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.

Question options:

  

4.27 years

 

3.13 years

 

3.59 years

 

3.36 years

 

Question 2

2.5 / 2.5 points

   

    

An annuity is a series of:

Question options:
  

variable cash payments at regular   intervals across time.

 

equal cash payments at regular   intervals across time.

 

variable cash payments at   different intervals across time.

 

equal cash payments at different   intervals across time.

 

Question 3

2.5 / 2.5 points

       

If you borrow

$100,000

at an annual rate of 8% 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?

Question options:
  

Amortized loan

 

Interest-only loan

 

Discount loan

 

Compound loan

 

Question 4

2.5 / 2.5 points
       

The main variables of the TVM equation are:

Question options:
  

present value, future value, time,   

interest rate

, and payment.

 

present value, future value,   perpetuity, interest rate, and payment.

 

present value, future value, time,   annuity, and interest rate.

 

present value, future value,   perpetuity, interest rate, and principal.

 

Question 5

2.5 / 2.5 points
       

You just won the Publisher’s Clearing House Sweepstakes and the right to 20 after-tax ordinary annuity cash flows of $163,291.18. Assuming a discount rate of 7.50%, what is the present value of your lottery winnings? Use a calculator to determine your answer.

Question options:
  

$3,265,823.60

 

$1,789,520.81

 

$1,664,670.52

 

There is not enough information to   answer this question.

 

Question 6

2.5 / 2.5 points
       

You have just won the Reader’s Digest lottery of

$5,000

per year for 20 years, with the first payment today followed by 19 more start-of-the-year cash flows. At an interest rate of 5%, what is the present value of your winnings?

Question options:
  
$100,000
 

$65,426.60

 

$62,311.05

 

$47,641.18

 

Question 7

2.5 / 2.5 points
       

What is the future value in

Year

12 of an ordinary annuity cash flow of

$6,000

per year at an interest rate of 4% per year?

Question options:
  

$90,154.83

 

$93,761.02

 

$28,675.97

 

$32,117.08

 

Question 8

2.5 / 2.5 points
       

What is the present value of a stream of annual end-of-the-year annuity cash flows if the discount rate is 0%, and the cash flows of $50 last for 20 years?

Question options:
  

Less than $1,000

 

Exactly $1,000

 

More than $1,000

 

This question cannot be answered   because we have an interest rate of 0%.

 

Question 9

2.5 / 2.5 points
       

Which is greater, the present value of a $1,000 five-year ordinary annuity discounted at 10%, or the present value of a $1,000 five-year

annuity due

discounted at 10%?

Question options:
  

The ordinary annuity is worth more   with a present value of $3,790.79.

 

The annuity due is worth more with   a present value of $4,169.87.

 

The ordinary annuity is worth more   with a present value of $4,169.87.

 

The annuity due is worth more with   a present value of $4,586.85.

 

Question 10

2.5 / 2.5 points
       

What is the future value in Year 25 of an ordinary annuity cash flow of $2,000 per year at an interest rate of 10% per year?

Question options:
  

$66,505.81

 

$55,000.00

 

$196,694.12

 

$216,363.53

 

Question 11

2.5 / 2.5 points
       

Given the following cash flows, what is the future value at Year 6 when compounded at an interest rate of 8%?

  
Year
0
2
4
6
 

Cash Flow

$5,000

$7,000

$9,000

$11,000

Question options:
  

$38,955.39

 

$56,687.43

 

$42,074.42

 

$32,000

 

Question 12

2.5 / 2.5 points
       

If you borrow $100,000 at an annual rate of 8% 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?

Question options:
  
Amortized loan
 
Interest-only loan
 
Discount loan
 
Compound loan
 

Question 13

2.5 / 2.5 points
       

Randy W. recently won the Western States Lottery of $6,500,000. The lottery pays either a total of twenty $325,000 payments per year with the first payment today (i.e., an annuity due), or $3,500,000 today. At what interest rate would Randy be financially indifferent between these two payout choices?

Question options:
  

5.37%

 

7.36%

 

7.76%

 

8.00%

 

Question 14

2.5 / 2.5 points
       

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?

Question options:
  
Amortized loan
 
Interest-only loan
 
Discount loan
 
Compound loan
 

Question 15

0 / 2.5 points

       

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?

Question options:
  
$0
 
$6,000
 

$8,333.33

 

$12,161.29

 

Question 16

2.5 / 2.5 points
       

If for the next 40 years you place $3,000 in equal year-end deposits into an account earning 8% per year, how much money will be in the account at the end of that time period?

Question options:
  

$120,000.00

 

$777,169.56

 

$839,343.12

 

$2,606,942.58

 

Question 17

2.5 / 2.5 points
       

If you borrow $100,000 at an annual rate of 8% 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?

Question options:
  
Amortized loan
 
Interest-only loan
 
Discount loan
 
Compound loan
 

Question 18

0 / 2.5 points
       

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 10 if the crane is financed at a rate of 8.50% as a discount loan?

Question options:
  

$228,611.56

 

$127,500

 

$3,391,475.16

 
There is not enough information to   answer this question.
 

Question 19

2.5 / 2.5 points
       

Present value calculations do which of the following?

Question options:
  

Compound all future cash flows   into the future

 

Compound all future cash flows   back to the present

 

Discount all future cash flows   back to the present

 

Discount all future cash flows   into the future

 

Question 20

2.5 / 2.5 points
       

A/An __________ is a series of cash flows at regular intervals across time.

Question options:
  
annuity
 
annuity due
 

perpetuity due

 

None of the above

 

Online Exam 5

   

Question 21

2.5 / 2.5 points

Assume that Don is 45 years old and has 20 years for saving until he retires. He expects an APR of 8.5% on his investments. How much does he need to save if he puts money away annually in equal end-of-the-year amounts to achieve a future value of $1 million in 20 years’ time?

Question options:
  

$20,570.00

 

$20,670.97

 

$20,770.90

 

$20,800.00

 

Question 22

2.5 / 2.5 points
       

The phrase “price to rent money” is sometimes used to refer to:

Question options:
  

historical prices.

 

compound rates.

 

discount rates.

 

interest rates.

 

Question 23

2.5 / 2.5 points
       

Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5%. What is your investment worth in one year?

Question options:
  

$1,025.00

 

$1,500.95

 

$1,025.27

 

$1,050.95

 

Question 24

2.5 / 2.5 points
       

James is a rational investor wishing to maximize his return over a 20-year period. The current yield curve is inverted with one-year rates at 5% and 20-year rates at 3.5%. James will invest in the lower-rate 20-year bonds if:

Question options:
  

he thinks rates will fall in the   future and locking in long-term rates today may provide the highest long-run   average return.

 

he thinks rates will rise in the   future and locking in long-term rates today may provide the lowest long-run   average return.

 

he thinks rates will remain flat   at 5% in the future and locking in long-term rates today will prevent him   from appearing greedy to those without this investment opportunity.

 

James has no idea what to do and   should just skip this question.

 

Question 25

2.5 / 2.5 points
       

Suppose you deposit money in a certificate of deposit (CD) at a bank.

Which of the following statements is true?

Question options:
  

The bank is borrowing money from   you without a promise to repay that money with interest.

 

The bank is lending money to you   with a promise to repay that money with interest.

 

The bank is technically renting   money from you with a promise to repay that money with interest.

 

The bank is lending money to you,   but not borrowing money from you.

 

Question 26

2.5 / 2.5 points
       

Assume you just bought a new home and now have a mortgage on the home. The amount of the principal is $150,000, the loan is at 5% APR, and the monthly payments are spread out over 30 years. What is the loan payment? Use a calculator to determine your answer.

Question options:
  

$798.95

 

$805.23

 

$850.32

 

$903.47

 

Question 27

2.5 / 2.5 points
       

The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are:

Question options:
  

the

default premium

and the   bankruptcy premium.

 

the liquidity premium and the   maturity premium.

 

the default premium and the   maturity premium.

 

the

inflation premium

and the   maturity premium.

 

Question 28

2.5 / 2.5 points
       

You put down 20% on a home with a purchase price of $300,000. The down payment is thus $60,000, leaving a balance owed of $240,000. The bank will loan you the remaining balance at 4.28% APR. You will make annual payments with a 20-year payment schedule. What is the annual annuity payment under this schedule?

Question options:
  

$18,100.23

 

$22,625.29

 

$12,000.00

 

$33,785.23

 

Question 29

2.5 / 2.5 points
       

Nominal interest rates are the sum of two major components. These components are:

Question options:
  

the real interest rate and   expected inflation.

 

the risk-free rate and expected   inflation.

 

the real interest rate and default   premium.

 

the real interest rate and the   T-bill rate.

 

Question 30

2.5 / 2.5 points
       

When interest rates are stated or given for loan repayments, it is assumed that they are __________ unless specifically stated otherwise.

Question options:
  

daily rates

 

annual percentage rates

 

effective annual rates

 

APYs

 

Question 31

2.5 / 2.5 points
       

The __________ compensates the investor for the additional risk that the loan will not be repaid in full.

Question options:
  
default premium
 
inflation premium
 

real rate

 
interest rate
 

Question 32

2.5 / 2.5 points
       

If you take out a loan from a bank, you will be charged:

Question options:
  

for principal but not interest.

 

for interest but not principal.

 

for both principal and interest.

 

for interest only.

 

Question 33

2.5 / 2.5 points
       

Which of the following statements is true if you increase your monthly payment above the required loan payment?

Question options:
  

The extra portion of the payment   does not go to the principal.

 

You can significantly increase the   number of payments needed to pay off the loan.

 

The extra portion of the payment   increases the principal.

 

You can significantly reduce the   number of payments needed to pay off the loan.

 

Question 34

2.5 / 2.5 points
       

We can write the true relationship between the nominal interest rate and the real rate and expected inflation as which of the following?

Question options:
  

(1 + r) = (1 + r) × (1 + h*)

 

r = (1 + r*) × (1 + h) – 1

 

r* = (1 + r) × (1 + h) -1

 

r = (1 + r*) × (1 + h) + 1

 

Question 35

2.5 / 2.5 points
       

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year:

Question options:
  

you will be able to consume fewer   goods.

 

you will be able to buy the same   amount of goods or services.

 

you will be able to buy fewer   goods or services.

 

you will be able to buy more goods   or services.

 

Question 36

2.5 / 2.5 points
       

The typical payments on a consumer loan are made at:

Question options:
  

the end of each day.

 

the end of each week.

 

the end of each month.

 

the beginning of each month.

 

Question 37

2.5 / 2.5 points
       

What is the EAR if the APR is 10.52% and compounding is daily?

Question options:
  

Slightly above 10.09%

 

Slightly below 11.09%

 

Slightly above 11.09%

 

Over 11.25%

 

Question 38

2.5 / 2.5 points
       

Suppose you invest $2,000 today, compounded monthly, with an annual interest rate of 7.5%. What is your investment worth in one year?

Question options:
  

$2,150

 

$2,152.81

 

$2,155.27

 

$2,154.77

 

Question 39

2.5 / 2.5 points
       

Suppose you postpone consumption so that by investing at 8% you will have an extra

$800

to spend in one year. Suppose that inflation is 4% during this time. What is the approximate real increase in your purchasing power?

Question options:
  
$800
 

$600

 

$400

 

$200

 

Question 40

2.5 / 2.5 points
       
Which of the following statements is true?
Question options:
  

On many calculators the TVM key   for interest is I/Y; this is Interest per Year, or the EAR rate.

 

On many calculators the TVM key   for interest is Y/I; this is Interest per Year, or the APR rate.

 

On many calculators the TVM key   for interest is I/Y; this is Interest per Year, or the APR rate.

 

On many calculators the TVM key   for a period is I/Y.