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Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

A) True
B) False

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Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?


A) $22,598.63
B) $23,788.03
C) $25,040.03
D) $26,357.92
E) $27,675.82

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

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The 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 greater the present value of a given lump sum to be received at some future date.

A) True
B) False

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You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?


A) 5.14
B) 5.71
C) 6.35
D) 7.05
E) 7.84

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

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Last year Dania Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?


A) $ 845.03
B) $ 889.51
C) $ 936.33
D) $ 983.14
E) $1,032.30

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

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Pace Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?


A) $120.83
B) $126.88
C) $133.22
D) $139.88
E) $146.87

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

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Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?


A) $2,404.91
B) $2,531.49
C) $2,658.06
D) $2,790.96
E) $2,930.51

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

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You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?


A) $1,122.54
B) $1,181.62
C) $1,240.70
D) $1,302.74
E) $1,367.88

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

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Suppose Community 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) A) and C)
G) A) and D)

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Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

A) True
B) False

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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) All of the above
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 PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
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 cannot solve for I.

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

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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 C)
G) A) and B)

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You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?


A) $15,234.08
B) $16,035.87
C) $16,837.67
D) $17,679.55
E) $18,563.53

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

Correct Answer

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


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

Correct Answer

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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 B)
G) B) and E)

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You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?


A) $5,493.71
B) $5,782.85
C) $6,087.21
D) $6,407.59
E) $6,744.83

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

Correct Answer

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Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?


A) $1,063,968
B) $1,119,966
C) $1,178,912
D) $1,240,960
E) $1,303,008

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

Correct Answer

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Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?


A) $ 825,835
B) $ 869,300
C) $ 915,052
D) $ 963,213
E) $1,011,374

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

Correct Answer

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The 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

Correct Answer

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