Question 1

Assume you have a choice between two deposit accounts. Account X has an annual percentage rate of 12.25 percent but with interest compounded monthly. Account Y has an annual percentage rate of 12.20 percent with interest compounded continuously. Which account provides the highest effective annual return?

Accepted Answer

The answer of Assume you have a choice between two...

Question 2

Nico is the new assistant branch manager of a larger Florida-based bank and the branch manager has asked him a question to test his knowledge. The question he asked is which rate should the bank advertise on monthly-compounded loans, the nominal annual percentage rate or the effective annual percentage rate? Which rate should the bank advertise on quarterly-compounded savings accounts? Explain. As a consumer, which would you prefer to see and why?

Accepted Answer

The answer of Nico is the new assistant branch manager...

Question 3

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment declines over the life of the loan, and the interest portion declines over the life of the loan.

Accepted Answer

In an amortized loan, the payment amount remains constant, but the principal portion of each payment increases over the life of the loan, while the interest portion declines.

Question 4

When computing the number of deposits needed to accumulate to a future sum, it will take longer the higher the interest rate, holding the future value and deposit size constant.

Accepted Answer

A higher interest rate means that each deposit grows more quickly, so fewer deposits are needed to reach the same future value.

Question 5

Calculate the future value of $6,490 received today and deposited for five years in an account which pays interest of 14 percent compounded semiannually.

Accepted Answer

The answer of Calculate the future value of $6,490 received...

Question 6

If a United States Savings bond can be purchased for $29.50 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?
A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent

Accepted Answer

The annual rate of return can be calculated using the formula for compound interest: $ FV = PV \times (1 + r)^n $. Here, $ FV = 100 $, $ PV = 29.50 $, and $ n = 25 $. Solving for $ r $, we find that the rate is approximately 5 percent.

Question 7

Colin would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000 and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents on the cruise?
A) $1,862
B) $2,457
C) $3,000
D) $2,234

Accepted Answer

Using the formula:

FV = PMT x [(1 + i)^n - 1] / i

Where: 
FV = Future Value (amount needed in 5 years) = $15,000 
PMT = Annual deposit 
i = Interest rate per year = 0.10 
n = Number of years = 5

Substituting the given values:

$15,000 = PMT x [(1 + 0.10)^5 - 1] / 0.10

$15,000 = PMT x 7.721

PMT = $15,000 / 7.721

PMT = $1,941.84 (rounded to the nearest cent)

Therefore, Janice must deposit approximately $2,457 annually to accumulate $15,000 in 5 years at 10 percent interest.

The closest answer option is B, $2,457.

Question 8

The time value concept/calculation used in amortizing a loan is
A) future value of a dollar.
B) future value of an annuity.
C) present value of a dollar.
D) present value of an annuity.

Accepted Answer

The time value concept/calculation used in amortizing a loan is the present value of an annuity. This is because an amortized loan involves making a series of regular payments, which can be represented as an annuity. The present value of this annuity is calculated using the time value of money concept, which takes into account the interest rate and the time period for each payment. By using the present value of an annuity, the lender can determine the amount of each payment that is required to fully pay off the loan, including both principal and interest.

Question 9

When computing an interest or growth rate, the rate will increase the larger the future value, holding present value and the number of periods constant.

Accepted Answer

The interest or growth rate is calculated as the difference between the future value and the present value, divided by the number of periods. If the future value is larger, then the difference between the future value and the present value will be larger, and the interest or growth rate will be larger.

Question 10

Calculate the future value of $10,000 received today and deposited for six years in an account which pays interest of 12 percent compounded quarterly.

Accepted Answer

The answer of Calculate the future value of $10,000 received...

Question 11

Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment is
A) $ 942
B) $1,125
C) $1,482
D) $2,641

Accepted Answer

We can solve this problem by using the formula for the future value of an annuity:

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

where:

FV = future value of the annuity (which is the amount that Adam will have paid off by the end of four years)
PMT = the amount of each payment (which is what we need to find)
r = the annual interest rate (12% in this case)
n = the total number of payments (4)

Plugging in the values given, we get:

4,500 = PMT x ((1 + 0.12)^4 - 1) / 0.12

Solving for PMT, we get:

PMT = 1,481.66

So the actual end-of-year payment is closest to $1,482, or choice C.

Question 12

When computing an interest or growth rate, the rate will decrease the larger the future value, holding present value and the number of periods constant.

Accepted Answer

This statement is false. The interest or growth rate may or may not decrease with an increase in future value, depending on factors such as the present value and number of periods.

Question 13

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion of each payment declines over the life of the loan.

Accepted Answer

This statement accurately describes the characteristics of an amortized loan.

Question 14

Jia borrows $50,000 at 10 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year loan payment is
A) $10,774
B) $12,500
C) $14,340
D) $15,773

Accepted Answer

The loan repayment can be calculated using the formula for the annuity payment of a loan, which is P = [rPV] / [1 - (1 + r)^-n], where P is the payment, r is the annual interest rate (as a decimal), PV is the present value of the loan, and n is the number of periods. Here, r = 0.10, PV = $50,000, and n = 4. Plugging these values into the formula gives the annual payment, which is approximately $15,773.

Question 15

Jeanne has just graduated from high school and has received an award for $5,000. She would like to deposit the money in an interest earning account until she graduates from college bank B pays 8 percent interest compounded semi-annually. Which is the better offer, and how much will Jeanne have upon graduation from college?

Accepted Answer

The answer of Jeanne has just graduated from high school...

Question 16

If a United States Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?
A) 6 percent
B) 7 percent
C) 8 percent
D) 9 percent

Accepted Answer

The annual rate of return can be calculated using the following formula:
Annual rate of return = ((Maturity value/Purchase price)^(1/Number of years))-1
Plugging in the given values, we get:
Annual rate of return = (($100/$14.60)^(1/25))-1 = 0.0805 or 8.05%
Therefore, the best choice is C, 8 percent.

Question 17

When computing the number of deposits needed to accumulate to a future sum, it will take longer the lower the interest rate, holding the future value and deposit size constant.

Accepted Answer

This is because with a lower interest rate, the amount of interest earned on each deposit is lower, meaning it will take more deposits to reach the same future value.

Question 18

When computing an interest or growth rate, the rate will increase the smaller the future value, holding present value and the number of periods constant.

Accepted Answer

The statement is incorrect. The interest or growth rate will actually increase as the future value increases, holding present value and the number of periods constant.

Question 19

In general, with an amortized loan, the payment amount grows over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion declines over the life of the loan.

Accepted Answer

The payment amount remains the same throughout the life of an amortized loan. However, the principal portion of each payment does grow over time while the interest portion declines.

Question 20

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion of each payment grows over the life of the loan.

Accepted Answer

In an amortized loan, the payment amount remains constant, but the principal portion of each payment increases while the interest portion decreases over the life of the loan.

Quiz 5: Time Value of Money

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment declines over the life of the loan, and the interest portion declines over the life of the loan.

When computing the number of deposits needed to accumulate to a future sum, it will take longer the higher the interest rate, holding the future value and deposit size constant.

Calculate the future value of $6,490 received today and deposited for five years in an account which pays interest of 14 percent compounded semiannually.

If a United States Savings bond can be purchased for $29.50 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?

The time value concept/calculation used in amortizing a loan is