Question 1

Which set of payments is the most valuable given 12% APR interest?

Accepted Answer

The present value of option A, which is receiving $100.00 monthly for the next 12 months, can be calculated using the formula PV = (PMT/i) * (1 - 1/(1+i)^n) where PMT is the monthly payment, i is the interest rate per month (APR/12), and n is the number of periods (12). Plugging in the values, we get PV = (100/0.01) * (1 - 1/(1.01)^12) = $1,126.51. This is the highest present value compared to the other options, making it the most valuable set of payments.

Question 2

A $300,000.00 thirty year mortgage has a monthly payment of $1,798.65. Over the life of the mortgage, how much money do you pay in interest?

Accepted Answer

The total amount paid over 30 years is $1,798.65 * 360 months = $647,514.00. Subtracting the principal of $300,000.00, the interest paid is $647,514.00 - $300,000.00 = $347,514.00.

Question 3

You currently have $600,000.00 in the bank and intend to withdrawal $60,000.00 from the account annually beginning next year. Assuming the account earns 10% annually, how long can you keep withdrawing $60,000.00 from the account?

Accepted Answer

This scenario describes a perpetual withdrawal situation where the annual interest earned (10% of $600,000 = $60,000) equals the annual withdrawal amount. Therefore, the principal remains intact, allowing withdrawals to continue indefinitely.

Question 4

Find the present value of a payment stream of $100 per year for the first fifteen years and $200 per year for the next five years, given a 12% discount rate.

Accepted Answer

The present value of the first fifteen years is $100 * (1 - (1 + 0.12)^-15) / 0.12 = $813. The present value of the next five years is $200 * (1 - (1 + 0.12)^-5) / 0.12 = $589. The total present value is $813 + $589 = $1,402.

Question 5

A business is expected to generate the following cash flows over the next five years after which it will be dissolved. How much is the business worth today if the interest rate is 8%?

Accepted Answer

The answer of A business is expected to generate the...

Question 6

The cash flow projected in a perpetuity is defined as a:

Accepted Answer

The answer of The cash flow projected in a perpetuity...

Question 7

A cash flow projected tomorrow for a specific period of time is a:

Accepted Answer

A cash flow projected tomorrow for a specific period of time represents the future value of a single sum, indicating the amount of money in the future as opposed to its current or present value.

Question 8

A $300,000.00 thirty year mortgage has a monthly payment of $1,798.65. Assuming a mortgage rate of 6% APR, how much interest is due on the first mortgage payment?

Accepted Answer

The answer of A $300,000.00 thirty year mortgage has a...

Question 9

The future value of an annuity:

Accepted Answer

The future value of an annuity is the end sum of all payments and all interest if each payment is deposited when received. This means that the total amount of money received after a set number of payments, with interest included, is the future value of the annuity.

Question 10

Which of the following cash flows is equivalent to receiving $125.00 today assuming a 9% annual discount rate?

Accepted Answer

The present value of $192.33 received five years from today at a 9% discount rate is approximately $125.00.

Question 11

The discounted value of a sum is its:

Accepted Answer

The discounted value of a sum refers to its present value, which takes into account the time value of money by adjusting for the interest or discount rate. The future value of a sum refers to the value of that sum at a future point in time, and is not directly related to its discounted value. Amortized value refers to the gradual reduction of a loan or bond's principal over time, while book value refers to the value of an asset as recorded on a company's balance sheet, and is not necessarily related to its discounted value.

Question 12

"Term" is defined as:

Accepted Answer

"Term" is commonly defined as a period of time, such as the term of a lease, a loan, or a contract. While the other options may be related to finance and investments, they do not accurately reflect the definition of the term in this context.

Question 13

Assuming a 5% annual discount rate, what is the value of receiving $100.00 annual payments perpetually starting today?

Accepted Answer

The answer of Assuming a 5% annual discount rate, what...

Question 14

You are considering an investment that will pay you $100 in Year 1, $500 in Year 2, $0 in Year 3 and $600 in Year 4. If you require a 12% return, what is the most you should pay for this investment today? (Round to nearest $)

Accepted Answer

To find the present value of the investment, we need to discount each cash flow back to present value using the required rate of return of 12%. Using the present value formula, we get:
PV = $100/(1+0.12)^1 + $500/(1+0.12)^2 + $0/(1+0.12)^3 + $600/(1+0.12)^4
PV = $100/1.12 + $500/1.2544 + $0/1.4049 + $600/1.5735
PV = $89.29 + $398.94 + $0 + $381.07
PV = $869.30
Therefore, the most you should pay for this investment today is $869. Rounded to the nearest dollar, the answer is B: $869.

Question 15

A thirty year $200,000.00 mortgage has a monthly payment of $1,199.10 based on a rate of 6% APR. After making 180 payments over fifteen years, how much of the mortgage do you still owe?

Accepted Answer

First, we need to calculate the remaining number of payments. 15 years is 180 months, so the total number of payments for a 30 year mortgage is 360.

Next, we need to calculate how much has been paid off in 180 payments. Using an amortization calculator, we find that after 180 payments, $57,901.85 of the mortgage has been paid off.

Finally, to find out how much is still owed, we subtract the amount paid off from the original mortgage amount of $200,000.

$200,000 - $57,901.85 = $142,098.15

Therefore, the answer is C.

Question 16

If you owe $1,200.00, which is the most advantageous way to pay it back assuming a 12% APR discount rate?

Accepted Answer

Paying the full amount after one year is the most advantageous because the 12% APR discount rate implies that the present value of the future payment is less than $1,200.00, making it cheaper in today's terms compared to spreading payments over time.

Question 17

Under which compounding frequency will you earn the most on an investment receiving 12% APR in interest?

Accepted Answer

Compounding more frequently will result in a higher effective annual interest rate (EAR), which means you will ultimately earn more interest on your investment. Monthly compounding will result in the highest EAR, followed by quarterly, semi-annually, and annually. Therefore, choice A is the best option.

Question 18

Assuming a 6% annual discount rate, what is the value of receiving $100.00 annually perpetually beginning next year?

Accepted Answer

To calculate the present value of an annuity perpetuity, we can use the formula PV = (Annual payment / Discount rate).
In this case, the annual payment is $100. The discount rate is 6%. 
Therefore, PV = ($100 / 0.06) = $1,666.67.
The correct answer is C.

Question 19

A cash flow projected today for a specific period of time is a:

Accepted Answer

The answer of A cash flow projected today for a...

Question 20

A cash flow projected today for a future period of time is a:

Accepted Answer