Question 1

Suppose you put in $500 in a savings account today, another $400 in 1 years' time. The interest rate on the savings account is 6%. How much money will you have in the savings account at the end of 2 years?

A) $954.00.
B) $985.80.
C) $1,484.00.
D) None of the above. Not enough information has been provided.

$985.80.

Accepted Answer

Using the techniques from Topic 5 and keeping in mind that the initial $500 has been invested for 2 years and the $400 for only a year, we need to calculate the future values of these investments. The answer is $985.80

Question 2

Suppose you put in $500 in a savings account today, another $400 in 1 years' time and $500 in 3 years' time. The interest rate on the savings account is 6%. How much money will you have in the savings account at the end of 4 years?

A) $2,268.88.
B) $2,131.92.
C) $1,637.55.
D) None of the above. Not enough information has been provided.

$1,637.55.

Accepted Answer

The same technique as Question 1 is being used. Students need to keep in mind that the initial $500 is being invested for 4 years, the $400 for 3 years and the other $500 for only a year. The final answer is $1,637.55.

Question 3

Suppose James wants to buy a car in 3 years' time and estimates that he will need $25,000. The interest rate that he can earn from a savings account is 6% per annum. If James can put in $7,000 today, $6,000 in one year's time and $5,000 in 2 years' time, how much will he have to come up with at the end of the third year to buy his car?

A) He does not require more money as the total amount earned from the savings account at the end of 3 years will be enough.
B) $4,621.29.
C) $20,378.71.
D) None of the above. Not enough information has been provided.

$4,621.29.

Accepted Answer

Once more, the same technique as the previous two questions is used. In this particular question, students need to calculate the total face value of the savings over three years and minus it from the cost of the car at the end of 3 years.

Question 4

An investment paying $1,000 in 1 year, $2,000 in 2 years and $7,000 in 3 years returning 10% per annum has a present value of:&#10;A) $6,002.54.&#10;B) $7,210.20.&#10;C) $7,821.19.&#10;D) $8,129.39.

Accepted Answer

The present value (PV) of an investment is calculated by discounting each future payment back to its value in present terms using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the annual interest rate, and n is the number of years until the payment is received. For this investment, the present value calculations for each payment are as follows:1. For $1,000 in 1 year: PV = $1,000 / (1 + 0.10)^1 = $909.092. For $2,000 in 2 years: PV = $2,000 / (1 + 0.10)^2 = $1,652.893. For $7,000 in 3 years: PV = $7,000 / (1 + 0.10)^3 = $5,259.21Adding these together gives the total present value of the investment: $909.09 + $1,652.89 + $5,259.21 = $7,821.19.

Question 5

An investment paying $2,000 in 2 years, $6,000 in 4 years and $5,000 in 12 years at an interest rate of 5% per annum has a present value of:&#10;A) $6,505.29.&#10;B) $7,354.21.&#10;C) $9,534.46.&#10;D) $12,090.49.

Accepted Answer

The present value (PV) of each cash flow is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of years. Calculating each: $2,000/(1.05)^2 + $6,000/(1.05)^4 + $5,000/(1.05)^12 gives a total PV of approximately $9,534.46.

Question 6

At an interest rate of 15% per annum, cash flows of $1,000 today, $2,000 in 1 year and $6,000 in 2 years have a future value in 2 years of:&#10;A) $10,200.46.&#10;B) $9,709.37.&#10;C) $8,700.00.&#10;D) $9,622.50.

Accepted Answer

The answer of At an interest rate of 15% per...

Question 7

Sheetal has made an investment that will pay her $11,455, $16,376, and $19,812 at the end of the next three years. Her investment was to earn her a return of 14 per cent. How much did she invest? (Round to the nearest dollar.)

A) $33,124.
B) $36,022.
C) $39,208.
D) $41,675.

Accepted Answer

To find out how much Sheetal invested, we need to calculate the present value of the future cash flows ($11,455, $16,376, and $19,812) discounted at the given rate of return (14%). The formula for the present value of a future amount is:$$ PV = \frac{FV}{(1 + r)^n} $$where $PV$ is the present value, $FV$ is the future value, $r$ is the rate of return, and $n$ is the number of periods.For each cash flow, we calculate its present value and sum them up:1. For $11,455 at the end of year 1:$$ PV_1 = \frac{11,455}{(1 + 0.14)^1} = \frac{11,455}{1.14} = 10,044.74 $$2. For $16,376 at the end of year 2:$$ PV_2 = \frac{16,376}{(1 + 0.14)^2} = \frac{16,376}{1.2996} = 12,598.82 $$3. For $19,812 at the end of year 3:$$ PV_3 = \frac{19,812}{(1 + 0.14)^3} = \frac{19,812}{1.4816} = 13,378.44 $$Adding these up:$$ Total \, PV = 10,044.74 + 12,598.82 + 13,378.44 = 36,022 $$Rounded to the nearest dollar, Sheetal invested $36,022.

Question 8

Suppose you open an account into which you deposit $200 semi-annually for 10 years. If the account pays 13% compounded semi-annually, how much will be in the account at the end of the 10 year period?&#10;A) $2,698.88.&#10;B) $7,765.06.&#10;C) $16,189.37.&#10;D) None of the above.

Accepted Answer

The account pays semi-annually compounding interest. As such, the n and i values in the future value of annuity formula need to be altered accordingly. Students should end up with $ 7765.06 as their final answer.

Question 9

The present value of an ordinary annuity paying $100 for 12 years at an interest rate of 9.25% per annum is:&#10;A) $707.14.&#10;B) $829.61.&#10;C) $843.05.&#10;D) $856.39.

Accepted Answer

The present value of an ordinary annuity is calculated using the formula:PV = PMT * [1 - (1 + r)^-n] / rwhere:PMT is the payment amountr is the interest rate per periodn is the number of periodsIn this case, PMT = $100, r = 9.25% / 12 = 0.007708, and n = 12. Plugging these values into the formula, we get:PV = $100 * [1 - (1 + 0.007708)^-12] / 0.007708PV = $100 * [1 - 0.567426] / 0.007708PV = $100 * 0.432574 / 0.007708PV = $843.05Therefore, the correct answer is C) $843.05.

Question 10

Julia is saving to buy a new car in four years. She will save $5,500 at the end of each of the next four years. If she invests her savings at 6.75 per cent, how much will she have after four years? (Round to the nearest dollar.)

A) $23,345.
B) $22,000.
C) $24,329.
D) $27,556.

Accepted Answer

Julia is making a series of equal annual investments, which is a classic example of an annuity. The future value of an annuity can be calculated using the formula: FV = P * [((1 + r)^n - 1) / r], where P is the payment amount, r is the annual interest rate, and n is the number of periods. Plugging in Julia's numbers: P = $5,500, r = 0.0675 (6.75%), and n = 4, we get FV = $5,500 * [((1 + 0.0675)^4 - 1) / 0.0675] ≈ $24,329 when rounded to the nearest dollar.

Question 11

Nadeen has funded a retirement investment with $250,000 earning a return of 5.75 per cent. What is the value of the payment that she can receive in a perpetuity? (Round to the nearest dollar.)&#10;A) $12,150.&#10;B) $14,375.&#10;C) $14,900.&#10;D) $15,250.

Accepted Answer

The answer of Nadeen has funded a retirement investment with...

Question 12

A lakefront cottage is selling at $100,000, with a $25,000 deposit, and the remainder mortgaged at 12 % per annum, to be amortised over 30 years. What is the monthly mortgage payment?&#10;A) $1,906.11.&#10;B) $792.90.&#10;C) $771.46.&#10;D) $931.77.

Accepted Answer

The answer of A lakefront cottage is selling at $100,000,...

Question 13

Your firm is looking at expanding its operations and need to borrow $2 million for 5 years. Three banks have submitted their interest rate quotes (all Annual percentage rates): Bank A: 15% compounded daily; Bank B: 15% compounded weekly; and Bank C: 15% compounded monthly. Which bank should the firm borrow from?

A) Bank A.
B) Bank B.
C) Bank C.
D) Any bank would do since the APR is the same across all banks.

Accepted Answer

The answer of Your firm is looking at expanding its...

Question 14

Your firm has generated extra profits and decides to put some money in a savings account. Three banks have submitted their interest rate quotes (all Annual percentage rates): Bank A: 15% compounded daily; Bank B: 15% compounded weekly; and Bank C: 15% compounded monthly. Which bank should the firm borrow from?

A) Bank A.
B) Bank B.
C) Bank C.
D) Any bank would do since the APR is the same across all banks.

Accepted Answer

The answer of Your firm has generated extra profits and...

Question 15

ABC Ltd borrowed $152,300 from a bank for three years. If the quoted rate (APR) is 11.75 per cent, and the compounding is daily, what is the effective annual rate (EAR)? (Round to one decimal place.)&#10;A) 11.6%&#10;B) 11.7%&#10;C) 12.5%&#10;D) 14.3%

Accepted Answer

The answer of ABC Ltd borrowed $152,300 from a bank...

Question 16

Thelma borrows $10,000 from &#34;Jaw Breaker Joe&#34; and promises to repay Joe a total of $10,500 in one month. What is the effective annual interest rate charged by Joe?&#10;A) 79.6%.&#10;B) 5.0%.&#10;C) 60.0%.&#10;D) 179.6%.

Accepted Answer

The answer of Thelma borrows $10,000 from &#34;Jaw Breaker Joe&#34;...

Deck 3: Discounted Cash Flows and Valuation