Question 1

We can use the present value of an annuity formula to calculate constant annual loan payments.

Accepted Answer

The present value of an annuity formula can be used to calculate the constant annual loan payments by calculating the present value of the loan and then dividing by the appropriate annuity factor.

Question 2

The present value of an annuity increases as the discount rate increases.

Accepted Answer

The present value of an annuity decreases as the discount rate increases.

Question 3

You have a credit card with a balance of $18 000.The annual interest rate on the card is 18% compounded monthly, and the minimum payment is $400 per month.If you pay only the minimum payment each month and do not make any new charges on the card, how many years will it take for you to pay off the $18 000 balance?

Accepted Answer

The answer of You have a credit card with a...

Question 4

You are going to pay $800 into an account at the beginning of each of 20 years.The account will then be left to compound for an additional 20 years.At the end of the 41st year you will begin receiving a perpetuity from the account.If the account pays 14%, how much will you receive each year from the perpetuity (round to nearest $1.00)?
A)$140 112
B)$150 360
C)$159 728
D)$182 090

Accepted Answer

Using the formula for the future value of an annuity, we can find the balance of the account after the initial 20 years:

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

FV = $800 x ((1 + 0.14)^20 - 1) / 0.14

FV = $74,446.41

Then, leaving that balance to compound for an additional 20 years, we get:

FV = PV x (1 + r) ^ n

FV = $74,446.41 x (1 + 0.14) ^ 20

FV = $1,172,253.53

Finally, we can calculate the perpetuity payment using the perpetuity formula:

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

PMT = $1,172,253.53 / ((1 + 0.14) ^ 20 - 1)

PMT = $159,727.53

Rounding to the nearest dollar, we get a perpetuity payment of $159,728. Therefore, the best choice is C.

Question 5

You have borrowed $70 000 to buy a boat.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate, compounded monthly.Create an amortisation schedule for the first two months of the loan.

Accepted Answer

The answer of You have borrowed $70 000 to buy...

Question 6

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.

Accepted Answer

This is one of the defining features of an annuity - equal payments or withdrawals made at regular intervals.

Question 7

A loan amortisation schedule provides a breakdown of loan payments into principal and interest payments.

Accepted Answer

A loan amortisation schedule is a table that shows the breakdown of loan payments over time, including the portion of each payment that goes towards paying off the principal balance and the portion that goes towards paying interest charges. Therefore, the statement is true.

Question 8

You have just received an endowment of $32 976.You plan to put the entire amount in an account earning 8%compounded annually and to withdraw $4000 at the end of each year.How many years can you continue to make the withdrawals?

Accepted Answer

The answer of You have just received an endowment of...

Question 9

If you have an opportunity cost of 10%, how much must you invest each year to have $4000 accumulated in 10 years?

Accepted Answer

The answer of If you have an opportunity cost of...

Question 10

You have just purchased a car from Friendly Sam.The selling price of the car is $6500.If you pay $500 down, then your monthly payments are $317.22.The annual interest rate is 24%.How many payments must you make?

Accepted Answer

The answer of You have just purchased a car from...

Question 11

You have just purchased of preferred shares for $50.00.The preferred shares pay an annual dividend of $5.50 per share forever.What is the rate of return on your investment?
A)5.5%
B)1.0%
C)11.0 %
D)22.2%

Accepted Answer

The rate of return on the investment can be calculated by dividing the annual dividend by the purchase price of the shares and multiplying by 100 to get a percentage. 
($5.50/$50.00) x 100 = 11.0% 
Therefore, the rate of return on the investment is 11.0%.

Question 12

An amortised loan is a loan paid in unequal instalments.

Accepted Answer

An amortised loan is a loan that is paid back in equal instalments.

Question 13

a.)If Unicorn Consulting deposits $150 at the end of each year for the next eight years in an account that pays 5% interest, how much money will the firm have at the end of eight years? b.)Suppose Unicorn Consulting decides that they need to have $5300 at the end of the eight years.How much will they have to deposit at the end of each year?

Accepted Answer

The answer of a.)If Unicorn Consulting deposits $150 at the...

Question 14

The present value of a perpetuity decreases when the [blank] decreases.
A)number of investment periods
B)annual discount rate
C)perpetuity payment
D)cash flow

Accepted Answer

The answer of The present value of a perpetuity decreases...

Question 15

An annuity involves depositing or investing a single sum of money and allowing it to grow for a certain number of years.

Accepted Answer

An annuity is a financial product that involves depositing or investing a single sum of money and allowing it to grow for a certain number of years, with regular payments or a lump-sum payout at a later date.

Question 16

You are considering the purchase of XYZ Company's ordinary shares which will pay a $1.00 per share dividend one year from the date of purchase.The dividend is expected to grow at the rate of 4% per year.If the appropriate discount rate for this investment is 14%, what is the price of one share of this stock?
A)$7.14
B)$10.00
C)$25.00
D)$30.12

Accepted Answer

The answer of You are considering the purchase of XYZ...

Question 17

To repay a $2000 loan from your bank, you promise to make equal payments every six months for the next five years totalling $3116.20.What annual rate of interest will you be paying?

Accepted Answer

The answer of To repay a $2000 loan from your...

Question 18

When repaying an amortised loan, the interest payments increase over time.

Accepted Answer

In an amortized loan, the interest payments decrease over time as the principal balance decreases.

Question 19

What is a series of equal payments for an infinite period of time called?
A)A perpetuity
B)An axiom
C)An outflow
D)An annuity

Accepted Answer

A perpetuity is a type of annuity where the periodic payments occur for an infinite period of time. It is also known as a perpetual annuity.

Question 20

You are saving money to buy a house.You will need $7473.50 to make the down payment.If you can deposit $500 per month in a savings account which pays 1% per month, how long will it take you to save the $7473.50?

Accepted Answer

The answer of You are saving money to buy a...

Quiz 6: The Time Value of Moneyannuities and Other Topics