Test Bank For Fundamentals of Corporate Finance 7th Edition – Richard Brealey

$45.00
Test Bank For Fundamentals of Corporate Finance 7th Edition – Richard Brealey

Test Bank For Fundamentals of Corporate Finance 7th Edition – Richard Brealey

$45.00
Test Bank For Fundamentals of Corporate Finance 7th Edition – Richard Brealey

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What student Can Expect From A Test Bank?

A test bank will include the following questions:

  1. True/False
  2. Multiple Choice Questions
  3. Matching Questions
  4. Fill In The Blanks
  5. Essay Questions
  6. Short Questions

Description

6

1.An annuity stream of cash flow payments is a set of:

A.level cash flows occurring each time period for a fixed length of time.

B.level cash flows occurring each time period forever.

C.increasing cash flows occurring each time period for a fixed length of time.

D.increasing cash flows occurring each time period forever.

E.arbitrary cash flows occurring each time period for no more than 10 years.

2.The present value factor for annuities is calculated as:

A.(1 + present value factor) ¸ r.

B.(1 – present value factor) ¸ r.

C.present value factor + (1 ¸ r).

D.(present value factor x r) + (1 ¸ r).

E.r x (1 + present value factor).

3.The future value factor for annuities is calculated as the:

A.future value factor + r.

B.(1 ¸ r) + (future value factor x r).

C.(1 ¸ r) + future value factor.

D.(future value factor – 1) ¸ r.

E.(future value factor + 1) ¸ r.

4.Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.

A.ordinary annuities; early annuities

B.late annuities; straight annuities

C.straight annuities; late annuities

D.annuities due; ordinary annuities

E.ordinary annuities; annuities due

5.An annuity stream where the payments occur forever is called a(n):

A.annuity due.

B.indemnity.

C.perpetuity.

D.amortized cash flow stream.

E.amortization table.

6.The interest rate expressed in terms of the interest payment made each period is called the _____ rate.

A.stated interest

B.compound interest

C.effective annual

D.periodic interest

E.daily interest

7.The interest rate expressed as if it were compounded once per year is called the _____ rate.

A.stated interest

B.compound interest

C.effective annual

D.periodic interest

E.daily interest

8.The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

A.effective annual

B.annual percentage

C.periodic interest

D.compound interest

E.daily interest

9.A loan where the borrower receives money today and repays a single lump sum at some time in the future is called a(n) _____ loan.

A.amortized

B.continuous

C.balloon

D.pure discount

E.interest-only

10.A loan where the borrower pays interest each period and repays the entire principal of the loan at some point in the future is called a(n) _____ loan.

A.amortized

B.continuous

C.balloon

D.pure discount

E.interest-only

11.A loan where the borrower pays interest each period, and repays some or all of the principal of the loan over time is called a(n) _____ loan.

A.amortized

B.continuous

C.balloon

D.pure discount

E.interest-only

12.A loan where the borrower pays interest each period, repays part of the principal of the loan over time, and repays the remainder of the principal at the end of the loan, is called a(n) _____ loan.

A.amortized

B.continuous

C.balloon

D.pure discount

E.interest-only

13.You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

A.Both annuities are of equal value today.

B.Annuity B is an annuity due.

C.Annuity A has a higher future value than annuity B.

D.Annuity B has a higher present value than annuity A.

E.Both annuities have the same future value as of ten years from today.

14.You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

A.Both options are of equal value given that they both provide $20,000 of income.

B.Option A is the better choice of the two given any positive rate of return.

C.Option B has a higher present value than option A given a positive rate of return.

D.Option B has a lower future value at year 5 than option A given a zero rate of return.

E.Option A is preferable because it is an annuity due.

15.You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects?
I. Both projects have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Both projects have the same future value at any point in time, given a positive rate of return.
IV. Project A has a higher future value than project B, given a positive rate of return.

A.II only

B.IV only

C.I and III only

D.II and IV only

E.I, II, and III only

16.A perpetuity differs from an annuity because:

A.perpetuity payments vary with the rate of inflation.

B.perpetuity payments vary with the market rate of interest.

C.perpetuity payments are variable while annuity payments are constant.

D.perpetuity payments never cease.

E.annuity payments never cease.

17.Which one of the following statements concerning the annual percentage rate is correct?

A.The annual percentage rate considers interest on interest.

B.The rate of interest you actually pay on a loan is called the annual percentage rate.

C.The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly.

D.When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.

E.The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

18.Which one of the following statements concerning interest rates is correct?

A.The stated rate is the same as the effective annual rate.

B.An effective annual rate is the rate that applies if interest were charged annually.

C.The annual percentage rate increases as the number of compounding periods per year increases.

D.Banks prefer more frequent compounding on their savings accounts.

E.For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

19.Which of the following statements concerning the effective annual rate are correct?
I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates.
II. The more frequently interest is compounded, the higher the effective annual rate.
III. A quoted rate of 6 percent compounded continuously has a higher effective annual rate than if the rate were compounded daily.
IV. When choosing which loan to accept, you should select the offer with the highest effective annual rate.

A.I and II only

B.I and IV only

C.I, II, and III only

D.II, III, and IV only

E.I, II, III,and IV

20.The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed as:

A..09e-1.

B.e.09x q.

C.e x (1 + .09).

D.e09- 1.

E.(1 + .09)q.

21.A pure discount loan is a(n):

A.example of a present value problem.

B.loan that is interest-free.

C.loan that gives you a discount if you pay your payments on time.

D.loan that requires all interest to be paid at the time the loan is made.

E.loan that discounts the payments if you pay them in advance.

22.The principle amount of an interest-only loan is:

A.never repaid.

B.repaid in equal increments and included in each loan payment.

C.repaid in full at the end of the loan period.

D.repaid in equal annual payments even when the loan interest is repaid monthly.

E.repaid in increasing increments and included in each loan payment.

23.An amortized loan:

A.requires the principle amount to be repaid in even increments over the life of the loan.

B.may have equal or increasing amounts applied to the principle from each loan payment.

C.requires that all interest be repaid on a monthly basis while the principle is repaid at the end of the loan term.

D.requires that all payments be equal in amount and include both principle and interest.

E.is the type of loan that describes most corporate bonds.

24.Your parents are giving you $100 a month for four years while you are in college. At a 6 percent discount rate, what are these payments worth to you when you first start college?

A.$3,797.40

B.$4,167.09

C.$4,198.79

D.$4,258.03

E.$4,279.32

25.You just won the lottery! As your prize you will receive $1,200 a month for 100 months. If you can earn 8 percent on your money, what is this prize worth to you today?

A.$87,003.69

B.$87,380.23

C.$87,962.77

D.$88,104.26

E.$90,723.76

26.Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9 percent, how much can Todd afford to borrow to buy a car?

A.$6,961.36

B.$8,499.13

C.$8,533.84

D.$8,686.82

E.$9,588.05

27.You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5 percent on your money. Which option should you take and why?

A.You should accept the payments because they are worth $56,451.91 today.

B.You should accept the payments because they are worth $56,523.74 today.

C.You should accept the payments because they are worth $56,737.08 today.

D.You should accept the $50,000 because the payments are only worth $47,757.69 today.

E.You should accept the $50,000 because the payments are only worth $47,808.17 today.

28.Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5 percent. Given these assumptions, what is this employee benefit worth to you today?

A.$13,144.43

B.$15,920.55

C.$16,430.54

D.$16,446.34

E.$16,519.02

29.You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of $50,000 for the next five years. At a discount rate of 12 percent, what is this job worth to you today?

A.$180,238.81

B.$201,867.47

C.$210,618.19

D.$223,162.58

E.$224,267.10

30.The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 3.25 percent interest compounded monthly. They deposit the first $1,500 today. If the company had wanted to deposit an equivalent lump sum today, how much would they have had to deposit?

A.$82,964.59

B.$83,189.29

C.$83,428.87

D.$83,687.23

E.$84,998.01

31.You need some money today and the only friend you have that has any is your ‘miserly’ friend. He agrees to loan you the money you need, if you make payments of $20 a month for the next six month. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 1.5 percent interest per month. How much money are you borrowing?

A.$113.94

B.$115.65

C.$119.34

D.$119.63

E.$119.96

32.You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first day of each year. What is the value of this annuity today at a 7 percent discount rate?

A.$84,282.98

B.$87,138.04

C.$90,182.79

D.$96,191.91

E.$116,916.21

33.You are scheduled to receive annual payments of $10,000 for each of the next 25 years. Your discount rate is 8.5 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

A.$8,699

B.$9,217

C.$9,706

D.$10,000

E.$10,850

34.You are comparing two annuities with equal present values. The applicable discount rate is 7.5 percent. One annuity pays $5,000 on the first day of each year for twenty years. How much does the second annuity pay each year for twenty years if it pays at the end of each year?

A.$4,651

B.$5,075

C.$5,000

D.$5,375

E.$5,405

35.Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both Martha and Stewart will receive payments for five years. At an 8 percent discount rate, what is the difference in the present value of these two sets of payments?

A.$32.88

B.$40.00

C.$99.01

D.$108.00

E.$112.50

36.What is the future value of $1,000 a year for five years at a 6 percent rate of interest?

A.$4,212.36

B.$5,075.69

C.$5,637.09

D.$6,001.38

E.$6,801.91

37.What is the future value of $2,400 a year for three years at an 8 percent rate of interest?

A.$6,185.03

B.$6,847.26

C.$7,134.16

D.$7,791.36

E.$8,414.67

38.Janet plans on saving $3,000 a year and expects to earn 8.5 percent. How much will Janet have at the end of twenty-five years if she earns what she expects?

A.$219,317.82

B.$230,702.57

C.$236,003.38

D.$244,868.92

E.$256,063.66

39.Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day of each year. They both earn a 9 percent rate of return. What is the difference in their savings account balances at the end of thirty years?

A.$35,822.73

B.$36,803.03

C.$38,911.21

D.$39,803.04

E.$40,115.31

40.You borrow $5,600 to buy a car. The terms of the loan call for monthly payments for four years at a 5.9 percent rate of interest. What is the amount of each payment?

A.$103.22

B.$103.73

C.$130.62

D.$131.26

E.$133.04

41.You borrow $149,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay?

A.$138,086

B.$218,161

C.$226,059

D.$287,086

E.$375,059

42.The Great Giant Corp. has a management contract with their newly hired president. The contract requires a lump sum payment of $25 million be paid to the president upon the completion of her first ten years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 6.5 percent on these funds. How much must the company set aside each year for this purpose?

A.$1,775,042.93

B.$1,798,346.17

C.$1,801,033.67

D.$1,852,617.25

E.$1,938,018.22

43.You retire at age 60 and expect to live another 27 years. On the day you retire, you have $464,900 in your retirement savings account. You are conservative and expect to earn 4.5 percent on your money during your retirement. How much can you withdraw from your retirement savings each month if you plan to die on the day you spend your last penny?

A.$2,001.96

B.$2,092.05

C.$2,398.17

D.$2,472.00

E.$2,481.27

44.The McDonald Group purchased a piece of property for $1.2 million. They paid a down payment of 20 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent compounded monthly. What is the amount of each mortgage payment?

A.$7,440.01

B.$8,978.26

C.$9,036.25

D.$9,399.18

E.$9,413.67

45.You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5 percent. If you want to have this debt paid in full within five years, how much must you pay each month?

A.$471.30

B.$473.65

C.$476.79

D.$479.37

E.$480.40

46.You are buying a previously owned car today at a price of $6,890. You are paying $500 down in cash and financing the balance for 36 months at 7.9 percent. What is the amount of each loan payment?

A.$198.64

B.$199.94

C.$202.02

D.$214.78

E.$215.09

47.The Good Life Insurance Co. wants to sell you an annuity which will pay you $500 per quarter for 25 years. You want to earn a minimum rate of return of 5.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?

A.$26,988.16

B.$27,082.94

C.$27,455.33

D.$28,450.67

E.$28,806.30

48.Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9 percent, what is the current value of the lease?

A.$15,882.75

B.$15,906.14

C.$15,947.61

D.$16,235.42

E.$16,289.54

49.Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35 percent?

A.$36,811.30

B.$37,557.52

C.$39,204.04

D.$39,942.42

E.$40,006.09

50.You recently filed suit against a company. Today, you received three settlement options as follows:
Option A: $10,000 on the first day of each year for 25 years
Option B: $880 on the first day of each month for 25 years
Option C: $119,830 as a lump sum payment today
You can earn 7.5 percent on your investments. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the next 25 years. Which one of the following statements is correct given this information?

A.Option C is clearly the best choice since you can earn 7.5 percent on the entire lump sum starting immediately.

B.Option B is clearly the best choice since it offers the largest number of payments.

C.Option A is clearly the best choice since it has by far the largest future value.

D.Option B is clearly the best choice since it has by far the largest present value.

E.You are relatively indifferent to the three options as they are all approximately equal in value to you.

51.Your firm wants to save $250,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each year starting today. The firm can earn a 4.7 percent rate of return. How much does the firm have to save each year to achieve their goal?

A.$75,966.14

B.$76,896.16

C.$78,004.67

D.$81.414.14

E.$83,333.33

52.Today is January 1. Starting today, Sam is going to contribute $140 on the first of each month to his retirement account. His employer contributes an additional 50 percent of the amount contributed by Sam. If both Sam and his employer continue to do this and Sam can earn a monthly rate of ½ of 1 percent, how much will he have in his retirement account 35 years from now?

A.$199,45.944.

B.$200,456.74

C.$249,981.21

D.$299,189.16

E.$300,685.11

53.You are considering an annuity which costs $100,000 today. The annuity pays $6,000 a year. The rate of return is 4.5 percent. What is the length of the annuity time period?

A.24.96 years

B.29.48 years

C.31.49 years

D.33.08 years

E.38.00 years

54.Today, you signed loan papers agreeing to borrow $4,954.85 at 9 percent compounded monthly. The loan payment is $143.84 a month. How many loan payments must you make before the loan is paid in full?

A.29.89

B.36.00

C.38.88

D.40.00

E.41.03

55.Winston Enterprises would like to buy some additional land and build a new factory. The anticipated total cost is $136 million. The owner of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire expansion project. Management has decided to save $450,000 a month for this purpose. The firm earns 6 percent compounded monthly on the funds it saves. How long does the company have to wait before expanding its operations?

A.184.61 months

B.199.97 months

C.234.34 months

D.284.61 months

E.299.97 months

56.Today, you are retiring. You have a total of $413,926 in your retirement savings and have the funds invested such that you expect to earn an average of 3 percent, compounded monthly, on this money throughout your retirement years. You want to withdraw $2,500 at the beginning of every month, starting today. How long will it be until you run out of money?

A.185.00 months

B.213.29 months

C.227.08 months

D.236.84 months

E.249.69 months

57.The Bad Guys Co. is notoriously known as a slow-payer. They currently need to borrow $25,000 and only one company will even deal with them. The terms of the loan call for daily payments of $30.76. The first payment is due today. The interest rate is 21 percent compounded daily. What is the time period of this loan?

A.2.88 years

B.2.94 years

C.3.00 years

D.3.13 years

E.3.25 years

58.The Robertson Firm is considering a project which costs $123,900 to undertake. The project will yield cash flows of $4,894.35 monthly for 30 months. What is the rate of return on this project?

A.12.53 percent

B.13.44 percent

C.13.59 percent

D.14.02 percent

E.14.59 percent

59.Your insurance agent is trying to sell you an annuity that costs $100,000 today. By buying this annuity, your agent promises that you will receive payments of $384.40 a month for the next 40 years. What is the rate of return on this investment?

A.3.45 percent

B.3.47 percent

C.3.50 percent

D.3.52 percent

E.3.55 percent

60.You have been investing $120 a month for the last 15 years. Today, your investment account is worth $47,341.19. What is your average rate of return on your investments?

A.9.34 percent

B.9.37 percent

C.9.40 percent

D.9.42 percent

E.9.46 percent

61.Brinker, Inc. has been investing $136,000 a year for the past 4 years into a business venture. Today, Brinker sold that venture for $685,000. What is their rate of return on this venture?

A.9.43 percent

B.11.06 percent

C.15.59 percent

D.16.67 percent

E.18.71 percent

62.Your mother helped you start saving $25 a month beginning on your 10thbirthday. She always made you make your deposit on the first day of each month just to “start the month out right”. Today, you turn 21 and have $4,482.66 in your account. What is your rate of return on your savings?

A.5.25 percent

B.5.29 percent

C.5.33 percent

D.5.36 percent

E.5.50 percent

63.Today, you turn 21. Your birthday wish is that you will be a millionaire by your 40thbirthday. In an attempt to reach this goal, you decide to save $25 a day, every day until you turn 40. You open an investment account and deposit your first $25 today. What rate of return must you earn to achieve your goal?

A.15.07 percent

B.15.13 percent

C.15.17 percent

D.15.20 percent

E.15.24 percent

64.Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a 14 percent rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

A.$19,201.76

B.$21,435.74

C.$23,457.96

D.$27,808.17

E.$31,758.00

65.You are considering two savings options. Both options offer a 4 percent rate of return. The first option is to save $1,200, $1,500, and $2,000 a year over the next three years, respectively. The other option is to save one lump sum amount today. If you want to have the same balance in your savings at the end of the three years, regardless of the savings method you select, how much do you need to save today if you select the lump sum option?

A.$4,318.67

B.$4,491.42

C.$4,551.78

D.$4,607.23

E.$4,857.92

66.You are considering two insurance settlement offers. The first offer includes annual payments of $5,000, $7,500, and $10,000 over the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 5 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

A.$19,877.67

B.$20,203.00

C.$21,213.15

D.$23,387.50

E.$24,556.88

67.You are considering a job offer. The job offers an annual salary of $52,000, $55,000, and $60,000 a year for the next three years, respectively. The offer also includes a starting bonus of $2,000 payable immediately. What is this offer worth to you today at a discount rate of 6 percent?

A.$148,283.56

B.$148,383.56

C.$150,283.56

D.$150,383.56

E.$152,983.56

68.You are considering a project with the following cash flows:
Year 1: $1,200
Year 2: $1,800
Year 3: $2,900
What is the present value of these cash flows, given a 9 percent discount rate?

A.$4,713.62

B.$4,855.27

C.$5,103.18

D.$5,292.25

E.$6,853.61

69.You are considering a project with the following cash flows:
Year 1: $5,600
Year 2: $9,000
Year 3: $2,000
What is the present value of these cash flows, given an 11 percent discount rate?

A.$8,695.61

B.$8,700.89

C.$13,732.41

D.$13,812.03

E.$19,928.16

70.You are considering a project with the following cash flows:
Year 1: $4,200
Year 2: $5,600
Year 3: $5,400
What is the present value of these cash flows, given a 3 percent discount rate?

A.$13,732.41

B.$13,812.03

C.$14,308.08

D.$14,941.76

E.$14,987.69

71.You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 8.75 percent, which offer should you accept and why?

A.You should accept the $189,000 today because it has the higher net present value.

B.You should accept the $189,000 today because it has the lower future value.

C.You should accept the second offer because you will receive $200,000 total.

D.You should accept the second offer because you will receive an extra $11,000.

E.You should accept the second offer because it has a present value of $194,555.42.

72.Your local travel agent is advertising an extravagant global vacation. The package deal requires that you pay $5,000 today, $15,000 one year from today, and a final payment of $25,000 on the day you leave two years from today. What is the cost of this vacation in today’s dollars if the discount rate is 6 percent?

A.$39,057.41

B.$41,400.85

C.$43,082.39

D.$44,414.14

E.$46,518.00

73.One year ago, the Jenkins Family Fun Center deposited $3,600 in an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $5,000 to this account. They plan on making a final deposit of $7,500 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a 7 percent rate of return?

A.$18,159.65

B.$19,430.84

C.$19,683.25

D.$20,194.54

E.$20,790.99

74.What is the future value of the following cash flows at the end of year 3 if the interest rate is 6 percent? The cash flows occur at the end of each year.
Year 1: $5,180
Year 2: $9,600
Year 3: $2,250

A.$15,916.78

B.$18,109.08

C.$18,246.25

D.$19,341.02

E.$19,608.07

75.What is the future value of the following cash flows at the end of year 3 if the interest rate is 9 percent? The cash flows occur at the end of each year.
Year 1: $9,820
Year 2: $0
Year 3: $4,510

A.$15,213.80

B.$15,619.70

C.$15,916.78

D.$16,177.14

E.$17,633.08

76.What is the future value of the following cash flows at the end of year 3 if the interest rate is 7.25 percent? The cash flows occur at the end of each year.
Year 1: $6,800
Year 2: $2,100
Year 3: $0

A.$8,758.04

B.$8,806.39

C.$10,073.99

D.$10,314.00

E.$10,804.36

77.Suzette is going to receive $10,000 today as the result of an insurance settlement. In addition, she will receive $15,000 one year from today and $25,000 two years from today. She plans on saving all of this money and investing it for her retirement. If Suzette can earn an average of 11 percent on her investments, how much will she have in her account if she retires 25 years from today?

A.$536,124.93

B.$541,414.14

C.$546,072.91

D.$570,008.77

E.$595,098.67

78.The Bluebird Company has a $10,000 liability they must pay three years from today. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. The plan is to make an initial deposit today and then deposit an additional $2,500 a year for the next three years, starting one year from today. The account pays a 3 percent rate of return. How much does the Bluebird Company need to deposit today?

A.$1,867.74

B.$2,079.89

C.$3,108.09

D.$4,276.34

E.$4,642.28

79.The government has imposed a fine on the Not-So-Legal Company. The fine calls for annual payments of $100,000, $250,000, and $250,000, respectively over the next three years. The first payment is due one year from today. The government plans to invest the funds until the final payment is collected and then donate the entire amount, including investment earnings, to a national health center. The government will earn 3.5 percent on the funds held. How much will the national health center receive three years from today?

A.$613,590.00

B.$614,622.50

C.$615,872.50

D.$616,006.00

E.$619,050.05

80.George Jefferson established a trust fund that provides $150,000 in scholarships each year for worthy students. The trust fund earns a 4.25 percent rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed?

A.$3,291,613.13

B.$3,529,411.77

C.$3,750,000.00

D.$4,328,970.44

E.$6,375,000.00

81.A 9 percent preferred stock pays an annual dividend of $4.50. What is one share of this stock worth today?

A.$.41

B.$4.50

C.$5.00

D.$45.00

E.$50.00

82.You would like to establish a trust fund that will provide $50,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 2.75 percent. How much money must you deposit today to fund this gift for your heirs?

A.$1,333,333.33

B.$1,375,000.00

C.$1,425,000.00

D.$1,666,666.67

E.$1,818,181.82

83.You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

A.3.25 percent

B.3.33 percent

C.3.43 percent

D.3.50 percent

E.3.67 percent

84.The Eternal Gift Insurance Company is offering you a policy that will pay you and your heirs $10,000 a year forever. The cost of the policy is $285,000. What is the rate of return on this policy?

A.2.85 percent

B.3.25 percent

C.3.46 percent

D.3.51 percent

E.3.60 percent

85.Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4 percent rate of return. How much will you receive each year if the trust is required to pay you all of the interest earnings on an annual basis?

A.$3,750

B.$4,000

C.$4,500

D.$5,400

E.$6,000

86.The preferred stock of ABC Co. offers an 8.4 percent rate of return. The stock is currently priced at $50.00 per share. What is the amount of the annual dividend?

A.$2.10

B.$4.20

C.$5.00

D.$6.40

E.$8.60

87.Your credit card company charges you 1.5 percent per month. What is the annual percentage rate on your account?

A.12.00 percent

B.15.00 percent

C.15.39 percent

D.18.00 percent

E.19.56 percent

88.What is the annual percentage rate on a loan with a stated rate of 2 percent per quarter?

A.2.00 percent

B.2.71 percent

C.4.04 percent

D.8.00 percent

E.8.24 percent

89.You are paying an effective annual rate of 13.8 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account?

A.11.50 percent

B.12.00 percent

C.13.00 percent

D.13.80 percent

E.14.71 percent

90.What is the effective annual rate if a bank charges you 7.64 percent compounded quarterly?

A.7.79 percent

B.7.86 percent

C.7.95 percent

D.7.98 percent

E.8.01 percent

91.Your credit card company quotes you a rate of 14.9 percent. Interest is billed monthly. What is the actual rate of interest you are paying?

A.13.97 percent

B.14.90 percent

C.15.48 percent

D.15.96 percent

E.16.10 percent

92.Mr. Miser loans money at an annual rate of 21 percent. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans?

A.22.97 percent

B.23.08 percent

C.23.21 percent

D.23.36 percent

E.23.43 percent

93.You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.45 percent compounded daily. Loan B offers a rate of 7.5 percent compounded semi-annually. Loan _____ is the better offer because______:

A.A; you will pay less interest.

B.A; the annual percentage rate is 7.45 percent.

C.B; the annual percentage rate is 7.64 percent.

D.B; the interest is compounded less frequently.

E.B; the effective annual rate is 7.64 percent.

94.You have $2,500 that you want to use to open a savings account. You have found five different accounts that are acceptable to you. All you have to do now is determine which account you want to use such that you can earn the highest rate of interest possible. Which account should you use based upon the annual percentage rates quoted by each bank?
account A: 3.75 percent, compounded annually
account B: 3.70 percent, compounded monthly
account C: 3.70 percent, compounded semi-annually
account D: 3.65 percent, compounded continuously
account E: 3.66 percent, compounded quarterly

A.account A

B.account B

C.account C

D.account D

E.account E

95.What is the effective annual rate of 14.9 percent compounded continuously?

A.15.96 percent

B.16.01 percent

C.16.05 percent

D.16.07 percent

E.16.17 percent

96.What is the effective annual rate of 9.75 percent compounded continuously?

A.9.99 percent

B.10.11 percent

C.10.24 percent

D.10.28 percent

E.10.30 percent

97.The Smart Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.9 percent annual percentage rate. What is the maximum rate the bank can actually earn based on the quoted rate?

A.7.90 percent

B.8.18 percent

C.8.20 percent

D.8.22 percent

E.8.39 percent

98.You are going to loan your friend $1,000 for one year at a 5 percent rate of interest. How much additional interest can you earn if you compound the rate continuously rather than annually?

A.$.97

B.$1.09

C.$1.27

D.$1.36

E.$1.49

99.You are borrowing money today at an 8 percent interest rate. You will repay the principle plus all the interest in one lump sum of $6,500 three years from today. How much are you borrowing?

A.$5,000.00

B.$5,159.91

C.$5,204.16

D.$5,572.70

E.$6,018.52

100.This morning you borrowed $3,900 at 7.75 percent interest. You are to repay the loan principle plus all of the loan interest in one lump sum two years from today. How much will you have to pay in two years?

A.$4,202.25

B.$4,241.41

C.$4,404.19

D.$4,465.11

E.$4,527.92

101.On this date last year you borrowed $7,450. You have to repay the loan principle plus all of the interest four years from today. The payment that is required at that time is $11,426. What is the interest rate on this loan?

A.7.67 percent

B.8.93 percent

C.10.67 percent

D.11.28 percent

E.13.34 percent

102.You just borrowed $12,750 from the bank to use in your business. The loan terms require you to pay the interest annually with the entire principle due in six years. The interest rate is 8.95 percent. How much will you pay to the bank in year five of the loan?

A.$1,106.67

B.$1,141.13

C.$1,203.17

D.$1,244.98

E.$1,424.58

103.On the day you enter college, you work out a deal with your local bank such that you borrow $9,600 for four years. The terms of the loan include an interest rate of 5.9 percent. The terms also stipulate that the principle is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much will you pay the bank one year after you graduate?

A.$566.40

B.$2,265.60

C.$10,166.40

D.$11,865.60

E.$12,432.00

104.As a college student, you work out a deal with your local bank such that you borrow $12,000 on the day you start college. The terms of the loan include an interest rate of 5 percent. The terms also stipulate that the principle is due in full one year after you graduate. Interest is to be paid annually at the end of each year. If you complete college in four years, how much total interest will you pay to the bank?

A.$600

B.$2,410

C.$2,586

D.$3,000

E.$3,315

105.On June 1, you take out a mortgage in the amount of $124,900 at a 6 percent rate compounded monthly. Payments are to be made at the end of each month for thirty years. How much of the first loan payment is interest? (Assume that each month is equal to 1/12 of a year.)

A.$600.00

B.$624.50

C.$633.33

D.$644.20

E.$648.84

106.On August 1, you borrow $160,000 to buy a house. The mortgage rate is 7.5 percent. The loan is to be repaid in equal monthly payments over 15 years. The first payment is due on September 1. How much of the third payment applies to the principle balance? (Assume that each month is equal to 1/12 of a year.)

A.$483.22

B.$486.24

C.$489.28

D.$492.30

E.$495.32

107.On December 1, you borrow $210,000 to buy a house. The mortgage rate is 8.25 percent. The loan is to be repaid in equal monthly payments over 20 years. The first payment is due on January 1. Which one of the following statements is true assuming that you repay the loan as agreed?

A.The total amount paid is about $429,442.

B.The monthly payment is $2,037.30.

C.The total interest paid is $278,952.

D.The monthly interest rate is .75 percent.

E.The first payment reduces the principle balance by $1,443.75.

108.Using the example of a savings account, explain the difference between the effective annual rate and the annual percentage rate.

109.If you ran a bank, which rate would you rather advertise on monthly-compounded loans, the effective annual rate or the annual percentage rate? Which rate would you rather advertise on quarterly-compounded savings accounts, the effective annual rate or the annual percentage rate? Explain. As a consumer, which would you prefer to see and why?

110.You are considering two annuities, both of which make total annuity payments of $10,000 over their life. Which would be worth more today: annuity A, which pays $1,000 at the end of each year for the next 10 years, or annuity B, which pays $775 at the end of the first year, but the annuity payment grows by $50 each year, reaching $1,225 at the end of year 10? Are there any circumstances in which the two would be equal? Explain.

111.There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.

112.There are three factors that affect the future value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.

113.Should lending laws be changed to require lenders to report the effective annual rate rather than the annual percentage rate? Explain the reasoning for your answer.

114.Annuity A makes annual payments of $813.73 for each of the next 10 years, while annuity B makes annual payments of $500 per year forever. At what interest rate would you be indifferent between the two? At interest rates above this break-even rate, which annuity would you choose? How about at interest rates below the break-even rate?

115.A friend who owns a perpetuity that promises to pay $1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of $1,000. At an interest rate of 10 percent, should you pay the $1,000 today to receive payment numbers 26 and onwards? What does this suggest to you about the value of perpetual payments?

6 Key

1.An annuity stream of cash flow payments is a set of:

A.level cash flows occurring each time period for a fixed length of time.

B.level cash flows occurring each time period forever.

C.increasing cash flows occurring each time period for a fixed length of time.

D.increasing cash flows occurring each time period forever.

E.arbitrary cash flows occurring each time period for no more than 10 years.

Ross – 006 Chapter… #1
Topic: ANNUITY
Type: Definition

2.The present value factor for annuities is calculated as:

A.(1 + present value factor) ¸ r.

B.(1 – present value factor) ¸ r.

C.present value factor + (1 ¸ r).

D.(present value factor x r) + (1 ¸ r).

E.r x (1 + present value factor).

Ross – 006 Chapter… #2
Topic: PRESENT VALUE FACTOR FOR ANNUITIES
Type: Definition

3.The future value factor for annuities is calculated as the:

A.future value factor + r.

B.(1 ¸ r) + (future value factor x r).

C.(1 ¸ r) + future value factor.

D.(future value factor – 1) ¸ r.

E.(future value factor + 1) ¸ r.

Ross – 006 Chapter… #3
Topic: FUTURE VALUE FACTOR FOR ANNUITIES
Type: Definition

4.Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.

A.ordinary annuities; early annuities

B.late annuities; straight annuities

C.straight annuities; late annuities

D.annuities due; ordinary annuities

E.ordinary annuities; annuities due

Ross – 006 Chapter… #4
Topic: ANNUITIES DUE
Type: Definition

5.An annuity stream where the payments occur forever is called a(n):

A.annuity due.

B.indemnity.

C.perpetuity.

D.amortized cash flow stream.

E.amortization table.

Ross – 006 Chapter… #5
Topic: PERPETUITY
Type: Definition

6.The interest rate expressed in terms of the interest payment made each period is called the _____ rate.

A.stated interest

B.compound interest

C.effective annual

D.periodic interest

E.daily interest

Ross – 006 Chapter… #6
Topic: STATED INTEREST RATES
Type: Definition

7.The interest rate expressed as if it were compounded once per year is called the _____ rate.

A.stated interest

B.compound interest

C.effective annual

D.periodic interest

E.daily interest

Ross – 006 Chapter… #7
Topic: EFFECTIVE ANNUAL RATE
Type: Definition

8.The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

A.effective annual

B.annual percentage

C.periodic interest

D.compound interest

E.daily interest

Ross – 006 Chapter… #8
Topic: ANNUAL PERCENTAGE RATE
Type: Definition

9.A loan where the borrower receives money today and repays a single lump sum at some time in the future is called a(n) _____ loan.

A.amortized

B.continuous

C.balloon

D.pure discount

E.interest-only

Ross – 006 Chapter… #9
Topic: PURE DISCOUNT LOAN
Type: Definition

10.A loan where the borrower pays interest each period and repays the entire principal of the loan at some point in the future is called a(n) _____ loan.

A.amortized

B.continuous

C.balloon

D.pure discount

E.interest-only

Ross – 006 Chapter… #10
Topic: INTEREST-ONLY LOAN
Type: Definition

11.A loan where the borrower pays interest each period, and repays some or all of the principal of the loan over time is called a(n) _____ loan.

A.amortized

B.continuous

C.balloon

D.pure discount

E.interest-only

Ross – 006 Chapter… #11
Topic: AMORTIZED LOAN
Type: Definition

12.A loan where the borrower pays interest each period, repays part of the principal of the loan over time, and repays the remainder of the principal at the end of the loan, is called a(n) _____ loan.

A.amortized

B.continuous

C.balloon

D.pure discount

E.interest-only

Ross – 006 Chapter… #12
Topic: BALLOON LOAN
Type: Definition

13.You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

A.Both annuities are of equal value today.

B.Annuity B is an annuity due.

C.Annuity A has a higher future value than annuity B.

D.Annuity B has a higher present value than annuity A.

E.Both annuities have the same future value as of ten years from today.

Ross – 006 Chapter… #13
Topic: ORDINARY ANNUITY VERSUS ANNUITY DUE
Type: Concept

14.You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

A.Both options are of equal value given that they both provide $20,000 of income.

B.Option A is the better choice of the two given any positive rate of return.

C.Option B has a higher present value than option A given a positive rate of return.

D.Option B has a lower future value at year 5 than option A given a zero rate of return.

E.Option A is preferable because it is an annuity due.

Ross – 006 Chapter… #14
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Concept

15.You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects?
I. Both projects have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Both projects have the same future value at any point in time, given a positive rate of return.
IV. Project A has a higher future value than project B, given a positive rate of return.

A.II only

B.IV only

C.I and III only

D.II and IV only

E.I, II, and III only

Ross – 006 Chapter… #15
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE
Type: Concept

16.A perpetuity differs from an annuity because:

A.perpetuity payments vary with the rate of inflation.

B.perpetuity payments vary with the market rate of interest.

C.perpetuity payments are variable while annuity payments are constant.

D.perpetuity payments never cease.

E.annuity payments never cease.

Ross – 006 Chapter… #16
Topic: PERPETUITY VERSUS ANNUITY
Type: Concept

17.Which one of the following statements concerning the annual percentage rate is correct?

A.The annual percentage rate considers interest on interest.

B.The rate of interest you actually pay on a loan is called the annual percentage rate.

C.The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly.

D.When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.

E.The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

Ross – 006 Chapter… #17
Topic: ANNUAL PERCENTAGE RATE
Type: Concept

18.Which one of the following statements concerning interest rates is correct?

A.The stated rate is the same as the effective annual rate.

B.An effective annual rate is the rate that applies if interest were charged annually.

C.The annual percentage rate increases as the number of compounding periods per year increases.

D.Banks prefer more frequent compounding on their savings accounts.

E.For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

Ross – 006 Chapter… #18
Topic: INTEREST RATES
Type: Concept

19.Which of the following statements concerning the effective annual rate are correct?
I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates.
II. The more frequently interest is compounded, the higher the effective annual rate.
III. A quoted rate of 6 percent compounded continuously has a higher effective annual rate than if the rate were compounded daily.
IV. When choosing which loan to accept, you should select the offer with the highest effective annual rate.

A.I and II only

B.I and IV only

C.I, II, and III only

D.II, III, and IV only

E.I, II, III,and IV

Ross – 006 Chapter… #19
Topic: EFFECTIVE ANNUAL RATE
Type: Concept

20.The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed as:

A..09e-1.

B.e.09x q.

C.e x (1 + .09).

D.e09- 1.

E.(1 + .09)q.

Ross – 006 Chapter… #20
Topic: CONTINUOUS COMPOUNDING
Type: Concept

21.A pure discount loan is a(n):

A.example of a present value problem.

B.loan that is interest-free.

C.loan that gives you a discount if you pay your payments on time.

D.loan that requires all interest to be paid at the time the loan is made.

E.loan that discounts the payments if you pay them in advance.

Ross – 006 Chapter… #21
Topic: PURE DISCOUNT LOAN
Type: Concept

22.The principle amount of an interest-only loan is:

A.never repaid.

B.repaid in equal increments and included in each loan payment.

C.repaid in full at the end of the loan period.

D.repaid in equal annual payments even when the loan interest is repaid monthly.

E.repaid in increasing increments and included in each loan payment.

Ross – 006 Chapter… #22
Topic: INTEREST-ONLY LOAN
Type: Concept

23.An amortized loan:

A.requires the principle amount to be repaid in even increments over the life of the loan.

B.may have equal or increasing amounts applied to the principle from each loan payment.

C.requires that all interest be repaid on a monthly basis while the principle is repaid at the end of the loan term.

D.requires that all payments be equal in amount and include both principle and interest.

E.is the type of loan that describes most corporate bonds.

Ross – 006 Chapter… #23
Topic: AMORTIZED LOAN
Type: Concept

24.Your parents are giving you $100 a month for four years while you are in college. At a 6 percent discount rate, what are these payments worth to you when you first start college?

A.$3,797.40

B.$4,167.09

C.$4,198.79

D.$4,258.03

E.$4,279.32

Ross – 006 Chapter… #24
Topic: ORDINARY ANNUITY AND PRESENT VALUE
Type: Problem

25.You just won the lottery! As your prize you will receive $1,200 a month for 100 months. If you can earn 8 percent on your money, what is this prize worth to you today?

A.$87,003.69

B.$87,380.23

C.$87,962.77

D.$88,104.26

E.$90,723.76

Ross – 006 Chapter… #25
Topic: ORDINARY ANNUITY AND PRESENT VALUE
Type: Problem

26.Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9 percent, how much can Todd afford to borrow to buy a car?

A.$6,961.36

B.$8,499.13

C.$8,533.84

D.$8,686.82

E.$9,588.05

Ross – 006 Chapter… #26
Topic: ORDINARY ANNUITY AND PRESENT VALUE
Type: Problem

27.You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5 percent on your money. Which option should you take and why?

A.You should accept the payments because they are worth $56,451.91 today.

B.You should accept the payments because they are worth $56,523.74 today.

C.You should accept the payments because they are worth $56,737.08 today.

D.You should accept the $50,000 because the payments are only worth $47,757.69 today.

E.You should accept the $50,000 because the payments are only worth $47,808.17 today.

Ross – 006 Chapter… #27
Topic: ORDINARY ANNUITY AND PRESENT VALUE
Type: Problem

28.Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5 percent. Given these assumptions, what is this employee benefit worth to you today?

A.$13,144.43

B.$15,920.55

C.$16,430.54

D.$16,446.34

E.$16,519.02

Ross – 006 Chapter… #28
Topic: ORDINARY ANNUITY AND PRESENT VALUE
Type: Problem

29.You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of $50,000 for the next five years. At a discount rate of 12 percent, what is this job worth to you today?

A.$180,238.81

B.$201,867.47

C.$210,618.19

D.$223,162.58

E.$224,267.10

Ross – 006 Chapter… #29
Topic: ORDINARY ANNUITY AND PRESENT VALUE
Type: Problem

30.The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 3.25 percent interest compounded monthly. They deposit the first $1,500 today. If the company had wanted to deposit an equivalent lump sum today, how much would they have had to deposit?

A.$82,964.59

B.$83,189.29

C.$83,428.87

D.$83,687.23

E.$84,998.01

Ross – 006 Chapter… #30
Topic: ANNUITY DUE AND PRESENT VALUE
Type: Problem

31.You need some money today and the only friend you have that has any is your ‘miserly’ friend. He agrees to loan you the money you need, if you make payments of $20 a month for the next six month. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 1.5 percent interest per month. How much money are you borrowing?

A.$113.94

B.$115.65

C.$119.34

D.$119.63

E.$119.96

Ross – 006 Chapter… #31
Topic: ANNUITY DUE AND PRESENT VALUE
Type: Problem

32.You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first day of each year. What is the value of this annuity today at a 7 percent discount rate?

A.$84,282.98

B.$87,138.04

C.$90,182.79

D.$96,191.91

E.$116,916.21

Ross – 006 Chapter… #32
Topic: ANNUITY DUE AND PRESENT VALUE
Type: Problem

33.You are scheduled to receive annual payments of $10,000 for each of the next 25 years. Your discount rate is 8.5 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

A.$8,699

B.$9,217

C.$9,706

D.$10,000

E.$10,850

Ross – 006 Chapter… #33
Topic: ORDINARY ANNUITY VERSUS ANNUITY DUE
Type: Problem

34.You are comparing two annuities with equal present values. The applicable discount rate is 7.5 percent. One annuity pays $5,000 on the first day of each year for twenty years. How much does the second annuity pay each year for twenty years if it pays at the end of each year?

A.$4,651

B.$5,075

C.$5,000

D.$5,375

E.$5,405

Ross – 006 Chapter… #34
Topic: ORDINARY ANNUITY VERSUS ANNUITY DUE
Type: Problem

35.Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both Martha and Stewart will receive payments for five years. At an 8 percent discount rate, what is the difference in the present value of these two sets of payments?

A.$32.88

B.$40.00

C.$99.01

D.$108.00

E.$112.50

Ross – 006 Chapter… #35
Topic: ORDINARY ANNUITY VERSUS ANNUITY DUE
Type: Problem

36.What is the future value of $1,000 a year for five years at a 6 percent rate of interest?

A.$4,212.36

B.$5,075.69

C.$5,637.09

D.$6,001.38

E.$6,801.91

Ross – 006 Chapter… #36
Topic: ORDINARY ANNUITY AND FUTURE VALUE
Type: Problem

37.What is the future value of $2,400 a year for three years at an 8 percent rate of interest?

A.$6,185.03

B.$6,847.26

C.$7,134.16

D.$7,791.36

E.$8,414.67

Ross – 006 Chapter… #37
Topic: ORDINARY ANNUITY AND FUTURE VALUE
Type: Problem

38.Janet plans on saving $3,000 a year and expects to earn 8.5 percent. How much will Janet have at the end of twenty-five years if she earns what she expects?

A.$219,317.82

B.$230,702.57

C.$236,003.38

D.$244,868.92

E.$256,063.66

Ross – 006 Chapter… #38
Topic: ORDINARY ANNUITY AND FUTURE VALUE
Type: Problem

39.Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day of each year. They both earn a 9 percent rate of return. What is the difference in their savings account balances at the end of thirty years?

A.$35,822.73

B.$36,803.03

C.$38,911.21

D.$39,803.04

E.$40,115.31

Ross – 006 Chapter… #39
Topic: ANNUITY DUE VERSUS ORDINARY ANNUITY
Type: Problem

40.You borrow $5,600 to buy a car. The terms of the loan call for monthly payments for four years at a 5.9 percent rate of interest. What is the amount of each payment?

A.$103.22

B.$103.73

C.$130.62

D.$131.26

E.$133.04

Ross – 006 Chapter… #40
Topic: ORDINARY ANNUITY PAYMENTS
Type: Problem

41.You borrow $149,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay?

A.$138,086

B.$218,161

C.$226,059

D.$287,086

E.$375,059

Ross – 006 Chapter… #41
Topic: ORDINARY ANNUITY PAYMENTS AND COST OF IN
Type: Problem

42.The Great Giant Corp. has a management contract with their newly hired president. The contract requires a lump sum payment of $25 million be paid to the president upon the completion of her first ten years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 6.5 percent on these funds. How much must the company set aside each year for this purpose?

A.$1,775,042.93

B.$1,798,346.17

C.$1,801,033.67

D.$1,852,617.25

E.$1,938,018.22

Ross – 006 Chapter… #42
Topic: ORDINARY ANNUITY PAYMENTS AND FUTURE VAL
Type: Problem

43.You retire at age 60 and expect to live another 27 years. On the day you retire, you have $464,900 in your retirement savings account. You are conservative and expect to earn 4.5 percent on your money during your retirement. How much can you withdraw from your retirement savings each month if you plan to die on the day you spend your last penny?

A.$2,001.96

B.$2,092.05

C.$2,398.17

D.$2,472.00

E.$2,481.27

Ross – 006 Chapter… #43
Topic: ORDINARY ANNUITY PAYMENTS AND PRESENT VA
Type: Problem

44.The McDonald Group purchased a piece of property for $1.2 million. They paid a down payment of 20 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent compounded monthly. What is the amount of each mortgage payment?

A.$7,440.01

B.$8,978.26

C.$9,036.25

D.$9,399.18

E.$9,413.67

Ross – 006 Chapter… #44
Topic: ORDINARY ANNUITY PAYMENTS AND PRESENT VA
Type: Problem

45.You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5 percent. If you want to have this debt paid in full within five years, how much must you pay each month?

A.$471.30

B.$473.65

C.$476.79

D.$479.37

E.$480.40

Ross – 006 Chapter… #45
Topic: ORDINARY ANNUITY PAYMENTS AND PRESENT VA
Type: Problem

46.You are buying a previously owned car today at a price of $6,890. You are paying $500 down in cash and financing the balance for 36 months at 7.9 percent. What is the amount of each loan payment?

A.$198.64

B.$199.94

C.$202.02

D.$214.78

E.$215.09

Ross – 006 Chapter… #46
Topic: ORDINARY ANNUITY PAYMENTS AND PRESENT VA
Type: Problem

47.The Good Life Insurance Co. wants to sell you an annuity which will pay you $500 per quarter for 25 years. You want to earn a minimum rate of return of 5.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?

A.$26,988.16

B.$27,082.94

C.$27,455.33

D.$28,450.67

E.$28,806.30

Ross – 006 Chapter… #47
Topic: ORDINARY ANNUITY PAYMENTS AND PRESENT VA
Type: Problem

48.Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9 percent, what is the current value of the lease?

A.$15,882.75

B.$15,906.14

C.$15,947.61

D.$16,235.42

E.$16,289.54

Ross – 006 Chapter… #48
Topic: ANNUITY DUE PAYMENTS AND PRESENT VALUE
Type: Problem

49.Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35 percent?

A.$36,811.30

B.$37,557.52

C.$39,204.04

D.$39,942.42

E.$40,006.09

Ross – 006 Chapter… #49
Topic: ANNUITY DUE PAYMENTS AND PRESENT VALUE
Type: Problem

50.You recently filed suit against a company. Today, you received three settlement options as follows:
Option A: $10,000 on the first day of each year for 25 years
Option B: $880 on the first day of each month for 25 years
Option C: $119,830 as a lump sum payment today
You can earn 7.5 percent on your investments. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the next 25 years. Which one of the following statements is correct given this information?

A.Option C is clearly the best choice since you can earn 7.5 percent on the entire lump sum starting immediately.

B.Option B is clearly the best choice since it offers the largest number of payments.

C.Option A is clearly the best choice since it has by far the largest future value.

D.Option B is clearly the best choice since it has by far the largest present value.

E.You are relatively indifferent to the three options as they are all approximately equal in value to you.

Ross – 006 Chapter… #50
Topic: ANNUITY DUE PAYMENTS AND PRESENT VALUE
Type: Problem

51.Your firm wants to save $250,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each year starting today. The firm can earn a 4.7 percent rate of return. How much does the firm have to save each year to achieve their goal?

A.$75,966.14

B.$76,896.16

C.$78,004.67

D.$81.414.14

E.$83,333.33

Ross – 006 Chapter… #51
Topic: ANNUITY DUE PAYMENTS AND FUTURE VALUE
Type: Problem

52.Today is January 1. Starting today, Sam is going to contribute $140 on the first of each month to his retirement account. His employer contributes an additional 50 percent of the amount contributed by Sam. If both Sam and his employer continue to do this and Sam can earn a monthly rate of ½ of 1 percent, how much will he have in his retirement account 35 years from now?

A.$199,45.944.

B.$200,456.74

C.$249,981.21

D.$299,189.16

E.$300,685.11

Ross – 006 Chapter… #52
Topic: ANNUITY DUE PAYMENTS AND FUTURE VALUE
Type: Problem

53.You are considering an annuity which costs $100,000 today. The annuity pays $6,000 a year. The rate of return is 4.5 percent. What is the length of the annuity time period?

A.24.96 years

B.29.48 years

C.31.49 years

D.33.08 years

E.38.00 years

Ross – 006 Chapter… #53
Topic: ORDINARY ANNUITY TIME PERIODS AND PRESEN
Type: Problem

54.Today, you signed loan papers agreeing to borrow $4,954.85 at 9 percent compounded monthly. The loan payment is $143.84 a month. How many loan payments must you make before the loan is paid in full?

A.29.89

B.36.00

C.38.88

D.40.00

E.41.03

Ross – 006 Chapter… #54
Topic: ORDINARY ANNUITY TIME PERIODS AND PRESEN
Type: Problem

55.Winston Enterprises would like to buy some additional land and build a new factory. The anticipated total cost is $136 million. The owner of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire expansion project. Management has decided to save $450,000 a month for this purpose. The firm earns 6 percent compounded monthly on the funds it saves. How long does the company have to wait before expanding its operations?

A.184.61 months

B.199.97 months

C.234.34 months

D.284.61 months

E.299.97 months

Ross – 006 Chapter… #55
Topic: ORDINARY ANNUITY TIME PERIODS AND FUTURE
Type: Problem

56.Today, you are retiring. You have a total of $413,926 in your retirement savings and have the funds invested such that you expect to earn an average of 3 percent, compounded monthly, on this money throughout your retirement years. You want to withdraw $2,500 at the beginning of every month, starting today. How long will it be until you run out of money?

A.185.00 months

B.213.29 months

C.227.08 months

D.236.84 months

E.249.69 months

Ross – 006 Chapter… #56
Topic: ANNUITY DUE TIME PERIODS AND PRESENT VAL
Type: Problem

57.The Bad Guys Co. is notoriously known as a slow-payer. They currently need to borrow $25,000 and only one company will even deal with them. The terms of the loan call for daily payments of $30.76. The first payment is due today. The interest rate is 21 percent compounded daily. What is the time period of this loan?

A.2.88 years

B.2.94 years

C.3.00 years

D.3.13 years

E.3.25 years

Ross – 006 Chapter… #57
Topic: ANNUITY DUE TIME PERIODS
Type: Problem

58.The Robertson Firm is considering a project which costs $123,900 to undertake. The project will yield cash flows of $4,894.35 monthly for 30 months. What is the rate of return on this project?

A.12.53 percent

B.13.44 percent

C.13.59 percent

D.14.02 percent

E.14.59 percent

Ross – 006 Chapter… #58
Topic: ORDINARY ANNUITY INTEREST RATE
Type: Problem

59.Your insurance agent is trying to sell you an annuity that costs $100,000 today. By buying this annuity, your agent promises that you will receive payments of $384.40 a month for the next 40 years. What is the rate of return on this investment?

A.3.45 percent

B.3.47 percent

C.3.50 percent

D.3.52 percent

E.3.55 percent

Ross – 006 Chapter… #59
Topic: ORDINARY ANNUITY INTEREST RATE
Type: Problem

60.You have been investing $120 a month for the last 15 years. Today, your investment account is worth $47,341.19. What is your average rate of return on your investments?

A.9.34 percent

B.9.37 percent

C.9.40 percent

D.9.42 percent

E.9.46 percent

Ross – 006 Chapter… #60
Topic: ORDINARY ANNUITY INTEREST RATE
Type: Problem

61.Brinker, Inc. has been investing $136,000 a year for the past 4 years into a business venture. Today, Brinker sold that venture for $685,000. What is their rate of return on this venture?

A.9.43 percent

B.11.06 percent

C.15.59 percent

D.16.67 percent

E.18.71 percent

Ross – 006 Chapter… #61
Topic: ORDINARY ANNUITY INTEREST RATE
Type: Problem

62.Your mother helped you start saving $25 a month beginning on your 10thbirthday. She always made you make your deposit on the first day of each month just to “start the month out right”. Today, you turn 21 and have $4,482.66 in your account. What is your rate of return on your savings?

A.5.25 percent

B.5.29 percent

C.5.33 percent

D.5.36 percent

E.5.50 percent

Ross – 006 Chapter… #62
Topic: ANNUITY DUE INTEREST RATE
Type: Problem

63.Today, you turn 21. Your birthday wish is that you will be a millionaire by your 40thbirthday. In an attempt to reach this goal, you decide to save $25 a day, every day until you turn 40. You open an investment account and deposit your first $25 today. What rate of return must you earn to achieve your goal?

A.15.07 percent

B.15.13 percent

C.15.17 percent

D.15.20 percent

E.15.24 percent

Ross – 006 Chapter… #63
Topic: ANNUITY DUE INTEREST RATE
Type: Problem

64.Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a 14 percent rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

A.$19,201.76

B.$21,435.74

C.$23,457.96

D.$27,808.17

E.$31,758.00

Ross – 006 Chapter… #64
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

65.You are considering two savings options. Both options offer a 4 percent rate of return. The first option is to save $1,200, $1,500, and $2,000 a year over the next three years, respectively. The other option is to save one lump sum amount today. If you want to have the same balance in your savings at the end of the three years, regardless of the savings method you select, how much do you need to save today if you select the lump sum option?

A.$4,318.67

B.$4,491.42

C.$4,551.78

D.$4,607.23

E.$4,857.92

Ross – 006 Chapter… #65
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

66.You are considering two insurance settlement offers. The first offer includes annual payments of $5,000, $7,500, and $10,000 over the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 5 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

A.$19,877.67

B.$20,203.00

C.$21,213.15

D.$23,387.50

E.$24,556.88

Ross – 006 Chapter… #66
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

67.You are considering a job offer. The job offers an annual salary of $52,000, $55,000, and $60,000 a year for the next three years, respectively. The offer also includes a starting bonus of $2,000 payable immediately. What is this offer worth to you today at a discount rate of 6 percent?

A.$148,283.56

B.$148,383.56

C.$150,283.56

D.$150,383.56

E.$152,983.56

Ross – 006 Chapter… #67
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

68.You are considering a project with the following cash flows:
Year 1: $1,200
Year 2: $1,800
Year 3: $2,900
What is the present value of these cash flows, given a 9 percent discount rate?

A.$4,713.62

B.$4,855.27

C.$5,103.18

D.$5,292.25

E.$6,853.61

Ross – 006 Chapter… #68
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

69.You are considering a project with the following cash flows:
Year 1: $5,600
Year 2: $9,000
Year 3: $2,000
What is the present value of these cash flows, given an 11 percent discount rate?

A.$8,695.61

B.$8,700.89

C.$13,732.41

D.$13,812.03

E.$19,928.16

Ross – 006 Chapter… #69
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

70.You are considering a project with the following cash flows:
Year 1: $4,200
Year 2: $5,600
Year 3: $5,400
What is the present value of these cash flows, given a 3 percent discount rate?

A.$13,732.41

B.$13,812.03

C.$14,308.08

D.$14,941.76

E.$14,987.69

Ross – 006 Chapter… #70
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

71.You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 8.75 percent, which offer should you accept and why?

A.You should accept the $189,000 today because it has the higher net present value.

B.You should accept the $189,000 today because it has the lower future value.

C.You should accept the second offer because you will receive $200,000 total.

D.You should accept the second offer because you will receive an extra $11,000.

E.You should accept the second offer because it has a present value of $194,555.42.

Ross – 006 Chapter… #71
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

72.Your local travel agent is advertising an extravagant global vacation. The package deal requires that you pay $5,000 today, $15,000 one year from today, and a final payment of $25,000 on the day you leave two years from today. What is the cost of this vacation in today’s dollars if the discount rate is 6 percent?

A.$39,057.41

B.$41,400.85

C.$43,082.39

D.$44,414.14

E.$46,518.00

Ross – 006 Chapter… #72
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE
Type: Problem

73.One year ago, the Jenkins Family Fun Center deposited $3,600 in an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $5,000 to this account. They plan on making a final deposit of $7,500 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a 7 percent rate of return?

A.$18,159.65

B.$19,430.84

C.$19,683.25

D.$20,194.54

E.$20,790.99

Ross – 006 Chapter… #73
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE
Type: Problem

74.What is the future value of the following cash flows at the end of year 3 if the interest rate is 6 percent? The cash flows occur at the end of each year.
Year 1: $5,180
Year 2: $9,600
Year 3: $2,250

A.$15,916.78

B.$18,109.08

C.$18,246.25

D.$19,341.02

E.$19,608.07

Ross – 006 Chapter… #74
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE
Type: Problem

75.What is the future value of the following cash flows at the end of year 3 if the interest rate is 9 percent? The cash flows occur at the end of each year.
Year 1: $9,820
Year 2: $0
Year 3: $4,510

A.$15,213.80

B.$15,619.70

C.$15,916.78

D.$16,177.14

E.$17,633.08

Ross – 006 Chapter… #75
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE
Type: Problem

76.What is the future value of the following cash flows at the end of year 3 if the interest rate is 7.25 percent? The cash flows occur at the end of each year.
Year 1: $6,800
Year 2: $2,100
Year 3: $0

A.$8,758.04

B.$8,806.39

C.$10,073.99

D.$10,314.00

E.$10,804.36

Ross – 006 Chapter… #76
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE
Type: Problem

77.Suzette is going to receive $10,000 today as the result of an insurance settlement. In addition, she will receive $15,000 one year from today and $25,000 two years from today. She plans on saving all of this money and investing it for her retirement. If Suzette can earn an average of 11 percent on her investments, how much will she have in her account if she retires 25 years from today?

A.$536,124.93

B.$541,414.14

C.$546,072.91

D.$570,008.77

E.$595,098.67

Ross – 006 Chapter… #77
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE
Type: Problem

78.The Bluebird Company has a $10,000 liability they must pay three years from today. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. The plan is to make an initial deposit today and then deposit an additional $2,500 a year for the next three years, starting one year from today. The account pays a 3 percent rate of return. How much does the Bluebird Company need to deposit today?

A.$1,867.74

B.$2,079.89

C.$3,108.09

D.$4,276.34

E.$4,642.28

Ross – 006 Chapter… #78
Topic: PRESENT VALUE, PAYMENTS AND FUTURE VALUE
Type: Problem

79.The government has imposed a fine on the Not-So-Legal Company. The fine calls for annual payments of $100,000, $250,000, and $250,000, respectively over the next three years. The first payment is due one year from today. The government plans to invest the funds until the final payment is collected and then donate the entire amount, including investment earnings, to a national health center. The government will earn 3.5 percent on the funds held. How much will the national health center receive three years from today?

A.$613,590.00

B.$614,622.50

C.$615,872.50

D.$616,006.00

E.$619,050.05

Ross – 006 Chapter… #79
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE
Type: Problem

80.George Jefferson established a trust fund that provides $150,000 in scholarships each year for worthy students. The trust fund earns a 4.25 percent rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed?

A.$3,291,613.13

B.$3,529,411.77

C.$3,750,000.00

D.$4,328,970.44

E.$6,375,000.00

Ross – 006 Chapter… #80
Topic: PERPETUITY PRESENT VALUE
Type: Problem

81.A 9 percent preferred stock pays an annual dividend of $4.50. What is one share of this stock worth today?

A.$.41

B.$4.50

C.$5.00

D.$45.00

E.$50.00

Ross – 006 Chapter… #81
Topic: PERPETUITY PRESENT VALUE
Type: Problem

82.You would like to establish a trust fund that will provide $50,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 2.75 percent. How much money must you deposit today to fund this gift for your heirs?

A.$1,333,333.33

B.$1,375,000.00

C.$1,425,000.00

D.$1,666,666.67

E.$1,818,181.82

Ross – 006 Chapter… #82
Topic: PERPETUITY PRESENT VALUE
Type: Problem

83.You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

A.3.25 percent

B.3.33 percent

C.3.43 percent

D.3.50 percent

E.3.67 percent

Ross – 006 Chapter… #83
Topic: PERPETUITY DISCOUNT RATE
Type: Problem

84.The Eternal Gift Insurance Company is offering you a policy that will pay you and your heirs $10,000 a year forever. The cost of the policy is $285,000. What is the rate of return on this policy?

A.2.85 percent

B.3.25 percent

C.3.46 percent

D.3.51 percent

E.3.60 percent

Ross – 006 Chapter… #84
Topic: PERPETUITY DISCOUNT RATE
Type: Problem

85.Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4 percent rate of return. How much will you receive each year if the trust is required to pay you all of the interest earnings on an annual basis?

A.$3,750

B.$4,000

C.$4,500

D.$5,400

E.$6,000

Ross – 006 Chapter… #85
Topic: PERPETUITY PAYMENT
Type: Problem

86.The preferred stock of ABC Co. offers an 8.4 percent rate of return. The stock is currently priced at $50.00 per share. What is the amount of the annual dividend?

A.$2.10

B.$4.20

C.$5.00

D.$6.40

E.$8.60

Ross – 006 Chapter… #86
Topic: PERPETUITY PAYMENT
Type: Problem

87.Your credit card company charges you 1.5 percent per month. What is the annual percentage rate on your account?

A.12.00 percent

B.15.00 percent

C.15.39 percent

D.18.00 percent

E.19.56 percent

Ross – 006 Chapter… #87
Topic: ANNUAL PERCENTAGE RATE
Type: Problem

88.What is the annual percentage rate on a loan with a stated rate of 2 percent per quarter?

A.2.00 percent

B.2.71 percent

C.4.04 percent

D.8.00 percent

E.8.24 percent

Ross – 006 Chapter… #88
Topic: ANNUAL PERCENTAGE RATE
Type: Problem

89.You are paying an effective annual rate of 13.8 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account?

A.11.50 percent

B.12.00 percent

C.13.00 percent

D.13.80 percent

E.14.71 percent

Ross – 006 Chapter… #89
Topic: ANNUAL PERCENTAGE RATE
Type: Problem

90.What is the effective annual rate if a bank charges you 7.64 percent compounded quarterly?

A.7.79 percent

B.7.86 percent

C.7.95 percent

D.7.98 percent

E.8.01 percent

Ross – 006 Chapter… #90
Topic: EFFECTIVE ANNUAL RATE
Type: Problem

91.Your credit card company quotes you a rate of 14.9 percent. Interest is billed monthly. What is the actual rate of interest you are paying?

A.13.97 percent

B.14.90 percent

C.15.48 percent

D.15.96 percent

E.16.10 percent

Ross – 006 Chapter… #91
Topic: EFFECTIVE ANNUAL RATE
Type: Problem

92.Mr. Miser loans money at an annual rate of 21 percent. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans?

A.22.97 percent

B.23.08 percent

C.23.21 percent

D.23.36 percent

E.23.43 percent

Ross – 006 Chapter… #92
Topic: EFFECTIVE ANNUAL RATE
Type: Problem

93.You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.45 percent compounded daily. Loan B offers a rate of 7.5 percent compounded semi-annually. Loan _____ is the better offer because______:

A.A; you will pay less interest.

B.A; the annual percentage rate is 7.45 percent.

C.B; the annual percentage rate is 7.64 percent.

D.B; the interest is compounded less frequently.

E.B; the effective annual rate is 7.64 percent.

Ross – 006 Chapter… #93
Topic: EFFECTIVE ANNUAL RATE
Type: Problem

94.You have $2,500 that you want to use to open a savings account. You have found five different accounts that are acceptable to you. All you have to do now is determine which account you want to use such that you can earn the highest rate of interest possible. Which account should you use based upon the annual percentage rates quoted by each bank?
account A: 3.75 percent, compounded annually
account B: 3.70 percent, compounded monthly
account C: 3.70 percent, compounded semi-annually
account D: 3.65 percent, compounded continuously
account E: 3.66 percent, compounded quarterly

A.account A

B.account B

C.account C

D.account D

E.account E

Ross – 006 Chapter… #94
Topic: EFFECTIVE ANNUAL RATE
Type: Problem

95.What is the effective annual rate of 14.9 percent compounded continuously?

A.15.96 percent

B.16.01 percent

C.16.05 percent

D.16.07 percent

E.16.17 percent

Ross – 006 Chapter… #95
Topic: CONTINUOUS COMPOUNDING
Type: Problem

96.What is the effective annual rate of 9.75 percent compounded continuously?

A.9.99 percent

B.10.11 percent

C.10.24 percent

D.10.28 percent

E.10.30 percent

Ross – 006 Chapter… #96
Topic: CONTINUOUS COMPOUNDING
Type: Problem

97.The Smart Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.9 percent annual percentage rate. What is the maximum rate the bank can actually earn based on the quoted rate?

A.7.90 percent

B.8.18 percent

C.8.20 percent

D.8.22 percent

E.8.39 percent

Ross – 006 Chapter… #97
Topic: CONTINUOUS COMPOUNDING
Type: Problem

98.You are going to loan your friend $1,000 for one year at a 5 percent rate of interest. How much additional interest can you earn if you compound the rate continuously rather than annually?

A.$.97

B.$1.09

C.$1.27

D.$1.36

E.$1.49

Ross – 006 Chapter… #98
Topic: CONTINUOUS COMPOUNDING VERSUS ANNUAL COM
Type: Problem

99.You are borrowing money today at an 8 percent interest rate. You will repay the principle plus all the interest in one lump sum of $6,500 three years from today. How much are you borrowing?

A.$5,000.00

B.$5,159.91

C.$5,204.16

D.$5,572.70

E.$6,018.52

Ross – 006 Chapter… #99
Topic: PURE DISCOUNT LOAN
Type: Problem

100.This morning you borrowed $3,900 at 7.75 percent interest. You are to repay the loan principle plus all of the loan interest in one lump sum two years from today. How much will you have to pay in two years?

A.$4,202.25

B.$4,241.41

C.$4,404.19

D.$4,465.11

E.$4,527.92

Ross – 006 Chapter… #100
Topic: PURE DISCOUNT LOAN
Type: Problem

101.On this date last year you borrowed $7,450. You have to repay the loan principle plus all of the interest four years from today. The payment that is required at that time is $11,426. What is the interest rate on this loan?

A.7.67 percent

B.8.93 percent

C.10.67 percent

D.11.28 percent

E.13.34 percent

Ross – 006 Chapter… #101
Topic: PURE DISCOUNT LOAN
Type: Problem

102.You just borrowed $12,750 from the bank to use in your business. The loan terms require you to pay the interest annually with the entire principle due in six years. The interest rate is 8.95 percent. How much will you pay to the bank in year five of the loan?

A.$1,106.67

B.$1,141.13

C.$1,203.17

D.$1,244.98

E.$1,424.58

Ross – 006 Chapter… #102
Topic: INTEREST ONLY LOAN
Type: Problem

103.On the day you enter college, you work out a deal with your local bank such that you borrow $9,600 for four years. The terms of the loan include an interest rate of 5.9 percent. The terms also stipulate that the principle is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much will you pay the bank one year after you graduate?

A.$566.40

B.$2,265.60

C.$10,166.40

D.$11,865.60

E.$12,432.00

Ross – 006 Chapter… #103
Topic: INTEREST ONLY LOAN
Type: Problem

104.As a college student, you work out a deal with your local bank such that you borrow $12,000 on the day you start college. The terms of the loan include an interest rate of 5 percent. The terms also stipulate that the principle is due in full one year after you graduate. Interest is to be paid annually at the end of each year. If you complete college in four years, how much total interest will you pay to the bank?

A.$600

B.$2,410

C.$2,586

D.$3,000

E.$3,315

Ross – 006 Chapter… #104
Topic: INTEREST ONLY LOAN
Type: Problem

105.On June 1, you take out a mortgage in the amount of $124,900 at a 6 percent rate compounded monthly. Payments are to be made at the end of each month for thirty years. How much of the first loan payment is interest? (Assume that each month is equal to 1/12 of a year.)

A.$600.00

B.$624.50

C.$633.33

D.$644.20

E.$648.84

Ross – 006 Chapter… #105
Topic: AMORTIZED LOAN
Type: Problem

106.On August 1, you borrow $160,000 to buy a house. The mortgage rate is 7.5 percent. The loan is to be repaid in equal monthly payments over 15 years. The first payment is due on September 1. How much of the third payment applies to the principle balance? (Assume that each month is equal to 1/12 of a year.)

A.$483.22

B.$486.24

C.$489.28

D.$492.30

E.$495.32

Ross – 006 Chapter… #106
Topic: AMORTIZED LOAN
Type: Problem

107.On December 1, you borrow $210,000 to buy a house. The mortgage rate is 8.25 percent. The loan is to be repaid in equal monthly payments over 20 years. The first payment is due on January 1. Which one of the following statements is true assuming that you repay the loan as agreed?

A.The total amount paid is about $429,442.

B.The monthly payment is $2,037.30.

C.The total interest paid is $278,952.

D.The monthly interest rate is .75 percent.

E.The first payment reduces the principle balance by $1,443.75.

Ross – 006 Chapter… #107
Topic: AMORTIZED LOAN
Type: Problem

108.Using the example of a savings account, explain the difference between the effective annual rate and the annual percentage rate.

The effective annual rate is what you actually earn, the annual percentage rate is a quoted rate. If interest is compounded during the year, the ending balance of a savings account cannot be calculated directly using the annual percentage rate. Also, in the case of the savings account, the effective annual rate will always be higher than the annual percentage rate as long as the account is compounded more than once a year and the interest rate is greater than zero.

Ross – 006 Chapter… #108
Topic: EFFECTIVE ANNUAL RATE VERSUS ANNUAL PERC

109.If you ran a bank, which rate would you rather advertise on monthly-compounded loans, the effective annual rate or the annual percentage rate? Which rate would you rather advertise on quarterly-compounded savings accounts, the effective annual rate or the annual percentage rate? Explain. As a consumer, which would you prefer to see and why?

A bank would rather advertise the annual percentage rate on loans since this rate is lower and the effective annual rate on savings accounts since this rate is higher. As a consumer, the effective annual rate is the more important rate since it represents the rate actually paid or earned.

Ross – 006 Chapter… #109
Topic: EFFECTIVE ANNUAL RATE VERSUS ANNUAL PERC

110.You are considering two annuities, both of which make total annuity payments of $10,000 over their life. Which would be worth more today: annuity A, which pays $1,000 at the end of each year for the next 10 years, or annuity B, which pays $775 at the end of the first year, but the annuity payment grows by $50 each year, reaching $1,225 at the end of year 10? Are there any circumstances in which the two would be equal? Explain.

The second annuity weights its payments more toward the back of the period, rather than the front, making it less valuable unless the discount rate is zero. Some students may get tripped up by the fact that the two annuities have the same total payments. This would clearly demonstrate a lack of understanding of the time value of money.

Ross – 006 Chapter… #110
Topic: COMPARING ANNUITIES

111.There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.

The factors are the interest rate, payment amount, and number of payments. An increase in the payment and number of payments will increase the present value, while an increase in the interest rate will decrease the present value.

Ross – 006 Chapter… #111
Topic: PRESENT VALUE OF AN ANNUITY

112.There are three factors that affect the future value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.

The factors are the interest rate, payment amount, and number of payments. An increase in any of these three will increase the future value of the annuity.

Ross – 006 Chapter… #112
Topic: FUTURE VALUE OF AN ANNUITY

113.Should lending laws be changed to require lenders to report the effective annual rate rather than the annual percentage rate? Explain the reasoning for your answer.

It would be more meaningful for consumers to know the effective annual rate rather than the annual percentage rate. The effective annual rate is slightly more difficult to calculate and also more difficult to explain, and may add confusion to the loan process. However, regardless of the costs, it would appear that consumers would benefit from learning what the effective annual rate is as opposed to the annual percentage rate.

Ross – 006 Chapter… #113
Topic: EFFECTIVE ANNUAL RATE VERSUS ANNUAL PERC

114.Annuity A makes annual payments of $813.73 for each of the next 10 years, while annuity B makes annual payments of $500 per year forever. At what interest rate would you be indifferent between the two? At interest rates above this break-even rate, which annuity would you choose? How about at interest rates below the break-even rate?

This requires the students to actually use the present value formulas, setting the present value annuity equal to the present value of a perpetuity and solving for the interest rate that makes the two equivalent. The first step is recognizing that the indifference point occurs when the two present values are equal. The break-even rate is 10 percent: below that rate, the perpetuity is better, while above that rate, the 10-year annuity is preferred.

Ross – 006 Chapter… #114
Topic: COMPARING ANNUITIES AND PERPETUITIES

115.A friend who owns a perpetuity that promises to pay $1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of $1,000. At an interest rate of 10 percent, should you pay the $1,000 today to receive payment numbers 26 and onwards? What does this suggest to you about the value of perpetual payments?

The present value of the perpetuity is $10,000, and the present value of the first 25 payments is $9,077.04, thus you should be willing to pay only $922.96 for payments 26 and onwards. This suggests that the value of a perpetuity is derived primarily from the payments received early in its life, and the payments to be received later have little worth today.

Ross – 006 Chapter… #115
Topic: PERPETUITY PAYMENTS

6 Summary

Category# of Questions
Ross – 006 Chapter…115
Topic: AMORTIZED LOAN5
Topic: ANNUAL PERCENTAGE RATE5
Topic: ANNUITIES DUE1
Topic: ANNUITY1
Topic: ANNUITY DUE AND PRESENT VALUE3
Topic: ANNUITY DUE INTEREST RATE2
Topic: ANNUITY DUE PAYMENTS AND FUTURE VALUE2
Topic: ANNUITY DUE PAYMENTS AND PRESENT VALUE3
Topic: ANNUITY DUE TIME PERIODS1
Topic: ANNUITY DUE TIME PERIODS AND PRESENT VAL1
Topic: ANNUITY DUE VERSUS ORDINARY ANNUITY1
Topic: BALLOON LOAN1
Topic: COMPARING ANNUITIES1
Topic: COMPARING ANNUITIES AND PERPETUITIES1
Topic: CONTINUOUS COMPOUNDING4
Topic: CONTINUOUS COMPOUNDING VERSUS ANNUAL COM1
Topic: EFFECTIVE ANNUAL RATE7
Topic: EFFECTIVE ANNUAL RATE VERSUS ANNUAL PERC3
Topic: FUTURE VALUE FACTOR FOR ANNUITIES1
Topic: FUTURE VALUE OF AN ANNUITY1
Topic: INTEREST ONLY LOAN3
Topic: INTEREST RATES1
Topic: INTEREST-ONLY LOAN2
Topic: ORDINARY ANNUITY AND FUTURE VALUE3
Topic: ORDINARY ANNUITY AND PRESENT VALUE6
Topic: ORDINARY ANNUITY INTEREST RATE4
Topic: ORDINARY ANNUITY PAYMENTS1
Topic: ORDINARY ANNUITY PAYMENTS AND COST OF IN1
Topic: ORDINARY ANNUITY PAYMENTS AND FUTURE VAL1
Topic: ORDINARY ANNUITY PAYMENTS AND PRESENT VA5
Topic: ORDINARY ANNUITY TIME PERIODS AND FUTURE1
Topic: ORDINARY ANNUITY TIME PERIODS AND PRESEN2
Topic: ORDINARY ANNUITY VERSUS ANNUITY DUE4
Topic: PERPETUITY1
Topic: PERPETUITY DISCOUNT RATE2
Topic: PERPETUITY PAYMENT2
Topic: PERPETUITY PAYMENTS1
Topic: PERPETUITY PRESENT VALUE3
Topic: PERPETUITY VERSUS ANNUITY1
Topic: PRESENT VALUE FACTOR FOR ANNUITIES1
Topic: PRESENT VALUE OF AN ANNUITY1
Topic: PRESENT VALUE, PAYMENTS AND FUTURE VALUE1
Topic: PURE DISCOUNT LOAN5
Topic: STATED INTEREST RATES1
Topic: UNEVEN CASH FLOWS AND FUTURE VALUE7
Topic: UNEVEN CASH FLOWS AND PRESENT VALUE10
Type: Concept11
Type: Definition12
Type: Problem84

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