Question 1

Your firm intends to finance the purchase of a new construction crane.The cost is $1,500,000.What is the size of the first payment if the crane is financed with an interest-only loan at an annual rate of 8.50%?
A)$228,611.56
B)$127,500.00
C)$3,391,475.16
D)There is not enough information to answer this question.

Accepted Answer

An interest-only loan means that the borrower only pays interest on the loan each period, so the first payment would be the interest for the first period. To calculate this, we can use the formula:

First payment = loan amount x interest rate

Plugging in the numbers:

First payment = $1,500,000 x 0.085 = $127,500

Therefore, the answer is B.

Question 2

Amortization tables are common and can be used for all but which of the following?
A)Car loans
B)Mortgage loans
C)Consumer product loans
D)Amortization tables may be used for all of the above.

Accepted Answer

Amortization tables can be used for all types of loans such as car loans, mortgage loans, and consumer product loans.

Question 3

Edward wishes to save enough money to purchase a retirement lake cabin.He is willing to spend $500,000 for the cabin and he can save $25,000 per year and invest the money into an account earning 8.00% per year.If Edward's investments come in the form of equal annual end-of-the-year cash flows and the first cash flow is in exactly one year,how long will it take him to save enough money to buy the lake cabin?
A)Between 8 and 9 years
B)Between 10 and 11 years
C)Between 12 and 13 years
D)Exactly 20 years

Accepted Answer

Using the future value of an annuity formula, it will take Edward between 12 and 13 years to accumulate $500,000 with annual savings of $25,000 at an 8% interest rate.

Question 4

Your firm intends to finance the purchase of a new construction crane.The cost is $1,500,000.How large is the payment at the end of year ten if the crane is financed at a rate of 8.50% as a discount loan?
A)$228,611.56
B)$127,500.00
C)$3,391,475.16
D)There is not enough information to answer this question.

Accepted Answer

The answer of Your firm intends to finance the purchase...

Question 5

You have a choice among three types of loan and wish to pay the LEAST total cash flows.An amortized loan will result in fewer dollars paid out than a discount or an interest-only loan for the same amount,positive interest rate,and time period.

Accepted Answer

An amortized loan has regular payments that include both principal and interest, resulting in the loan being paid off over time. This means that the total amount paid out over the life of the loan will be less than that of a discount or interest-only loan, which do not have regular payments of both principal and interest. Therefore, an amortized loan will result in fewer dollars paid out.

Question 6

Amortization tables are useful for each of the following reasons EXCEPT:
A)determining the principal balance due if the loan is being paid off early.
B)determining how much of a total payment is interest and how much is principal for tax purposes.
C)determining the regular periodic total payment.
D)All of these are useful purposes of an amortization table.

Accepted Answer

Amortization tables are indeed useful for determining the principal balance due if the loan is being paid off early, how much of a total payment is interest versus principal (which is important for tax purposes), and the regular periodic total payment. Therefore, there is no exception listed among the options provided.

Question 7

If you borrow $5,000 at an annual interest rate of 9.0% for six years,what will your repayment(s)be if this is an interest-only loan?

Accepted Answer

The answer of If you borrow $5,000 at an annual...

Question 8

You have saved $47,000 for college and wish to use $15,000 per year.If you use the money as an ordinary annuity and earn 6.15% on your investment,how many years will your annuity last? Use a calculator to determine your answer.
A)4.27 years
B)3.13 years
C)3.59 years
D)3.36 years

Accepted Answer

This problem can be solved using the formula for the present value of an ordinary annuity:

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

where PV is the present value (amount saved), A is the annual payment, r is the interest rate, and n is the number of years.

Plugging in the given values, we get:

$47,000 = $15,000 * ((1 - (1 + 0.0615)^(-n)) / 0.0615)

Simplifying and solving for n, we get:

n = 3.59 years (rounded to two decimal places)

Therefore, the best choice is C.

Question 9

If you borrow $5,000 at an annual interest rate of 9.0% for six years,what will your repayment(s)be if this is a discount loan?

Accepted Answer

The answer of If you borrow $5,000 at an annual...

Question 10

Assume a five-year equal payment amortization schedule with an annual interest rate of 12% and annual payments.If the beginning principal is $8,000,then the first interest payment will be how large?
A)$960.00
B)$1,200.00
C)$2,219.28
D)There is not enough information to answer this question.

Accepted Answer

The annual interest rate is 12%, so the periodic interest rate is 1% (12%/12 months). The annual payment is equal to the present value of an annuity factor of 5 years at 12%, which is $2,333.88. The monthly payment is $2,333.88/12, which is $194.49.

To calculate the first interest payment, we need to find the interest on the beginning principal of $8,000 for the first month. The interest is calculated by multiplying the beginning principal by the periodic interest rate.

Interest for the first month = $8,000 x 1% = $80

Therefore, the first interest payment is $80. Answer choice A is correct.

Question 11

Your firm intends to finance the purchase of a new construction crane.The cost is $1,500,000.What is the size of the annual ordinary annuity payment if the loan is amortized over a ten-year period at a rate of 8.50%?
A)$228,611.56
B)$127,500.00
C)$3,391,475.16
D)There is not enough information to answer this question.

Accepted Answer

The formula to calculate the annual ordinary annuity payment is A = (P*r)/(1-(1+r)^-n), where P is the principal amount borrowed, r is the interest rate per period, and n is the number of periods. Plugging in the values, we get A = (1,500,000*0.085)/(1-(1+0.085)^-10) = $228,611.56. Therefore, the correct choice is A.

Question 12

Marie has a $1,000,000 investment portfolio and she wishes to spend $87,500 per year as an ordinary annuity.If the investment account earns 6% annually,how long will her portfolio last? Use a calculator to determine your answer.
A)11.43 years
B)14.17 years
C)19.86 years
D)23.08 years

Accepted Answer

Using the formula for the present value of an ordinary annuity, we can calculate the number of years the portfolio will last. The formula is: PV = PMT * [(1 - (1 + r)^-n) / r]. Plugging in the values: $1,000,000 = $87,500 * [(1 - (1 + 0.06)^-n) / 0.06], solving for n gives approximately 19.86 years.

Question 13

Which of the following is NOT true regarding the total payment in an equal payment amortization table?
A)The total payment for any period is equal to the principal plus interest payments for that same period.
B)The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment.
C)The final total payment will be greater than the beginning principal for the final period,assuming a positive interest rate.
D)All of the above are true.

Accepted Answer

The answer of Which of the following is NOT true...

Question 14

Your parents have an investment portfolio of $400,000,and they wish to take out cash flows of $50,000 per year as an ordinary annuity.How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%? Use a calculator to determine your answer.
A)8.00 years
B)9.10 years
C)9.60 years
D)10.14 years

Accepted Answer

Using the formula for the present value of an ordinary annuity, we can calculate the number of years the portfolio will last. The formula is: PV = PMT * [(1 - (1 + r)^-n) / r]. Plugging in the values: $400,000 = $50,000 * [(1 - (1 + 0.045)^-n) / 0.045], solving for n gives approximately 10.14 years.

Question 15

The last interest payment on a 12-year,6%,$138,000,fully-amortized loan with annual payments will be less than the first interest payment.

Accepted Answer

In a fully amortized loan, the payments are structured so that the amount of interest decreases over time as the principal is paid down, making the last interest payment less than the first.

Question 16

Your need to repay a loan with a future value of $304,071.00 in 18.5 years.If you can make annual year-end deposits of $11,000 into an account,what annual rate of return would you require to earn enough money to pay the loan in full at the due date?
A)7.92%
B)8.73%
C)4.16%
D)4.39%

Accepted Answer

The answer of Your need to repay a loan with...

Question 17

Once you begin making payments on an amortization schedule for a loan such as a mortgage or car loan,most contracts clearly state that you may NOT pay off the loan early.

Accepted Answer

Most contracts allow for early pay off of the loan, although there may be prepayment penalties or other fees involved. It is important to read the contract carefully to understand the terms and conditions of early pay off.

Question 18

The first interest payment on a 5-year,8%,$100,000,fully-amortized loan with annual payments will be less than the last interest payment.

Accepted Answer

The interest portion of each payment decreases over time as the loan is paid off, so the first interest payment will be higher than the last interest payment.

Question 19

Which of the following is NOT true with regard to an amortization table?
A)The interest payment for a period is equal to the periodic interest rate multiplied by the beginning-of-the-period principal balance.
B)The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment.
C)The total payment is calculated by using the present value of an annuity formula.
D)All of the above are true.

Accepted Answer

The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal balance less the principal portion of the payment for that period, not less the total payment. The total payment includes both principal and interest components.

Question 20

Complete the equal-payments three-year amortization table.

Accepted Answer

The answer of Complete the equal-payments three-year amortization table. ...

Quiz 4: The Time Value of Money Part 2

Your firm intends to finance the purchase of a new construction crane.The cost is $1,500,000.What is the size of the first payment if the crane is financed with an interest-only loan at an annual rate of 8.50%?

Amortization tables are common and can be used for all but which of the following?

Your firm intends to finance the purchase of a new construction crane.The cost is $1,500,000.How large is the payment at the end of year ten if the crane is financed at a rate of 8.50% as a discount loan?

You have a choice among three types of loan and wish to pay the LEAST total cash flows.An amortized loan will result in fewer dollars paid out than a discount or an interest-only loan for the same amount,positive interest rate,and time period.

Amortization tables are useful for each of the following reasons EXCEPT:

If you borrow $5,000 at an annual interest rate of 9.0% for six years,what will your repayment(s)be if this is an interest-only loan?

You have saved $47,000 for college and wish to use $15,000 per year.If you use the money as an ordinary annuity and earn 6.15% on your investment,how many years will your annuity last? Use a calculator to determine your answer.

If you borrow $5,000 at an annual interest rate of 9.0% for six years,what will your repayment(s)be if this is a discount loan?

Assume a five-year equal payment amortization schedule with an annual interest rate of 12% and annual payments.If the beginning principal is $8,000,then the first interest payment will be how large?

Your firm intends to finance the purchase of a new construction crane.The cost is $1,500,000.What is the size of the annual ordinary annuity payment if the loan is amortized over a ten-year period at a rate of 8.50%?

Marie has a $1,000,000 investment portfolio and she wishes to spend $87,500 per year as an ordinary annuity.If the investment account earns 6% annually,how long will her portfolio last? Use a calculator to determine your answer.

Which of the following is NOT true regarding the total payment in an equal payment amortization table?

Your parents have an investment portfolio of $400,000,and they wish to take out cash flows of $50,000 per year as an ordinary annuity.How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%? Use a calculator to determine your answer.

The last interest payment on a 12-year,6%,$138,000,fully-amortized loan with annual payments will be less than the first interest payment.

Your need to repay a loan with a future value of $304,071.00 in 18.5 years.If you can make annual year-end deposits of $11,000 into an account,what annual rate of return would you require to earn enough money to pay the loan in full at the due date?

Once you begin making payments on an amortization schedule for a loan such as a mortgage or car loan,most contracts clearly state that you may NOT pay off the loan early.

The first interest payment on a 5-year,8%,$100,000,fully-amortized loan with annual payments will be less than the last interest payment.

Which of the following is NOT true with regard to an amortization table?

Complete the equal-payments three-year amortization table.