Question 1

Samuelson Engines wants to save $750,000 to buy some new equipment four years from now.The plan is to set aside an equal amount of money on the first day of each quarter starting today.The firm can earn 4.75 percent on its savings.How much does the firm have to save each quarter to achieve its goal?

Accepted Answer

The answer of Samuelson Engines wants to save $750,000 to...

Question 2

Today, you are retiring.You have a total of $411,016 in your retirement savings and have the funds invested such that you expect to earn an average of 7.10 percent, compounded monthly, on this money throughout your retirement years.You want to withdraw $2,500 at the beginning of every month, starting today.How long will it be until you run out of money?

Accepted Answer

t = 578.33688 months/12 = 48.19 years

Question 3

You have been investing $250 a month for the last 13 years.Today, your investment account is worth $73,262.What is your average rate of return on your investments?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 4

You just received an insurance settlement offer related to an accident you had six years ago.The offer gives you a choice of one of the following three offers:  You can earn 7.5 percent on your investments.You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period.Which one of the following statements is correct given this information?

Accepted Answer

The answer of You just received an insurance settlement offer...

Question 5

Meadow Brook Manor would like to buy some additional land and build a new assisted living center.The anticipated total cost is $20.5 million.The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire construction project.Management has decided to save $1.2 million a quarter for this purpose.The firm earns 6.25 percent, compounded quarterly, on the funds it saves.How long does the company have to wait before expanding its operations?

Accepted Answer

t = 15.26003 quarters/4 = 3.82 years

Question 6

Gene's Art Gallery is notoriously known as a slow-payer.The firm currently needs to borrow $27,500 and only one company will even deal with them.The terms of the loan call for daily payments of $100.The first payment is due today.The interest rate is 24 percent, compounded daily.What is the time period of this loan? Assume a 365 day year.

Accepted Answer

Using the formula for calculating the present value of an annuity, we can determine the time period of the loan.

PV = (PMT / r) * (1 - (1 + r)^(-n))

where PV is the present value (which in this case is the amount of the loan), PMT is the regular payment amount, r is the daily interest rate, and n is the number of periods.

Plugging in the values from the problem, we get:

$27,500 = ($100 / 0.24) * (1 - (1 + 0.24/365)^(-n))

Solving for n, we get n = 303.22 days, or choice C.

Question 7

Atlas Insurance wants to sell you an annuity which will pay you $1,600 per quarter for 25 years.You want to earn a minimum rate of return of 6.5 percent.What is the most you are willing to pay as a lump sum today to buy this annuity?

Accepted Answer

We can use the formula for the present value of an annuity to solve for the most you are willing to pay as a lump sum today:

PV = (PMT / r) x (1 - (1 + r)^(-n))

where PV is the present value, PMT is the payment per period, r is the interest rate per period, and n is the total number of periods.

In this case, PMT = $1,600 per quarter, r = 6.5% / 4 = 0.01625, and n = 25 x 4 = 100.

Plugging in these values, we get:

PV = ($1,600 / 0.01625) x (1 - (1 + 0.01625)^(-100))
PV = $78,818.41

Therefore, the most you are willing to pay as a lump sum today to buy this annuity is $78,818.41. The correct answer is C.

Question 8

You estimate that you will owe $45,300 in student loans by the time you graduate.The interest rate is 4.25 percent.If you want to have this debt paid in full within ten years, how much must you pay each month?

Accepted Answer

We can calculate the monthly payment using the formula for the present value of an annuity:

PMT = PV * (r/12) / (1 - (1+r/12)^(-n*12))

where:
PV = $45,300
r = 0.0425 (the monthly interest rate is 0.0425/12)
n = 10 (the number of years is 10)

Plugging in these values, we get:

PMT = 45300 * (0.0425/12) / (1 - (1+0.0425/12)^(-10*12))
PMT = $464.04

Therefore, the best choice is answer B.

Question 9

Stephanie is going to contribute $300 on the first of each month, starting today, to her retirement account.Her employer will provide a 50 percent match.In other words, her employer will contribute 50 percent of the amount Stephanie saves.If both Stephanie and her employer continue to do this and she can earn a monthly rate of 0.90 percent, how much will she have in her retirement account 35 years from now?

Accepted Answer

We'll use the future value formula for an annuity,

FV = PMT × ((1 + r)n - 1) ÷ r

where

PMT = monthly payment = $300 + 0.5($300) = $450
r = monthly interest rate = 0.90% ÷ 100% ÷ 12 = 0.0075
n = number of months = 35 years × 12 months/year = 420

Substituting these values, we get

FV = $450 × ((1 + 0.0075)^420 - 1) ÷ 0.0075
   = $2,123,007.15

Therefore, Stephanie will have $2,123,007 in her retirement account 35 years from now.

The answer is (E).

Question 10

Your great aunt left you an inheritance in the form of a trust.The trust agreement states that you are to receive $2,400 on the first day of each year, starting immediately and continuing for 20 years.What is the value of this inheritance today if the applicable discount rate is 6.75 percent?

Accepted Answer

The answer of Your great aunt left you an inheritance...

Question 11

Your car dealer is willing to lease you a new car for $245 a month for 48 months.Payments are due on the first day of each month starting with the day you sign the lease contract.If your cost of money is 6.5 percent, what is the current value of the lease?

Accepted Answer

The answer of Your car dealer is willing to lease...

Question 12

Kingston Development Corp.purchased a piece of property for $2.79 million.The firm paid a down payment of 15 percent in cash and financed the balance.The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent, compounded monthly.What is the amount of each mortgage payment?

Accepted Answer

Amount financed = $2,790,000 × (1 - 0.15) = $2,371,500

Question 13

Your father helped you start saving $20 a month beginning on your 5^th birthday.He always made you deposit the money into your savings account on the first day of each month just to "start the month out right." Today completes your 17^th year of saving and you now have $6,528.91 in this account.What is the rate of return on your savings?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 14

You are buying a previously owned car today at a price of $3,500.You are paying $300 down in cash and financing the balance for 36 months at 8.5 percent.What is the amount of each loan payment?

Accepted Answer

Amount financed = $3,500 - $300 = $3,200

Question 15

Your insurance agent is trying to sell you an annuity that costs $230,000 today.By buying this annuity, your agent promises that you will receive payments of $1,225 a month for the next 30 years.What is the rate of return on this investment?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 16

Will has been purchasing $25,000 worth of New Tek stock annually for the past 15 years.His holdings are now worth $598,100.What is his annual rate of return on this stock?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 17

You are considering an annuity which costs $160,000 today.The annuity pays $17,500 a year at an annual interest rate of 7.50 percent.What is the length of the annuity time period?

Accepted Answer

The answer of You are considering an annuity which costs...

Question 18

The Wine Press is considering a project which has an initial cash requirement of $187,400.The project will yield cash flows of $2,832 monthly for 84 months.What is the rate of return on this project?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 19

Today, you borrowed $6,200 on your credit card to purchase some furniture.The interest rate is 14.9 percent, compounded monthly.How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $120?

Accepted Answer

To solve this problem, we need to use the formula for calculating the time it takes to pay off a debt with compound interest:
n = -(1/30) log(1 - (r/p) * A)
where:
r = annual interest rate as a decimal = 0.149/12
p = monthly payment = 120
A = initial amount borrowed = 6200
n = number of months to pay off the debt

Plugging in the values, we get:
n = -(1/30) log(1 - (0.149/12)/120 * 6200)
n = 83.52
Since we can't have a fraction of a month for the payment, we round up to the nearest whole month. Therefore, it will take 84 months to pay off the debt. Converting this to years:
84/12 = 7
So the answer is 7 years, rounded to two decimal places, which is C) 6.93 years.

Question 20

Today, you turn 23.Your birthday wish is that you will be a millionaire by your 40^th birthday.In an attempt to reach this goal, you decide to save $75 a day, every day until you turn 40.You open an investment account and deposit your first $75 today.What rate of return must you earn to achieve your goal?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Quiz 6: Bond Valuation

You have been investing $250 a month for the last 13 years.Today, your investment account is worth $73,262.What is your average rate of return on your investments?

Atlas Insurance wants to sell you an annuity which will pay you $1,600 per quarter for 25 years.You want to earn a minimum rate of return of 6.5 percent.What is the most you are willing to pay as a lump sum today to buy this annuity?

You estimate that you will owe $45,300 in student loans by the time you graduate.The interest rate is 4.25 percent.If you want to have this debt paid in full within ten years, how much must you pay each month?

Your great aunt left you an inheritance in the form of a trust.The trust agreement states that you are to receive $2,400 on the first day of each year, starting immediately and continuing for 20 years.What is the value of this inheritance today if the applicable discount rate is 6.75 percent?

Your car dealer is willing to lease you a new car for $245 a month for 48 months.Payments are due on the first day of each month starting with the day you sign the lease contract.If your cost of money is 6.5 percent, what is the current value of the lease?

You are buying a previously owned car today at a price of $3,500.You are paying $300 down in cash and financing the balance for 36 months at 8.5 percent.What is the amount of each loan payment?

Your insurance agent is trying to sell you an annuity that costs $230,000 today.By buying this annuity, your agent promises that you will receive payments of $1,225 a month for the next 30 years.What is the rate of return on this investment?

Will has been purchasing $25,000 worth of New Tek stock annually for the past 15 years.His holdings are now worth $598,100.What is his annual rate of return on this stock?

You are considering an annuity which costs $160,000 today.The annuity pays $17,500 a year at an annual interest rate of 7.50 percent.What is the length of the annuity time period?

The Wine Press is considering a project which has an initial cash requirement of $187,400.The project will yield cash flows of $2,832 monthly for 84 months.What is the rate of return on this project?

Today, you borrowed $6,200 on your credit card to purchase some furniture.The interest rate is 14.9 percent, compounded monthly.How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $120?