Question 1

The Gift House offers credit to its customers and charges interest of 1.1 percent per month. What is the annual percentage rate?

Accepted Answer

A)   13.20 percent
B)   13.39 percent
C)   13.84 percent
D)   14.03 percent
E)   14.24 percentF) A) and B)
G) A) and C)

Question 2

What is the value today of $3,600 received at the end of each year for 7 years if the first payment is paid at the end of year 3 and the discount rate is 12 percent?

Accepted Answer

A)   $11,694.21
B)   $12,484.57
C)   $13,097.52
D)   $15,089.23
E)   $16,429.52F) A) and E)
G) A) and D)

Question 3

Kristina started setting aside funds 3 years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved for her down payment?

Accepted Answer

A)   $11,542.10
B)   $12,388.19
C)   $15,209.80
D)   $15,366.67
E)   $16,023.13F) A) and B)
G) A) and C)

Question 4

Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is 6 years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?

Accepted Answer

A)   Interest-only
B)   Pure discount
C)   Compound
D)   Amortized
E)   ComplexF) A) and D)
G) A) and E)

Question 5

Today, you are borrowing money from your local bank. The loan is to be repaid in one lump sum payment of $14,000 one year from now. How much money are you borrowing today if the APR is 9.6 percent?

Accepted Answer

A)   $11,899.48
B)   $12,550.00
C)   $12,773.72
D)   $13,221.64
E)   $14,000.00F) A) and E)
G) C) and E)

Question 6

Which one of the following statements concerning annuities is correct?

Accepted Answer

A)   The present value of an annuity is equal to the cash flow amount divided by the discount rate.
B)   An annuity due has payments that occur at the beginning of each time period.
C)   The future value of an annuity decreases as the interest rate increases.
D)   If unspecified, you should assume an annuity is an annuity due.
E)   An annuity is an unending stream of equal payments occurring at equal intervals of time.F) B) and C)
G) B) and E)

Question 7

Your parents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 7 percent interest?

Accepted Answer

A)   $678,342
B)   $700,000
C)   $1,211,516
D)   $1,389,407
E)   $1,428,571F) B) and C)
G) D) and E)

Question 8

A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent compounded semiannually, what is the value of this annuity 4 years from now?

Accepted Answer

A)   $37,139.58
B)   $38,399.20
C)   $40,687.14
D)   $41,811.67
E)   $42,618.52F) A) and B)
G) A) and C)

Question 9

You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?

Accepted Answer

A)   5.84 years
B)   6.37 years
C)   6.80 years
D)   7.33 years
E)   7.59 yearsF) B) and D)
G) A) and D)

Question 10

Wesson Metals has an outstanding loan that calls for equal annual payments of $9,768.46 over the life of the loan. The original loan amount was $50,000 at an APR of 8.5 percent. How much of the second loan payment is interest?

Accepted Answer

A)   $3,525.61
B)   $3,780.93
C)   $4,250.00
D)   $5,409.16
E)   $5,987.53F) B) and D)
G) None of the above

Question 11

Kristi is considering an investment that will pay $5,000 a year for 7 years, starting one year from today. How much should she pay for this investment if she wishes to earn a 12 percent rate of return?

Accepted Answer

A)   $17,899.08
B)   $18,023.88
C)   $20,186.75
D)   $22,818.78
E)   $24,507.19F) All of the above
G) B) and D)

Question 12

The Good Life Store has a 6-year, interest-only loan at 9 percent interest. The firm originally borrowed $125,000. How much will the firm pay in total interest over the life of the loan?

Accepted Answer

A)   $42,189.84
B)   $53,666.67
C)   $67,500.00
D)   $69,000.00
E)   $74,500.00F) C) and D)
G) None of the above

Question 13

If today is Year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 6.9 percent per year.

Accepted Answer

A)   $35,211.57
B)   $36,666.67
C)   $38,604.00
D)   $40,020.50
E)   $42,141.41F) All of the above
G) A) and C)

Question 14

You have an outstanding loan with an EAR of 14.6 percent. What is the APR if interest is compounded monthly?

Accepted Answer

A)   13.48 percent
B)   13.71 percent
C)   14.60 percent
D)   15.41 percent
E)   15.62 percentF) B) and E)
G) A) and C)

Question 15

Which one of the following statements is true concerning annuities?

Accepted Answer

A)   All else equal, an ordinary annuity is more valuable than an annuity due.
B)   All else equal, a decrease in the number of payments increases the future value of an annuity due.
C)   An annuity with payments at the beginning of each period is called an ordinary annuity.
D)   All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
E)   All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.F) D) and E)
G) A) and E)

Question 16

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

Accepted Answer

A)   The present value of Annuity A is equal to the present value of Annuity B.
B)   Annuity B will pay one more payment than Annuity A will.
C)   The future value of Annuity A is greater than the future value of Annuity B.
D)   Annuity B has both a higher present value and a higher future value than Annuity A.
E)   Annuity A has a higher future value but a lower present value than Annuity B.F) C) and D)
G) B) and D)

Question 17

If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows?

Accepted Answer

A)   $71,407.19
B)   $74,221.80
C)   $78,270.77
D)   $80,407.16
E)   $81,121.03F) B) and D)
G) B) and C)

Question 18

Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n) :

Accepted Answer

A)   interest-only loan.
B)   pure discount loan.
C)   quoted rate loan.
D)   compound interest loan.
E)   amortized loan.F) All of the above
G) B) and E)

Question 19

Kris will receive $800 a month for the next 5 years from an insurance settlement. The interest rate is 4 percent, compounded monthly, for the first 2 years and 5 percent, compounded monthly, for the final 3 years. What is this settlement worth to him today?

Accepted Answer

A)   $36,003.18
B)   $38,219.97
C)   $41,388.71
D)   $43,066.22
E)   $45,115.16F) None of the above
G) B) and C)

Question 20

You just won a contest! You will receive $100,000 a year for 20 years, starting today. If you can earn 12 percent on your investments, what are your winnings worth today?

Accepted Answer

A)   $750,000.00
B)   $833,333.33
C)   $836,577.69
D)   $850,000.00
E)   $887,450.72F) B) and C)
G) A) and C)

Exam 5: Discounted Cash Flow Valuation

Wesson Metals has an outstanding loan that calls for equal annual payments of $9,768.46 over the life of the loan. The original loan amount was $50,000 at an APR of 8.5 percent. How much of the second loan payment is interest?

Correct AnswerverifiedShow Answer

A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent compounded semiannually, what is the value of this annuity 4 years from now?

Correct AnswerverifiedShow Answer

The Good Life Store has a 6-year, interest-only loan at 9 percent interest. The firm originally borrowed $125,000. How much will the firm pay in total interest over the life of the loan?

Correct AnswerverifiedShow Answer

You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?

Correct AnswerverifiedShow Answer

Which one of the following statements is true concerning annuities?

Correct AnswerverifiedShow Answer

Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is 6 years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?

Correct AnswerverifiedShow Answer

If today is Year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 6.9 percent per year.

Correct AnswerverifiedShow Answer

Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n) :

Correct AnswerverifiedShow Answer

Today, you are borrowing money from your local bank. The loan is to be repaid in one lump sum payment of $14,000 one year from now. How much money are you borrowing today if the APR is 9.6 percent?

Correct AnswerverifiedShow Answer

You just won a contest! You will receive $100,000 a year for 20 years, starting today. If you can earn 12 percent on your investments, what are your winnings worth today?

Correct AnswerverifiedShow Answer

Kris will receive $800 a month for the next 5 years from an insurance settlement. The interest rate is 4 percent, compounded monthly, for the first 2 years and 5 percent, compounded monthly, for the final 3 years. What is this settlement worth to him today?

Correct AnswerverifiedShow Answer

Kristina started setting aside funds 3 years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved for her down payment?

Correct AnswerverifiedShow Answer

Your parents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 7 percent interest?

Correct AnswerverifiedShow Answer

The Gift House offers credit to its customers and charges interest of 1.1 percent per month. What is the annual percentage rate?

Correct AnswerverifiedShow Answer

What is the value today of $3,600 received at the end of each year for 7 years if the first payment is paid at the end of year 3 and the discount rate is 12 percent?

Correct AnswerverifiedShow Answer

You have an outstanding loan with an EAR of 14.6 percent. What is the APR if interest is compounded monthly?

Correct AnswerverifiedShow Answer

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

Correct AnswerverifiedShow Answer

If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows?

Correct AnswerverifiedShow Answer

Which one of the following statements concerning annuities is correct?

Correct AnswerverifiedShow Answer

Kristi is considering an investment that will pay $5,000 a year for 7 years, starting one year from today. How much should she pay for this investment if she wishes to earn a 12 percent rate of return?

Correct AnswerverifiedShow Answer

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