Question 1

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 2

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 answer of When computing an interest or growth rate,...

Question 3

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

The answer of When computing the number of deposits needed...

Question 4

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 when a loan is amortized, the borrower pays a fixed amount of money at regular intervals (usually monthly) over a set period of time. This payment is essentially an annuity, and the present value of that annuity is used to determine the amount of the loan and the payment schedule.

Question 5

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

We can use the formula for the future value of an ordinary annuity to calculate the annual deposit required:

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

where FV is the future value (in this case, $15,000), PMT is the annual deposit, r is the interest rate (10% or 0.10), and n is the number of years (5).

Plugging in the values, we get:

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

Simplifying:

$15,000 = PMT x 7.72173

PMT = $15,000 / 7.72173

PMT = $1,942.93 (rounded)

Therefore, the closest answer choice is B, $2,457.

Question 6

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 7

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 8

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

Using the formula for the present value of an annuity, we can find that each of the four equal annual payments is $1,347.83. To find the actual end-of-year payment, we need to add the interest accumulated during the year to this amount. After the first year, the balance remaining on the loan is $4,725 ($4,500 + $540 interest - $315 payment), and the interest on this balance for the second year is $567 ($4,725 x 0.12). Therefore, the second end-of-year payment is $1,912 ($1,347.83 + $567). Similarly, the third end-of-year payment is $1,542 ($1,347.83 + $194.17) and the final end-of-year payment is $1,206 ($1,347.83 - $141.83). Adding up all these payments gives a total of $6,007, which is the actual amount repaid. Therefore, the correct answer is C) $1,482.

Question 9

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

With an amortized loan, the payment amount stays the same over the life of the loan, while the principal portion of each payment grows and the interest portion declines over time.

Question 10

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

To find the annual rate of return, we need to use the formula:

Annual rate of return = (Maturity value / Purchase price)^(1/number of years) - 1

Plugging in the values given:

Annual rate of return = ($100 / $14.60)^(1/25) - 1

Annual rate of return = 0.085 or 8.5%

Rounding down to the nearest whole number, we get:

Annual rate of return = 8%

Thus, the best choice is C) 8 percent.

Question 11

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 answer of If a United States Savings bond can...

Question 12

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

The answer of In general, with an amortized loan, the...

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 how amortized loans work.

Question 14

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 15

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 interest or growth rate will actually increase as the future value increases, holding present value and the number of periods constant. This is because a larger future value means that the investment is growing at a faster rate over time.

Question 16

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 true. With a lower interest rate, the growth of the deposit will be slower, thus requiring more deposits over a longer period of time to reach the same future value.

Question 17

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

The answer of In general, with an amortized loan, the...

Question 18

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

The rate will actually increase if the future value is larger, holding the present value and the number of periods constant. This is because a larger future value indicates that more interest or growth has been earned over time, resulting in a higher rate.

Question 19

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 20

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...

Quiz 5: Time Value of Money

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.

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.

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.

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

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.

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

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