Deck 20: Annuities and Sinking Funds

Question 1

The maturity value in compounding is like the value of an annuity.

Answer 1

True

Question 2

An annuity due provides a lower final value compared with an ordinary annuity.

Answer 2

False

Question 3

The same formula can be used to find the value of an annuity or an annuity due by adding one payment.

Answer 3

False

Question 4

Annuities can be done manually or by computer.

Question 5

Maturity value is equal to principal plus interest.

Question 6

There is only one class of annuities.

Question 7

An annuity is one lump sum payment.

Question 8

Sinking funds accumulate money in the present to accumulate a specific sum at a predetermined present date.

Question 9

Companies that plan to retire bonds in the future could utilize sinking funds.

Question 10

Annuities certain have a specific stated number of payments.

Question 11

Sinking funds utilize the concept of compound interest.

Question 12

An ordinary annuity results in the deposit or payment being made at end of the period.

Question 13

The amount of money one needs to invest in the future to receive a stream of payments in the present is called the present value of an ordinary annuity.

Question 14

Interest is not calculated in ordinary annuities.

Question 15

All annuities due are based on a semiannual payment.

Question 16

An annuity due requires that deposits or payments be made at the end of the period.

Question 17

Insurance companies do not use annuities.

Question 18

A contingent annuity has a fixed amount of payments.

Question 19

The present value of an annuity looks from the present to the future.

Question 20

The value of an annuity is the series of payments and interest.

Question 21

Ted Williams made deposits of $500 at the end of each year for eight years. The rate is 8% compounded annually. The value of Ted's annuity at the end of eight years is

A) $5,318.31
B) $4,318.30
C) $2,837.03
D) $2,873.30
E) None of these

Question 22

Nancy Billows promised to pay her son $600 quarterly for four years. If Nancy can invest her money at 6% in an ordinary annuity, she must invest how much today?

A) $10,759.38
B) $10,759.83
C) $8,478.76
D) $8,478.27
E) None of these

Question 23

The present value of an ordinary annuity:

A) Tells how much money one needs to invest in the future
B) Is a lump sum
C) Can only be calculated manually
D) Indicates how much money needs to be invested today
E) None of these

Question 24

Payments in annuities must be made:

A) Daily
B) Quarterly
C) Semiannually
D) Yearly
E) None of these

Question 25

An annuity is:

A) Not used by lotteries today
B) A one-time payment
C) A stream of payments
D) Never made up of equal payments
E) None of these

Question 26

In an ordinary annuity the interest on a yearly investment starts building interest:

A) At the beginning of the first period
B) At the end of the first period
C) During the first period
D) After the second period ends
E) None of these

Question 27

How much would Howard Steele need to invest today so that he may withdraw $12,000 each year for the next 20 years, assuming a rate of 8% compounded annually?

A) $117,817.77
B) $454,144.00
C) $112,817.20
D) $549,144
E) None of these

Question 28

A sinking fund:

A) Requires at the beginning one lump sum payment
B) Is really not an annuity
C) Aids in meeting a future obligation
D) Does not compound its money
E) None of these

Question 29

Jones Co. borrowed money that is to be repaid in 12 years. So that the loan will be paid back at end of the 12th year, the company invests $8,000 at end of each year at 5% compounded annually. The amount of the original loan was

A) $127,337.01
B) $70,905.60
C) $127,636.80
D) $70,950.60
E) None of these

Question 30

Ordinary annuity payments are made:

A) At the end of the period
B) Yearly
C) Monthly
D) At the beginning of the period
E) None of these

Question 31

An annuity due compared with an ordinary annuity results in a:

A) Higher value
B) Lower value
C) Same value
D) Value three times the annuity due
E) None of these

Question 32

At the beginning of each year, Bill Ross invests $1,400 semiannually at 8% for nine years. The cash value of the annuity due at the end of the ninth year is

A) $38,739.68
B) $37,399.68
C) $37,939.86
D) $37,339.72
E) None of these

Question 33

Ed Sloan invests $1,600 at the beginning of each year for eight years into an account that pays 10% compounded semiannually. The value of the annuity due is:

A) $41,344.48
B) $1,600.00
C) $38,744.48
D) $37,744.48
E) None of these

Question 34

Lance Rice has decided to invest $1,200 quarterly for eight years in an ordinary annuity at 4%. The total cash value of the annuity at end of year 8 is

A) $46,642.80
B) $44,992.88
C) $46,246.80
D) $44,292.92
E) None of these

Question 35

Annuity due payments are made:

A) Monthly
B) At the beginning of the period
C) Yearly
D) At the end of the period
E) None of these

Question 36

Abby Mia wants to know how much must be deposited in her local bank today so that she will receive yearly payments of $18,000 for 20 years at a current rate of 9% compounded annually.

A) $1,085.82
B) $1,463.13
C) $164,313.82
D) $163,313
E) None of these

Question 37

Contingent annuities:

A) Have a fixed amount of payments
B) Pay for 30 years
C) Are only paid by the month
D) Have no fixed amount of payments
E) None of these

Question 38

Lee Associates borrowed $60,000. The company plans to set up a sinking fund that will pay back the loan at the end of 12 years. Assuming a rate of 8% compounded semiannually, the amount to be paid into the fund each period is):

A) $1,350
B) $1,535.21
C) $1,653
D) $5,163
E) None of these

Question 39

Joe Sullivan invests $9,000 at the end of each year for 20 years. The rate of interest Joe gets is 8% annually. The final value of Joe's investment at the end of the 20th year on this ordinary annuity is

A) $411,588.00
B) $88,362.90
C) $411,857.68
D) $88,632.90
E) None of these

Question 40

An annuity due can use the ordinary annuity formula if the ordinary annuity formula is adjusted:

A) Add one payment to total value
B) Multiply results by 1+i
C) Add two payments to total value
D) Subtract three payments from total value
E) None of these