Question 1

Assume that you are 23 years old and that you place $3,000 year-end deposits each year into a stock index fund that earns an average of 9.5% per year for the next 17 years.How much money will be in the account at the end of 17 years? How much money will you have in the account 15 years later at age 55 if the account continues to earn 9.5% per year but you discontinue making new contributions? How much money would you have at the end of 17 years if you had made the same number of deposits but at the beginning of the year instead of at the end of the year? How much money will you have in the account 15 years later at age 55 if the account continues to earn 9.5% per year but you discontinued making new contributions?

Accepted Answer

The answer of Assume that you are 23 years old...

Question 2

What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date?
A)Amortized loan
B)Interest-only loan
C)Discount loan
D)Compound loan

Accepted Answer

An interest-only loan is a type of loan where the borrower pays only the interest due on the loan each month, and does not pay down the principal amount of the loan. The principal amount is due in a lump sum payment at the maturity date, along with the final interest payment. Therefore, the interest payments are made throughout the life of the loan, and the principal and final interest payment are due at maturity. Amortized loans, on the other hand, involve paying both principal and interest each month, with the payments gradually decreasing the principal balance over the life of the loan. Discount loans involve receiving the full amount of the loan upfront, with the borrower paying back a reduced amount at maturity. Compound loans involve interest being continuously added to the principal, resulting in the borrower paying interest on both the original principal and the accumulated interest.

Question 3

A British consol bond can be considered a type of perpetuity.

Accepted Answer

A British consol bond is a type of government bond that pays a fixed amount of interest in perpetuity, meaning there is no maturity date or end date for the bond. Because the bond continues to pay interest indefinitely, it can be considered a type of perpetuity.

Question 4

What type of loan requires both principal and interest payments as you go by making equal payments each period?
A)Amortized loan
B)Interest-only loan
C)Discount loan
D)Compound loan

Accepted Answer

An amortized loan requires both principal and interest payments to be made in equal payments each period. This is a common type of loan for mortgages, car loans, and other installment loans. Interest-only loans only require payment of interest for a period of time before the principal must be paid, while discount loans have a lower amount borrowed but require repayment of the full amount at maturity. Compound loans accrue interest on both the principal and the already accrued interest.

Question 5

You sign a contract to pay back all of the interest and principal of a loan at the maturity date.This is an example of an interest-only loan.

Accepted Answer

Signing a contract to pay back both interest and principal at maturity is not an example of an interest-only loan. In an interest-only loan, the borrower only pays the interest during the loan term and then pays back the full principal at the end.

Question 6

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the interest of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end of 10 years,then you have just repaid what type of loan?
A)Amortized loan
B)Interest-only loan
C)Discount loan
D)Compound loan

Accepted Answer

This is an interest-only loan because the borrower is only paying the interest each year and then paying back the full principal at the end of the loan term. There is no amortization of the principal over time.

Question 7

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity)on a discount loan?
A)$0.00
B)$6,000.00
C)$8,333.33
D)$12,161.29

Accepted Answer

The answer of If you borrow $50,000 at an annual...

Question 8

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity)on an interest-only type of loan?
A)$0.00
B)$6,000.00
C)$8,333.33
D)$12,161.29

Accepted Answer

In an interest-only loan, you only pay the interest each year. The annual interest is 12% of $50,000, which is $6,000.00.

Question 9

Ordinary annuity payments occur at the beginning of the period,whereas annuity due payments occur at the end of the period.

Accepted Answer

Ordinary annuity payments occur at the end of the period, while annuity due payments occur at the beginning of the period.

Question 10

You have decided to endow the insert your name here Chair in Finance at the State University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today)and is invested at a rate that pays out 4.50% per year forever?

Accepted Answer

The answer of You have decided to endow the insert...

Question 11

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the total amount of principal and interest due of $215,892.50 at the end of 10 years,what type of loan did you have?
A)Amortized loan
B)Interest-only loan
C)Discount loan
D)Compound loan

Accepted Answer

The answer of If you borrow $100,000 at an annual...

Question 12

You sign a contract to pay back all of the interest and principal of a loan at the maturity date.This is an example of a discount loan.

Accepted Answer

The answer of You sign a contract to pay back...

Question 13

Home mortgage loans are commonly paid off by making equal monthly payments consisting of both interest and principal.This is an example of an amortized loan.

Accepted Answer

Amortized loans are paid off by making equal monthly payments that cover both principal and interest. This allows the borrower to pay off the loan gradually over time.

Question 14

When you pay off the principal and all of the interest at one time at the maturity date of the loan,we call this type of loan a/an ________.
A)amortized loan
B)interest-only loan
C)discount loan
D)compound loan

Accepted Answer

The given scenario describes a discount loan, where the interest is deducted from the loan amount upfront, and the borrower pays back the principal and remaining interest at the maturity date. An amortized loan requires the borrower to make regular payments of both principal and interest over the term of the loan. An interest-only loan requires the borrower to only make payments towards the interest accrued on the loan, with the principal remaining the same. A compound loan, also known as a compound interest loan, accrues interest on both the principal and interest already earned, resulting in interest payments that increase over time.

Question 15

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay with 10 equal annual end-of-the-year payments of $14,902.95,then you have just repaid what type of loan?
A)Amortized loan
B)Interest-only loan
C)Discount loan
D)Compound loan

Accepted Answer

An amortized loan is a type of loan where the borrower makes equal payments at regular intervals (usually monthly) until the loan is paid off. Each payment includes both principal and interest, with the majority of the early payments going towards interest and the majority of later payments going towards principal. The fact that the borrower is making equal payments over a set period of time suggests that this is an amortized loan. The other options, such as interest-only, discount, or compound loans, do not fit the characteristics of this type of loan.

Question 16

Given a positive interest rate and a positive cash flow,an ordinary annuity always has a greater future value than an annuity due of the same size and number of cash flows.

Accepted Answer

An annuity due has a cash flow at the beginning of each period, which means that each cash flow earns interest for one additional period than in an ordinary annuity. This compounding effect results in a greater future value for an annuity due compared to an ordinary annuity of the same size and number of cash flows.

Question 17

Given a positive interest rate and a positive cash flow,an annuity due always has a greater present value than an ordinary annuity of the same size and number of cash flows.

Accepted Answer

This is because the cash flows in an annuity due are received at the beginning of each period, which allows for a longer period of compounding, resulting in a higher present value compared to an ordinary annuity where cash flows are received at the end of each period.

Question 18

A wealthy woman just died and left her pet cats the following estate: $50,000 per year for the next 15 years with the first cash flow today.At a discount rate of 3.2%,what is the feline estate worth in today's dollars?
A)$588,352.84
B)$607,180.14
C)$750,000.00
D)$774,000.00

Accepted Answer

This is a simple case of calculating the present value of an annuity due. Using the formula: PV = (C/r) x (1 - 1/(1+r)^n), where PV is the present value, C is the annual cash flow, r is the discount rate, and n is the number of years. Plugging in the values given, we get PV = (50,000/0.032) x (1 - 1/(1+0.032)^15) = $607,180.14. Therefore, the best choice is B.

Question 19

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity)on a fully amortized loan?
A)$0.00
B)$6,000.00
C)$8,333.33
D)$12,161.29

Accepted Answer

The annual payment on a fully amortized loan can be calculated using the formula for an annuity. Given the principal, interest rate, and loan term, the annual payment is $12,161.29.

Question 20

Given a positive interest rate and a positive cash flow,an ordinary annuity always has a greater present value than an annuity due of the same size and number of cash flows.

Accepted Answer

An annuity due has one additional compounding period compared to an ordinary annuity, which can result in a higher present value. Therefore, an annuity due of the same size and number of cash flows can have a greater present value than an ordinary annuity.

Quiz 4: The Time Value of Money Part 2

What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date?

A British consol bond can be considered a type of perpetuity.

What type of loan requires both principal and interest payments as you go by making equal payments each period?

You sign a contract to pay back all of the interest and principal of a loan at the maturity date.This is an example of an interest-only loan.

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the interest of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end of 10 years,then you have just repaid what type of loan?

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity) on a discount loan?

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity) on an interest-only type of loan?

Ordinary annuity payments occur at the beginning of the period,whereas annuity due payments occur at the end of the period.

You have decided to endow the insert your name here Chair in Finance at the State University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today)and is invested at a rate that pays out 4.50% per year forever?

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the total amount of principal and interest due of $215,892.50 at the end of 10 years,what type of loan did you have?

You sign a contract to pay back all of the interest and principal of a loan at the maturity date.This is an example of a discount loan.

Home mortgage loans are commonly paid off by making equal monthly payments consisting of both interest and principal.This is an example of an amortized loan.

When you pay off the principal and all of the interest at one time at the maturity date of the loan,we call this type of loan a/an ________.

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay with 10 equal annual end-of-the-year payments of $14,902.95,then you have just repaid what type of loan?

Given a positive interest rate and a positive cash flow,an ordinary annuity always has a greater future value than an annuity due of the same size and number of cash flows.

Given a positive interest rate and a positive cash flow,an annuity due always has a greater present value than an ordinary annuity of the same size and number of cash flows.

A wealthy woman just died and left her pet cats the following estate: $50,000 per year for the next 15 years with the first cash flow today.At a discount rate of 3.2%,what is the feline estate worth in today's dollars?

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity) on a fully amortized loan?

Given a positive interest rate and a positive cash flow,an ordinary annuity always has a greater present value than an annuity due of the same size and number of cash flows.