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You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?


A) $11,973
B) $12,603
C) $13,267
D) $13,930
E) $14,626

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

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As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

A) True
B) False

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Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?


A) 8.46%
B) 8.90%
C) 9.37%
D) 9.86%
E) 10.38%

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

Correct Answer

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Which of the following statements is CORRECT?


A) If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
B) If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
C) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.
D) If you solve for I and get a negative number, then you must have made a mistake.
E) If CF0 is positive and all the other CFs are negative, then you can still solve for I.

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

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


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

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

Correct Answer

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You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?


A) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
B) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
C) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
D) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.
E) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

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

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Which of the following statements is CORRECT?


A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
D) Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.
E) Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

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

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Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. Merchants Bank offers to lend you the $50,000, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?


A) 1.56%
B) 1.30%
C) 1.09%
D) 0.91%
E) 0.72%

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

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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) C) and D)
G) B) and E)

Correct Answer

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What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?


A) $3,089
B) $3,251
C) $3,422
D) $3,602
E) $3,782

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

Correct Answer

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

Correct Answer

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Five years ago, Greenery Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?


A) 15.54%
B) 16.36%
C) 17.18%
D) 18.04%
E) 18.94%

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

Correct Answer

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You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?


A) 12.37
B) 13.74
C) 15.27
D) 16.97
E) 18.85

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

Correct Answer

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Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.


A) 7.12%
B) 7.49%
C) 7.87%
D) 8.26%
E) 8.67%

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

Correct Answer

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What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?


A) $16,576
B) $17,449
C) $18,367
D) $19,334
E) $20,352

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

Correct Answer

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Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?


A) 73.67%
B) 77.55%
C) 81.63%
D) 85.93%
E) 90.45%

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

Correct Answer

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

Correct Answer

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


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

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

Correct Answer

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A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

A) True
B) False

Correct Answer

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