Question 1

Your current bank is paying 6.25% simple interest rate.You can move your savings account to Harris Bank that pays 6.25% compounded annually or to First Chicago bank paying 6% compounded semi-annually.To maximize your return you would choose:
A)your current bank
B)Harris Bank
C)First Chicago bank
D)you are indifferent,because the effective interest rate for all three banks is the same

Accepted Answer

Harris Bank pays 6.25% compounded annually, which means that interest is added to the principal annually, resulting in a higher effective interest rate than the simple interest paid by the current bank. First Chicago bank pays a lower interest rate of 6%, compounded semi-annually, which means that interest is added to the principal twice a year, resulting in a lower effective interest rate than Harris Bank. Therefore, to maximize your return, you would choose Harris Bank.

Question 2

Tom Vu deposited $5,000 in a savings account that paid 8% interest compounded quarterly.What is the effective rate of interest?
A)8.00%
B)8.24%
C)8.33%
D)8.46%

Accepted Answer

Since the interest is compounded quarterly, the effective rate of interest is higher than the nominal rate of 8%. Using the formula for effective interest rate, we get:

Effective rate = (1 + (nominal rate / number of compounding periods))^number of compounding periods - 1
Effective rate = (1 + (0.08 / 4))^4 - 1
Effective rate = 0.0824 or 8.24%

Therefore, the best choice is B.

Question 3

A loan that is repaid in equal payments over a specified time period is called a (n)
A)discount loan
B)balloon loan
C)amortized loan
D)none of the above

Accepted Answer

An amortized loan is a type of loan in which the borrower makes equal payments over a specific period of time to repay the loan. This type of loan is different from a discount loan, in which the borrower receives a lump sum payment up front but pays back a higher amount later, and a balloon loan, in which the borrower makes small payments throughout the loan term but pays a large final payment at the end.

Question 4

John deposits $2,000 per year at the end of the year for the next 20 years into an IRA account that pays 6%.How much will John have on deposit at the end of 20 years?
A)$67,520
B)$73,572
C)$81,990
D)$75,686

Accepted Answer

The answer of John deposits $2,000 per year at the...

Question 5

Daniel deposits $2,000 per year at the end of the year for the next 15 years into an IRA account that currently pays 7%.How much will Daniel have on deposit at the end of the 15 years?
A)$39,981
B)$46,753
C)$49,002
D)$50,258

Accepted Answer

The answer of Daniel deposits $2,000 per year at the...

Question 6

Cecilia bought 100 shares of Minnesota Mining and Manufacturing in June,1987 for $38 a share for a total investment of $3,800.She sold the shares in June,1996 for $8,960.What is Cecilia's annual rate of return on her investment?
A)10%
B)10.6%
C)11%
D)11.2%

Accepted Answer

The answer of Cecilia bought 100 shares of Minnesota Mining...

Question 7

The method of calculating interest on a loan that is set by law is called the:
A)negotiated legal rate (NLR)
B)effective annual rate (EAR)
C)annual percentage rate (APR)
D)none of the above

Accepted Answer

The annual percentage rate (APR) is the method of calculating interest on a loan that is set by law. It includes not only the interest rate but also any additional fees or charges associated with the loan, providing a standardized way for borrowers to compare the costs of different loan options. The negotiated legal rate (NLR) refers to the interest rate that lenders and borrowers agree upon through negotiation, and the effective annual rate (EAR) is a calculation of the total cost of borrowing over the course of a year, taking compounding into account.

Question 8

Christine has just purchased a used Mercedes for $18,995.She plans to make a $2,500 down payment on the new car.What is the amount of her monthly payment on the remaining loan if she must pay 12% annual interest on a 24-month car loan?
A)$759.53
B)$776.48
C)$894.16
D)$899.87

Accepted Answer

First, we need to calculate the amount of the loan. Since Christine made a $2,500 down payment, the amount of the loan is:

Loan amount = purchase price - down payment
Loan amount = $18,995 - $2,500
Loan amount = $16,495

Next, we need to calculate the monthly payment on the loan. We can use the following formula to calculate the monthly payment:

P = (r * A) / (1 - (1 + r)^(-n))

Where:
P = monthly payment
r = monthly interest rate (annual interest rate divided by 12)
A = loan amount
n = total number of payments (number of years times 12)

In this case, r = 0.12/12 = 0.01, A = $16,495, and n = 24. Plugging in these values, we get:

P = (0.01 * $16,495) / (1 - (1 + 0.01)^(-24))
P = $776.48

Therefore, the amount of Christine's monthly payment on the loan is $776.48. The best choice is B.

Question 9

How much would you be willing to pay for a preferred stock that pays $6.50 to perpetuity if the appropriate discount rate is 9%?
A)$65.00
B)$72.22
C)$81.25
D)$722.20

Accepted Answer

The formula for calculating the value of a perpetuity is annual payment / discount rate. Therefore, the value of this preferred stock would be 6.50 / 0.09 = $72.22.

Question 10

Joseph has just accepted a job as a stockbroker.He estimates his gross pay each year for the next three years is $35,000 in year 1,$21,000 in year 2,and $32,000 in year 3.What is the present value of these cash flows if they are discounted at 4%?
A)$79,452.30
B)$80,294.50
C)$81,517.10
D)$88,000

Accepted Answer

The answer of Joseph has just accepted a job as...

Question 11

You want to buy a Volvo in seven years.The car is currently selling for $50,000,and the price will increase at a compound rate of 10% per year.You can presently invest in high-yield bonds earning a compound annual rate 14% per year.How much must you invest at the end of each of the next seven years to be able to purchase your dream car in seven years?
A)$8,831.46
B)$9,080.20
C)$9,125.42
D)$9,282.09

Accepted Answer

First, we need to calculate how much the car will cost in seven years:
$50,000 x 1.10^7 = $1,28226.81

Next, we need to calculate how much we need to invest each year in order to have $128,226.81 in seven years:
PV = 0, PMT = ?, FV = $128,226.81, n = 7, i = 14%

Using the PMT function on a financial calculator, we get the answer of $9,080.20.

Question 12

Your subscription to Consumer Reports is about to expire.You may renew it for $24 a year or,instead,you may get a lifetime subscription to the magazine for a onetime payment of $400 today.Payments for the regular subscription are made at the beginning of each year.Using a discount rate of 5%,how many years does it take to make the lifetime subscription the better deal?
A)25 years
B)28 years
C)30 years
D)40 years

Accepted Answer

The answer of Your subscription to Consumer Reports is about...

Question 13

You need $8,000 four years from now for a down payment on your future house.How much money must you deposit today if your credit union pays 5% interest compounded annually? Pick the closest answer.
A)$6,269.59
B)$6,578.95
C)$6,394.12
D)$6,189.83

Accepted Answer

Using the compound interest formula, we have:
FV = PV(1+r)^n 
where FV is the future value, PV is the present value, r is the interest rate, and n is the number of compounding periods. 
In this case, FV = $8,000, r = 0.05 (5% expressed as a decimal), and n = 4 (four years). We want to solve for PV, so we can rearrange the formula:
PV = FV/(1+r)^n 
Plugging in the given values, we get: 
PV = $8,000/(1+0.05)^4 = $6,578.95
Therefore, the closest answer is B, $6,578.95.

Question 14

Your college has agreed to give you a $10,000 tuition loan.As part of the agreement,you must repay $12,600 at the end of the three-year period.What interest rate is the college charging?
A)8%
B)9%
C)11%
D)6%

Accepted Answer

The college is charging an 8% interest rate. This can be found using the formula for simple interest: $I = PRT$, where $I$ is the interest ($2,600), $P$ is the principal amount ($10,000), $R$ is the rate, and $T$ is the time (3 years). Rearranging the formula to solve for $R$, we get $R = I / (PT)$. Plugging in the numbers, $R = 2600 / (10000*3) = 0.0867$, which is approximately 8.67%, rounding to the nearest whole number gives 8%.

Question 15

You deposit $1,000 in a long-term certificate of deposit with a fixed interest rate of ? 9%.How many years will it take for you to triple your deposit? Pick the closest ? answer.
A)11 years
B)12 years
C)13 years
D)14 years

Accepted Answer

The answer of You deposit $1,000 in a long-term certificate...

Question 16

In 1966,the average tuition for one year in the MBA program at the University of Chicago was $3,600.Thirty years later,in 1996,the average tuition was $27,400.What is the compound annual growth rate in tuition (rounded to the nearest whole percentage)over the 30-year period?
A)6%
B)7%
C)8%
D)10%

Accepted Answer

The compound annual growth rate can be calculated using the formula:CAGR = (Ending Value / Beginning Value)^(1/n) - 1where:CAGR is the compound annual growth rateEnding Value is the value at the end of the periodBeginning Value is the value at the beginning of the periodn is the number of yearsIn this case, the ending value is $27,400, the beginning value is $3,600, and the number of years is 30. Plugging these values into the formula, we get:CAGR = (27,400 / 3,600)^(1/30) - 1= 0.0794= 7.94%Rounding to the nearest whole percentage, the compound annual growth rate is 8%.

Question 17

In 1976,the average price of a domestic car was $5,100.Twenty years later,in 1996,the average price was $16,600.What was the annual growth rate in the car price over the 20-year period?
A)5%
B)6%
C)7%
D)8%

Accepted Answer

The answer of In 1976,the average price of a domestic...

Question 18

Jill Clinton puts $1,000 in a savings passbook that pays 4% compounded quarterly.How much will she have in her account after five years?
A)$1,200.50
B)$1,220.20
C)$1,174.80
D)$1,217.50

Accepted Answer

First, we need to determine how many quarters are in five years. Since there are four quarters in one year, there are 4 x 5 = 20 quarters in five years.
Next, we use the formula for compound interest: A = P(1 + r/n)^(nt), where A is the ending amount, P is the principal (starting amount), r is the interest rate, n is the number of times the interest is compounded per year, and t is the time in years.
Plugging in the values, we get:
A = 1000(1 + 0.04/4)^(4 x 5)
A = 1000(1 + 0.01)^20
A = 1000(1.01)^20
A = 1000 x 1.221
A = $1,220.20
Therefore, Jill will have $1,220.20 in her account after five years, so the best choice is B.

Question 19

You borrow $10,000 to pay for your college tuition.The loan is amortized over a three-year period with an interest rate of 18%.What is your remaining balance at the end of year two?
A)$7,201
B)$4,599
C)$3,898
D)$3,303

Accepted Answer

Using the formula for amortization of a loan, we can calculate the payment amount:

Payment = [P x R x (1+R)^N] / [(1+R)^N - 1]

Where P is the principal (initial amount borrowed), R is the interest rate per period, and N is the total number of periods.

In this case, P = $10,000, R = 18%/3 = 6% per year (since the loan is amortized over three years), and N = 3 years x 12 months/year = 36 months.

Payment = [$10,000 x 0.06 x (1+0.06)^36] / [(1+0.06)^36 - 1] = $343.27 per month

After two years (24 months), we have made 24 payments, and the remaining balance can be calculated using the formula:

Balance = P x [(1+R)^N - (1+R)^P] / [(1+R)^N - 1]

Where P is the number of payments made, and the other variables are the same as before.

Balance = $10,000 x [(1+0.06)^36 - (1+0.06)^24] / [(1+0.06)^36 - 1] = $3,898.02

Therefore, the correct answer is C: $3,898.

Question 20

You put $2,000 in an IRA account at Northern Trust.This account pays a fixed interest rate of 8% compounded quarterly.How much money do you have in five years?
A)$2,914
B)$2,938
C)$2,972
D)$2,999

Accepted Answer

The answer of You put $2,000 in an IRA account...

Quiz 9: Time Value of Money

Your current bank is paying 6.25% simple interest rate.You can move your savings account to Harris Bank that pays 6.25% compounded annually or to First Chicago bank paying 6% compounded semi-annually.To maximize your return you would choose:

Tom Vu deposited $5,000 in a savings account that paid 8% interest compounded quarterly.What is the effective rate of interest?

A loan that is repaid in equal payments over a specified time period is called a (n)

John deposits $2,000 per year at the end of the year for the next 20 years into an IRA account that pays 6%.How much will John have on deposit at the end of 20 years?

Daniel deposits $2,000 per year at the end of the year for the next 15 years into an IRA account that currently pays 7%.How much will Daniel have on deposit at the end of the 15 years?

Cecilia bought 100 shares of Minnesota Mining and Manufacturing in June,1987 for $38 a share for a total investment of $3,800.She sold the shares in June,1996 for $8,960.What is Cecilia's annual rate of return on her investment?

The method of calculating interest on a loan that is set by law is called the:

Christine has just purchased a used Mercedes for $18,995.She plans to make a $2,500 down payment on the new car.What is the amount of her monthly payment on the remaining loan if she must pay 12% annual interest on a 24-month car loan?

How much would you be willing to pay for a preferred stock that pays $6.50 to perpetuity if the appropriate discount rate is 9%?

Joseph has just accepted a job as a stockbroker.He estimates his gross pay each year for the next three years is $35,000 in year 1,$21,000 in year 2,and $32,000 in year 3.What is the present value of these cash flows if they are discounted at 4%?

You need $8,000 four years from now for a down payment on your future house.How much money must you deposit today if your credit union pays 5% interest compounded annually? Pick the closest answer.

Your college has agreed to give you a $10,000 tuition loan.As part of the agreement,you must repay $12,600 at the end of the three-year period.What interest rate is the college charging?

You deposit $1,000 in a long-term certificate of deposit with a fixed interest rate of ? 9%.How many years will it take for you to triple your deposit? Pick the closest ? answer.

In 1966,the average tuition for one year in the MBA program at the University of Chicago was $3,600.Thirty years later,in 1996,the average tuition was $27,400.What is the compound annual growth rate in tuition (rounded to the nearest whole percentage) over the 30-year period?

In 1976,the average price of a domestic car was $5,100.Twenty years later,in 1996,the average price was $16,600.What was the annual growth rate in the car price over the 20-year period?

Jill Clinton puts $1,000 in a savings passbook that pays 4% compounded quarterly.How much will she have in her account after five years?

You borrow $10,000 to pay for your college tuition.The loan is amortized over a three-year period with an interest rate of 18%.What is your remaining balance at the end of year two?

You put $2,000 in an IRA account at Northern Trust.This account pays a fixed interest rate of 8% compounded quarterly.How much money do you have in five years?