Question 1

BB&C bank has agreed to lend you $30,000 today, but you must repay $42,135 in 3 years.What rate is the bank charging you?
A)10%
B)11%
C)12%
D)13%

Accepted Answer

PVIFᵢ,₃ = $30,000/$42,135 = 0.712;or 12% from Table II

Question 2

Many IRA fund managers argue that investors should invest at the beginning of the year rather than at the end.What is the difference to an investor who invests $2,000 per year at 11 percent over a 30 year period?
A)$43,785
B)$36,189
C)$54,244
D)There is no difference

Accepted Answer

FVAN₃₀ = $2,000(199.021) = $398,042 FVAND₃₀ = $2,000(199.021)(1.11) = $441,827
Difference = $43,785

Question 3

Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40 year working life and then retire.What will Billy have if the account will earn 10 percent compounded annually?
A)$394,786
B)$23,470
C)$1,062,223
D)$810,917

Accepted Answer

FVAN₄₀ = $2,400(442.593) = $1,062,223

Question 4

You have just won a $50,000 bond that pays no interest and matures in 20 years.If the discount rate is 10%, what is the present value of your bond?
A)$7,450
B)$8,175
C)$8,900
D)$1,490

Accepted Answer

PV = $50,000(0.149) = $7,450

Question 5

Idlewild Bank has granted you a seven year loan for $50,000.If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging?
A)14%
B)23%
C)12.6%
D)11%

Accepted Answer

PVIFA = $50,000/$11,660.45 = 4.288;or 14% from Table IV

Question 6

An insurance company offers you an end of year annuity of $48,000 per year for the next 20 years.They claim your return on the annuity is 9 percent.What should you be willing to pay today for this annuity?
A)$429,600
B)$438,144
C)$408,672
D)$398,144

Accepted Answer

PVAN = $48,000(9.128) = $438,144

Question 7

John is 25 years old and wishes to retire in 30 years.His plan is to invest in a mutual fund earning a 12 percent annual return and have a $1 million retirement fund at age 55.How much must he invest at the end of each year to achieve this goal?
A)$7,499.96
B)$5,024.60
C)$4,143.65
D)$33,333.33

Accepted Answer

PMT = $1,000,000/241.333 = $4,143.65

Question 8

New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the next 15 years.If you must pay $109,296 today for this annuity, what is your expected rate of return?
A)8%
B)9%
C)7%
D)10%

Accepted Answer

PVIFA = $109,296/$12,000 = 9.108;or 7% from Table IV

Question 9

Designs Now is opening a showcase office to display and sell its computer designed poster art.Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year.If Designs uses 11 percent as its discount rate, what is the present value of the cash flows?
A)$429,720
B)$457,620
C)$456,000
D)$424,820

Accepted Answer

PV = $120,000(0.901) + $180,000(0.812) + $240,000(0.731) = $429,720

Question 10

Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer.The loan requires five equal annual end of the year payments.If the loan provides the bank with a 12 percent return, what will be your annual payments?
A)$5,548
B)$3,148.12
C)$6,000
D)$1,666.67

Accepted Answer

PMT = $20,000/3.605 = $5,547.85

Question 11

The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years.At a discount rate of 14 percent, what is the present value of this stream of lease payments?
A)$130,872
B)$149,194
C)$142,710
D)$264,000

Accepted Answer

PVAND = $24,000(5.453)(1 + 0.14) = $149,194

Question 12

Joe Brady just won a $450,000 lottery in Pennsylvania.Instead of receiving a lump sum, he found that he would receive $22,500 annually (end of year) for 20 years.Joe is 75 years old and wants his money now.He has been offered $140,827 to sell his ticket.What rate of return is the buyer expecting to make if Joe accepts the offer?
A)less than 1%
B)15%
C)18%
D12%

Accepted Answer

PVIFA = $140,827/$22,500 = 6.259;or 15% from Table IV

Question 13

In six years, your daughter will be going to college.You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college.How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years?
A)$29,744.65
B)$29,783.76
C)$17,878.80
D)$21,651.10

Accepted Answer

PVAN = $10,000(3.170) = $31,700 PV = $31,700(0.564) = $17,878.80

Question 14

Your firm, New Sunrise, has just leased a $28,000 BMW for you.The lease requires six beginning of the year payments that will fully amortize the cost of the car.What is the amount of the payments if the interest rate is 12 percent?
A)$6,810.99
B)$7,766.99
C)$6,423.74
D)$6,081.25

Accepted Answer

PMT = $28,000/(4.111)(1.12) = $6,081.25

Question 15

The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years.What is the future value of this lottery if you plan to put each payment in an account earning 9 percent?
A)$2.28 million
B)$12.79 million
C)$14.32 million
D)$5.00 million

Accepted Answer

FVAN₂₀ = $250,000(51.160) = $12,790,000

Question 16

Alabama Power has preferred stock that pays an annual dividend of $9.44.If the security has no maturity, what is its value to an investor who wishes to obtain a 9 percent rate of return?
A)$84.96
B)$104.89
C)$95.34
D)$94.40

Accepted Answer

PVPER = $9.44/0.09 = $104.89

Question 17

Baggos has seen their EPS increase from $0.30 to $3.16 in seven years.What has been the growth rate of Baggos's EPS?
A)about 30%
B)about 40%
C)about 20%
D)about 10%

Accepted Answer

FVIFᵢ,₇ = $3.16/$0.30 = 10.53;or 40 percent from Table I

Question 18

Jane wants to have $200,000 in an account in 20 years.If her account earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000?
A)$25,116
B)$3,115
C)$10,000
D)$3,492

Accepted Answer

PMT = $200,000/64.203 = $3,115

Question 19

What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded monthly for five years?
A)$17,623.42
B)$18,170
C)$16,105.10
D)$16,122.26

Accepted Answer

FV = $10,000(1 + 0.12/12)¹²⁽⁵⁾ = $18,170 (using 1% factor for 60 periods from Table I)

Question 20

What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded monthly?
A)9.92%
B)9.74%
C)10.02%
D)9.86%

Accepted Answer

iₑff = (1 + .095/12)¹² - 1 = 0.0992 or 9.92%

Quiz 5: The Time Value of Money

BB&C bank has agreed to lend you $30,000 today, but you must repay $42,135 in 3 years.What rate is the bank charging you?

Many IRA fund managers argue that investors should invest at the beginning of the year rather than at the end.What is the difference to an investor who invests $2,000 per year at 11 percent over a 30 year period?

Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40 year working life and then retire.What will Billy have if the account will earn 10 percent compounded annually?

You have just won a $50,000 bond that pays no interest and matures in 20 years.If the discount rate is 10%, what is the present value of your bond?

Idlewild Bank has granted you a seven year loan for $50,000.If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging?

An insurance company offers you an end of year annuity of $48,000 per year for the next 20 years.They claim your return on the annuity is 9 percent.What should you be willing to pay today for this annuity?

John is 25 years old and wishes to retire in 30 years.His plan is to invest in a mutual fund earning a 12 percent annual return and have a $1 million retirement fund at age 55.How much must he invest at the end of each year to achieve this goal?

New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the next 15 years.If you must pay $109,296 today for this annuity, what is your expected rate of return?

Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer.The loan requires five equal annual end of the year payments.If the loan provides the bank with a 12 percent return, what will be your annual payments?

The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years.At a discount rate of 14 percent, what is the present value of this stream of lease payments?

In six years, your daughter will be going to college.You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college.How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years?

Your firm, New Sunrise, has just leased a $28,000 BMW for you.The lease requires six beginning of the year payments that will fully amortize the cost of the car.What is the amount of the payments if the interest rate is 12 percent?

The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years.What is the future value of this lottery if you plan to put each payment in an account earning 9 percent?

Alabama Power has preferred stock that pays an annual dividend of $9.44.If the security has no maturity, what is its value to an investor who wishes to obtain a 9 percent rate of return?

Baggos has seen their EPS increase from $0.30 to $3.16 in seven years.What has been the growth rate of Baggos's EPS?

Jane wants to have $200,000 in an account in 20 years.If her account earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000?

What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded monthly for five years?

What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded monthly?