value of Moes annuity? Review section 6.2. [D] :Did you get $1,000 as the present value of Larrys entire perpetuity? Review section 6.2. [E] :What is the difference in the present value of these two payment streams? Review section 6.2.

59) Your brother-in-law borrowed $2,000 from you 4 years ago and then disappeared. Now he has returned and wants to repay the loan, including the interest accrued. You had agreed to charge him 10 percent interest compounded annually. He is offering to make five equal annual payments beginning in one year. How much will your brother-in-law have to pay you annually in order to extinguish this debt? [A] $697.43 [B] $738.63 [C] $751.46 [D] $772.45 [E] $798.24 [A] :Did you compute the current amount he owes you as $2,928.20? Review section 6.2. [B] :Did you compute the current amount he owes you as $2,928.20? Review section 6.2. [C] :Did you compute the current amount he owes you as $2,928.20? Review section 6.2. [D] :You are correct! [E] :Did you compute the current amount he owes you as $2,928.20? Review section 6.2.

60) Suppose you buy a new Toyota for $20,000, paying nothing down. You agree to a repayment schedule of 6 equal annual payments beginning one year from today. The banker's required return is 9 percent, compounded annually. What is the amount of each annual payment? [A] $3,729.03 [B] $4,458.40 [C] $5,121.24 [D] $6,664.91 [E] $7,563.01 [A] :This is a present value of an annuity problem. Review section 6.2. [B] :You are correct! [C] :This is a present value of an annuity problem. Review section 6.2. [D] :This is a present value of an annuity problem. Review section 6.2. [E] :This is a present value of an annuity problem. Review section 6.2.

61) You are going to invest $500 at the end of each year for ten years. Given an interest rate, you can find the future value of this investment by: I. adding the cash flows together and then applying a future value factor to that sum. II. applying the proper future value factor to each cash flow, then adding up these values. III. finding the present value of each cash flow, adding all of the present values together, then finding the future value at the end of year ten of this lump sum. IV. finding the present value of an ordinary annuity. [A] II only [B] III only [C] II and III only [D] I, II, and IV only [E] II, III, and IV only [A] :True, but there is another method that also works. Review section 6.1. [B] :True, but there is another method that also works. Review section 6.1. [C] :You are correct! [D] :At least one of these choices is incorrect. Review section 6.1. [E] :At least one of these choices is incorrect. Review section 6.1.

62) What is the effective annual rate of 12 percent compounded semi-annually? [A] 12.12 percent [B] 12.36 percent [C] 12.55 percent [D] 12.68 percent [E] 12.75 percent [A] :What is the number of compounding periods? Review section 6.3. [B] :You are correct! [C] :What is the number of compounding periods? Review section 6.3. [D] :What is the number of compounding periods? Review section 6.3. [E] :What is the number of compounding periods? Review section 6.3.

63) You are borrowing $1,500 at 6 percent compounded annually. You plan to pay $90 at the end of each year on the loan. How long will it take you to repay the loan in full? [A] 9 years [B] 10 years [C] 11 years [D] 12 years [E] You will never pay off the loan. [A] :How much interest will you owe for year one? Review section 6.2. [B] :How much of the first payment is applied to the loan principal? Review section 6.2. [C] :How much interest will you owe for year one? Review section 6.2. [D] :How much of the first payment is applied to the loan principal? Review section 6.2. [E] :You are correct!

64) You have just won the lottery. You and your heirs will receive $25,000 per year forever, beginning one year from now. What is the present value of this lottery given an 8 percent discount rate? [A] $182,500 [B] $200,000 [C] $287,500 [D] $312,500 [E] $337,500 [A] :This is a present value of a perpetuity problem. Review section 6.2. [B] :This is a present value of a perpetuity problem. Review section 6.2. [C] :This is a present value of a perpetuity problem. Review section 6.2. [D] :You are correct! [E] :This is a present value of a perpetuity problem. Review section 6.2.

65) A consol is a type of perpetuity. [A] True [B] False [A] :You are correct! [B] :You need to review this definition in section 6.2.

66) An annuity is a level stream of cash flows for a fixed period of time. [A] True [B] False [A] :You are correct! [B] :This is the definition of an annuity. Review section 6.2.

67) You invest $500 today. You plan on adding annual amounts $500, $600, and $700 to the account at the end of each of the next three years, respectively. What will your account be worth five years from now if you earn a 7 percent rate of return? [A] $2,788.91 [B] $2,893.13 [C] $2,903.14 [D] $2,934.86 [E] $3,006.38 [A] :This is a future value with multiple cash flows. Review section 6.1. [B] :You are correct! [C] :This is a future value with multiple cash flows. Review section 6.1. [D] :This is a future value with multiple cash flows. Review section 6.1. [E] :This is a future value with multiple cash flows. Review section 6.1.

68) In almost all present and future value computations, it is implicitly assumed that the cash flows occur at the end of each period. [A] True [B] False [A] :You are correct! [B] :If the cash flows occur at the beginning of the period that information will be so noted. Review section 6.1.

69) Five years from now you will begin to receive cash flows of $75 per year. These cash flows will continue forever. If the discount rate is 6 percent, what is the present value of these cash flows? [A] $799.68 [B] $894.22 [C] $934.07 [D] $990.12 [E] $1,104.67 [A] :Did you get a value for the perpetuity of $1,250 at the end of four years from now? Did you discount the $1,250 back to today? Review section 6.2. [B] :Did you get a value for the perpetuity of $1,250 at the end of four years from now? Did you discount the $1,250 back to today? Review section 6.2. [C] :Did you get a value for the perpetuity of $1,250 at the end of four years from now? Did you discount the $1,250 back to today? Review section 6.2. [D] :You are correct!

[E] :Did you get a value for the perpetuity of $1,250 at the end of four years from now? Did you discount the $1,250 back to today? Review section 6.2.

70) A preferred stock pays an annual dividend of $5.50. If you want to earn 9 percent on your investments, how much are you willing to pay for one share of this stock? [A] $57.50 [B] $58.33 [C] $60.00 [D] $61.11 [E] $62.66 [A] :You need to review perpetuities in section 6.2. [B] :You need to review perpetuities in section 6.2. [C] :You need to review perpetuities in section 6.2. [D] :You are correct! [E] :You need to review perpetuities in section 6.2.

71) You are comparing three investments. Option A pays 9 percent compounded semi-annually. Option B pays 8.9 percent compounded monthly. Option C pays 8.75 percent compounded daily. Which option should you choose if you wish to invest your money for five years? [A] Option A because it has the higher quoted rate [B] Option A because it has the highest effective annual rate [C] Option B because it has the highest effective annual rate [D] Option C because it will pay the most interest on interest over the five years [E] Option C because it will compound a total of 1,825 times over the five years [A] :Is the quoted rate what you actually earn? Review section 6.3. [B] :Did you get an effective annual rate of 9.20 percent for Option A? Review section 6.3. [C] :You are correct! [D] :Option C pays the lowest amount of interest on interest of these three options. Review section 6.3. [E] :There are 1,825 compounding periods but the effective annual rate is the lowest of the three options. Review section 6.3.

72) Joe purchases a $100 perpetuity on which payments begin in one year. Lynn purchases a $100 perpetuity on which payments begin immediately. Both annuities pay annual payments. The applicable discount rate is 10 percent. Which one of the following statements is true? [A] Joe's perpetuity is worth $100 more than Lynn's. [B] Lynn's perpetuity is worth $100 more than Joe's. [C] The perpetuities are of equal value today. [D] Lynn's perpetuity is worth $90.91 more than Joe's. [E] Joes perpetuity is worth $90.91 more than Lynns. [A] :This compares a perpetuity with a perpetuity due. If it were not for the $100 Lynn gets immediately, the two perpetuities would be worth the same amount. Review section 6.2. [B] :You are correct! [C] :This compares a perpetuity with a perpetuity due. Notice that if not for the $100 Lynn gets immediately, the two perpetuities would be worth the same amount. Review section 6.2. [D] :This compares a perpetuity with a perpetuity due. Notice that if not for the $100 Lynn gets immediately, the two perpetuities would be worth the same amount. Review section 6.2.

[E] :This compares a perpetuity with a perpetuity due. Notice that if not for the $100 Lynn gets immediately, the two perpetuities would be worth the same amount. Review section 6.2.

73) Which one of the following is the annuity present value factor? [A] 1-[1/(1+r)t]/r [B] [(1+r)t-1]/r [C] [1- (1+r)t][1+r] [D] 1+[(1+r)t/r]/r [E] 1+[1/(1+r)t]/r [A] :You are correct! [B] :Try again. Review section 6.2. [C] :Try again. Review section 6.2. [D] :Try again. Review section 6.2. [E] :Try again. Review section 6.2.

74) The present value of an ordinary annuity and an annuity due will be equal if both annuities have the same payment per period, the same number of periods, and the same discount rate. Assume the discount rate is greater than zero. [A] True [B] False [A] :Is the timing of the payments equal? Review section 6.2. [B] :You are correct!

75) You want to establish a trust fund to give your heirs $100,000 a year forever. The fund is expected to earn a 5.75 percent rate of return. How much money must you deposit today to establish this trust? [A] $1,700,000 [B] $1,716,067 [C] $1,723,049 [D] $1,739,130 [E] $1,800,000 [A] :This is a present value of a perpetuity. Review section 6.2. [B] :This is a present value of a perpetuity. Review section 6.2. [C] :This is a present value of a perpetuity. Review section 6.2. [D] :You are correct! [E] :This is a present value of a perpetuity. Review section 6.2.

76) What is the present value of $1,000 payments received at the beginning of each year for the next 10 years? Assume an interest rate of 5.49 percent compounded monthly. [A] $7,069.13 [B] $7,093.62 [C] $7,492.64 [D] $7,912.58 [E] $7,955.26

[A] :Since the frequency of the compounding differs from the frequency of the payments, you must compute the effective annual rate and use this rate to find the present value of the annuity. Review section 6.3. [B] :Since the frequency of the compounding differs from the frequency of the payments, you must compute the effective annual rate and use this rate to find the present value of the annuity. Review section 6.3. [C] :Since the frequency of the compounding differs from the frequency of the payments, you must compute the effective annual rate and use this rate to find the present value of the annuity. Review section 6.3. [D] :You are correct! [E] :Since the frequency of the compounding differs from the frequency of the payments, you must compute the effective annual rate and use this rate to find the present value of the annuity. Review section 6.3.

77) You are considering various loan offers. The loan terms are equivalent with the exception of the interest rate. Which one of the following rates should you accept? [A] 8.75 percent compounded monthly [B] 8.90 percent compounded semi-annually [C] 8.70 percent compounded continuously [D] 8.99 percent compounded annually [E] 8.95 percent compounded quarterly [A] :Is this the lowest effective annual rate? Review section 6.3. [B] :Is this the lowest effective annual rate? Review section 6.3. [C] :Is this the lowest effective annual rate? Review section 6.3. [D] :You are correct! [E] :Is this the lowest effective annual rate? Review section 6.3.

78) A pure discount loan is a loan on which the borrower receives money today and repays a single lump sum at some time in the future. [A] True [B] False [A] :You are correct! [B] :This is the definition of a pure discount loan. Review section 6.4.

79) Preferred stock is an example of a perpetuity. [A] True [B] False [A] :You are correct! [B] :Doesnt preferred stock pay a fixed payment per period forever? Review section 6.2.

80) Dom Diego is establishing a $1 million trust fund to provide scholarships for exchange students. The fund will distribute the interest income annually. The principal must remain invested at all times. How much will be available annually for students if the fund can earn a 5 percent rate of return? [A] $25,000 [B] $50,000

[C] $100,000 [D] $125,000 [E] $150,000 [A] :What is 5 percent of $1 million? Review section 6.2. [B] :You are correct! [C] :What is 5 percent of $1 million? Review section 6.2. [D] :What is 5 percent of $1 million? Review section 6.2. [E] :What is 5 percent of $1 million? Review section 6.2.

81) In order to compare equally risky investment opportunities that have interest rates reported in different formats you should convert each rate to a(n): [A] annual nominal rate. [B] monthly nominal rate. [C] effective annual rate. [D] annual percentage rate. [E] stated rate. [A] :Is the nominal rate what you actually pay or earn? Review section 6.3. [B] :Is the nominal rate what you actually pay or earn? Review section 6.3. [C] :You are correct! [D] :Is the annual percentage rate what you actually pay or earn? Review section 6.3. [E] :Is the annual percentage rate what you actually pay or earn? Review section 6.3.

82) An interest rate quoted as six percent compounded monthly means interest is paid at a rate of six percent each month. [A] True [B] False [A] :In this case, interest is paid at a rate of 0.5 percent each month. Review section 6.3. [B] :You are correct!

83) You are planning to save your annual bonuses from work and are comparing savings accounts. Account A compounds semi-annually while Account B compounds monthly. If both accounts have the same effective annual rate of interest and you place only the bonuses in the account, you: [A] should choose Account A because it has a higher annual percentage rate. [B] should choose Account B because it has a higher annual percentage rate. [C] should choose Account B because it is compounded more frequently. [D] should choose Account A because you will pay less in taxes. [E] can choose either account since you are indifferent between the two. [A] :You should not choose based on the annual percentage rate. Review section 6.3. [B] :You should not choose based on the annual percentage rate. Review section 6.3. [C] :Just because an account compounds more frequently does not automatically mean it is the better choice. Review section 6.3. [D] :Taxes are not a part of the problem as it is stated. Review section 6.3. [E] :You are correct!

84) The First National Bank offers one-year certificates of deposit with a stated rate of 5.50 percent compounded quarterly. Which one of the following rates, compounded semi-annually, comes closest to providing you with the same amount of interest? [A] 5.487 percent [B] 5.500 percent [C] 5.507 percent [D] 5.512 percent [E] 5.538 percent [A] :Did you compare effective annual rates? Review section 6.3. [B] :Did you compare effective annual rates? Review section 6.3. [C] :Did you compare effective annual rates? Review section 6.3. [D] :Did you compare effective annual rates? Review section 6.3. [E] :You are correct!

85) You are going to withdraw $1,000 at the end of each year for the next three years from an account that pays interest of 8 percent compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much interest will you earn on the account over the three-year life? [A] $0.00 [B] $240.00 [C] $422.90 [D] $576.24 [E] $3,000.00 [A] :First determine the present value of this annuity, then subtract this number from the total withdrawals. Review section 6.2. [B] :First determine the present value of this annuity, then subtract this number from the total withdrawals. Review section 6.2. [C] :You are correct! [D] :First determine the present value of this annuity, then subtract this number from the total withdrawals. Review section 6.2. [E] :First determine the present value of this annuity, then subtract this number from the total withdrawals. Review section 6.2.

86) What is the effective annual rate of 10 percent compounded monthly? [A] 10.25 percent [B] 10.38 percent [C] 10.47 percent [D] 10.50 percent [E] 10.52 percent [A] :What is the number of compounding periods? Review section 6.3. [B] :What is the number of compounding periods? Review section 6.3. [C] :You are correct! [D] :What is the number of compounding periods? Review section 6.3. [E] :What is the number of compounding periods? Review section 6.3.

87) If interest is compounded annually, the effective annual rate and the annual percentage rate will be the same.

[A] True [B] False [A] :You are correct! [B] :These two rates are equal anytime interest is compounded annually. Review section 6.3.

88) You save $350 a month for forty years. Your average rate of return is 8.5 percent. What is your account balance at the end of the forty years? [A] $168,000.00 [B] $789,518.23 [C] $793,004.61 [D] $1,413,528.32 [E] $1,423,540.81 [A] :Did you forget about the interest earned? Review section 6.2. [B] :This is a future value of an ordinary annuity. Review section 6.2. [C] :This is a future value of an ordinary annuity. Review section 6.2. [D] :You are correct! [E] :Did you confuse this with an annuity due? Review section 6.2.

89) If a loan is set up to be fully amortized over a period of ten years but the loan period is only five years, then the borrower will owe a balloon payment at the end of the five-year period. [A] True [B] False [A] :You are correct! [B] :Whenever the number of payments is less than the period over which the loan is amortized there will be a balloon payment. Review section 6.4.

90) Three years from now, you can afford to make a $6,000 payment to the bank. The bank will give you an 8 percent pure discount loan. How much cash is the bank willing to give you today? [A] $4,762.99 [B] $5,144.03 [C] $5,389.18 [D] $5,401.03 [E] $5,555.56 [A] :You are correct! [B] :What is the present value of the $6,000? Review section 6.4. [C] :What is the present value of the $6,000? Review section 6.4. [D] :What is the present value of the $6,000? Review section 6.4. [E] :What is the present value of the $6,000? Review section 6.4.

91) A perpetuity is the same thing as an annuity due. [A] True [B] False [A] :How long do perpetuity payments continue? Review section 6.2.

[B] :You are correct!

92) Which one of the following is the correct formula for computing the future value of an annuity? [A] FVt= C X [(1+r)t-1]/r [B] FVt= C X1/[(1+r)t-1] [C] FVt= C X [(1+r)t-1] X r [D] FVt= C X [(1+r)t+1]/t [E] FVt= C X [(1+r)t+1]/r [A] :You are correct! [B] :Try again. Review section 6.2. [C] :Try again. Review section 6.2. [D] :Try again. Review section 6.2. [E] :Try again. Review section 6.2.

93) The preferred stock of Marble Comics currently sells for $31.25 per share. The annual dividend is $2.50. Assuming a constant dividend forever, what is the rate of return on this stock? [A] 4.5 percent [B] 6.0 percent [C] 8.0 percent [D] 9.5 percent [E] 12.5 percent [A] :Is this a perpetuity? Review section 6.2. [B] :Is this a perpetuity? Review section 6.2. [C] :You are correct! [D] :Is this a perpetuity? Review section 6.2. [E] :This is a perpetuity. Review section 6.2.

94) Rob and Laura wish to buy a new home. The price is $187,500 and they plan to put 20 percent down. New Rochelle Savings and Loan will lend them the remainder at 10 percent compounded monthly for 30 years. The first payment is due one month from today. What is the amount of their monthly payment? [A] $1,316.36 [B] $1,325.99 [C] $1,512.56 [D] $1,645.45 [E] $1,760.45 [A] :You are correct! [B] :You cannot find the annual payment and then divide by twelve. This ignores the effects of compounding monthly. Review section 6.4. [C] :Be sure to incorporate the down payment into your computation and work with a 360-month loan. Review section 6.4. [D] :Did you take the down payment into account? Review section 6.4. [E] :Be sure to incorporate the down payment into your computation and work with a 360-month loan. Review section 6.4.

95) An effective annual rate will always be equal to or greater than the annual percentage rate.

[A] True [B] False [A] :You are correct! [B] :You need to review these definitions in section 6.3.

96) Daryl wishes to save money to provide for his retirement. Beginning one month from now, he will deposit a fixed amount into a retirement savings account that will earn 12 percent compounded monthly for thirty years. He will make 360 such deposits. Then, one year after making his final deposit, he will withdraw $100,000 annually for 25 years. The account balance will reduce to zero when the last withdrawal is made. The fund will earn 12.68 percent compounded annually during the last twenty-five years. What is the fixed monthly amount that Daryl will be depositing for the first thirty years? [A] $205.28 [B] $209.58 [C] $214.24 [D] $234.89 [E] $249.38 [A] :You first need to compute how much Daryl must have in his account immediately after making his 360th deposit. This amount is the present value of $100,000 per year for 25 years at a rate of 12.68 percent. From this, you can determine how much he must deposit each month. Review section 6.2. [B] :You first need to compute how much Daryl must have in his account immediately after making his 360th deposit. This amount is the present value of $100,000 per year for 25 years at a rate of 12.68 percent. From this, you can determine how much he must deposit each month. Review section 6.2. [C] :You are correct! [D] :You first need to compute how much Daryl must have in his account immediately after making his 360th deposit. This amount is the present value of $100,000 per year for 25 years at a rate of 12.68 percent. From this, you can determine how much he must deposit each month. Review section 6.2. [E] :You first need to compute how much Daryl must have in his account immediately after making his 360th deposit. This amount is the present value of $100,000 per year for 25 years at a rate of 12.68 percent. From this, you can determine how much he must deposit each month. Review section 6.2.

97) A given rate is quoted as 8 percent, but has an effective annual rate of 8.33 percent. What is the rate of compounding during the year? [A] annually [B] semi-annually [C] quarterly [D] monthly [E] continuously [A] :If interest is compounded annually, the effective and quoted rates are equal. Review section 6.3. [B] :Eight percent compounded semi-annually has an effective annual rate of 8.16 percent. Review section 6.3. [C] :Eight percent compounded quarterly has an effective annual rate of 8.24 percent. Review section 6.3. [D] :Eight percent compounded monthly has an effective annual rate of 8.3 percent. Review section 6.3. [E] :You are correct!

98) As a gift from your parents, you and your heirs will receive $25,000 per year forever, beginning one year from now. What discount rate is being used if the present value of this gift is quoted at $416,667? [A] 4.0 percent [B] 5.0 percent [C] 6.0 percent [D] 7.0 percent [E] 8.0 percent [A] :Do you get $25,000 if you multiply the present value by this rate? Review section 6.2. [B] :Do you get $25,000 if you multiply the present value by this rate? Review section 6.2. [C] :You are correct! [D] :Do you get $25,000 if you multiply the present value by this rate? Review section 6.2. [E] :Do you get $25,000 if you multiply the present value by this rate? Review section 6.2.

99) You want to retire 35 years from today and have $5 million in your retirement savings at that time. You expect to earn an average rate of return of 12 percent compounded monthly on your savings. How much must you save at the beginning of each month to achieve this goal if you have nothing saved as of today? [A] $650 [B] $733 [C] $730 [D] $770 [E] $777 [A] :This is a future value of an annuity due problem. Review section 6.2. [B] :This is a future value of an annuity due problem. Review section 6.2. [C] :This is a future value of an annuity due problem. Review section 6.2. [D] :You are correct! [E] :Did you confuse this with an ordinary annuity? Review section 6.2.

100) What is the effective annual rate of 8 percent compounded quarterly? [A] 8.00 percent [B] 8.16 percent [C] 8.24 percent [D] 8.30 percent [E] 8.33 percent [A] :Did you forget about compounding? Review section 6.3. [B] :How many compounding periods are there? Review section 6.3. [C] :You are correct! [D] :How many compounding periods are there? Review section 6.3. [E] :How many compounding periods are there? Review section 6.3.

101) As a general rule, the effective annual rate is more appropriate for financial decision making than is the annual percentage rate. [A] True [B] False [A] :You are correct!

[B] :The effective annual rate is what you actually pay or earn, the annual percentage rate is not. Review section 6.3.

102) What is the present value of $1,000 payments received at the end of each year for the next 10 years? Assume an interest rate of 5.625 percent. [A] $7,069.13 [B] $7,093.62 [C] $7,492.64 [D] $7,914.10 [E] $8,165.12 [A] :You need to review annuity computations in section 6.2. [B] :You need to review annuity computations in section 6.2. [C] :You are correct! [D] :Did you treat this as an annuity due? Review section 6.2. [E] :You need to review annuity computations in section 6.2.

103) Which of the following statements are true? I. There is an inverse relationship between present values and interest rates. II. The effective annual rate will be higher than the annual percentage rate for a loan that compounds interest monthly. III. There is an inverse relationship between future values and periods of time. IV. All else equal, the more frequently interest is compounded on a loan, the more interest you will have to pay. [A] I and II only [B] III and IV only [C] II, III, and IV only [D] I, II, and IV only [E] I, II, III, and IV [A] :Yes, but there is another correct statement also. Review section 6.3. [B] :One of these statements is false. Review section 6.1. [C] :One of these statements is false. Review section 6.1. [D] :You are correct! [E] :One of these statements is false. Review section 6.1.

104) Fast Eddie's Used Cars will sell you a pre-owned Honda for $3,000 with no money down. You agree to make weekly payments for 2 years, beginning one week after you buy the car. The stated rate on the loan is 26 percent. How much is each payment? [A] $32.96 [B] $37.06 [C] $38.19 [D] $45.90 [E] $69.65 [A] :This is a present value of an annuity problem with weekly compounding. Review section 6.2. [B] :You are correct! [C] :This is a present value of an annuity problem with weekly compounding. Review section 6.2. [D] :This is a present value of an annuity problem with weekly compounding. Review section 6.2. [E] :This is a present value of an annuity problem with weekly compounding. Review section 6.2.