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What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?


A) 8.95%
B) 9.39%
C) 9.86%
D) 10.36%
E) 10.88%

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

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Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly.The loan (principal plus interest) must be repaid at the end of the year.Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?


A) 0.52%
B) 0.44%
C) 0.36%
D) 0.30%
E) 0.24%

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

Correct Answer

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a rate of 6.5%, what is the future value of the following cash flow stream?


A) $526.01
B) $553.69
C) $582.83
D) $613.51
E) $645.80

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

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much would $100, growing at 5% per year, be worth after 75 years?


A) $3,689.11
B) $3,883.27
C) $4,077.43
D) $4,281.30
E) $4,495.37

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

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want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions, how much will you have 3 years from today?


A) $20,993
B) $22,098
C) $23,261
D) $24,424
E) $25,645

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

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lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

A) True
B) False

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greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

A) True
B) False

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What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?


A) $8,509
B) $8,957
C) $9,428
D) $9,924
E) $10,446

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

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we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

A) True
B) False

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Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?


A) 8.24%
B) 8.45%
C) 8.66%
D) 8.88%
E) 9.10%

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

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other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.

A) True
B) False

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January 1, 2009, your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for 2009?


A) $17,419.55
B) $17,593.75
C) $17,769.68
D) $17,947.38
E) $18,126.85

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

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Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?


A) 18.58%
B) 19.56%
C) 20.54%
D) 21.57%
E) 22.65%

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

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


A) 23
B) 27
C) 32
D) 38
E) 44

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

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After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own business.You expect to save and deposit $7,500 a year for the first 6 years The first deposit will be made a year from today.In addition, your grandfather just gave you a $25,000 graduation gift which you will deposit immediately If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?


A) $238,176
B) $250,712
C) $263,907
D) $277,797
E) $291,687

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

Correct Answer

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the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

A) True
B) False

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plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?


A) The cash flows are in the form of a deferred annuity, and they total to $100,000.You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
B) The discount rate decreases.
C) The riskiness of the investment's cash flows increases.
D) The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.
E) The discount rate increases.

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

Correct Answer

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annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?


A) $77.19
B) $81.25
C) $85.31
D) $89.58
E) $94.06

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

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


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

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

Correct Answer

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$50,000 loan is to be amortized over 7 years, with annual end-of-year payments.Which of these statements is CORRECT?


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

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

Correct Answer

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