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You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?


A) $1,122.54
B) $1,181.62
C) $1,240.70
D) $1,302.74
E) $1,367.88

F) A) and B)
G) A) and C)

Correct Answer

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What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?


A) $969
B) $1,020
C) $1,074
D) $1,131
E) $1,187

F) A) and E)
G) B) and E)

Correct Answer

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Starting to invest early for retirement reduces the benefits of compound interest.

A) True
B) False

Correct Answer

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You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?


A) 4.93%
B) 5.19%
C) 5.46%
D) 5.75%
E) 6.05%

F) B) and C)
G) A) and E)

Correct Answer

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Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

A) True
B) False

Correct Answer

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Starting to invest early for retirement increases the benefits of compound interest.

A) True
B) False

Correct Answer

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Which of the following statements is CORRECT?


A) The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
B) If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.
C) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
D) The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
E) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

F) A) and E)
G) B) and C)

Correct Answer

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All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

A) True
B) False

Correct Answer

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Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?


A) $22,598.63
B) $23,788.03
C) $25,040.03
D) $26,357.92
E) $27,675.82

F) A) and C)
G) A) and E)

Correct Answer

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You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?


A) $11,973
B) $12,603
C) $13,267
D) $13,930
E) $14,626

F) A) and D)
G) A) and E)

Correct Answer

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Last year Thomson Inc's earnings per share were $3.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Thomson's EPS to triple?


A) 9.29
B) 10.33
C) 11.47
D) 12.75
E) 14.02

F) B) and C)
G) A) and E)

Correct Answer

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You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?


A) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
B) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
C) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
D) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.
E) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

F) C) and E)
G) A) and D)

Correct Answer

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Your uncle will sell you his bicycle shop for $250,000, with "seller financing," at a 6.0% nominal annual rate. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years, and then make an additional final (balloon) payment of $50,000 at the end of the last month. What would your equal monthly payments be?


A) $4,029.37
B) $4,241.44
C) $4,464.67
D) $4,699.66
E) $4,947.01

F) A) and B)
G) C) and D)

Correct Answer

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Which of the following statements is CORRECT?


A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
D) Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
E) Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

F) A) and D)
G) A) and C)

Correct Answer

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Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.


A) 7.12%
B) 7.49%
C) 7.87%
D) 8.26%
E) 8.67%

F) C) and E)
G) B) and E)

Correct Answer

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Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?


A) 14.39
B) 15.15
C) 15.95
D) 16.79
E) 17.67

F) D) and E)
G) All of the above

Correct Answer

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You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?


A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
B) The discount rate increases.
C) The riskiness of the investment's cash flows decreases.
D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
E) The discount rate decreases.

F) None of the above
G) B) and D)

Correct Answer

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You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?


A) $50,753
B) $53,424
C) $56,236
D) $59,195
E) $62,311

F) B) and E)
G) A) and B)

Correct Answer

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Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

A) True
B) False

Correct Answer

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If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

A) True
B) False

Correct Answer

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