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1. An appropriate method for evaluating different cash flow scenarios is to compare their present values.
A. True
B. False

2. Aaron earns 10% interest compounded annually on his savings. He will deposit $750 today, $825 one year from today, and
$910 two years from today. What will be the account balance three years from today?
A. $2,486.00
B. $2,642.50

C. $2,733.50
D. $3006.50

3. The amount borrowed on a loan equals the

A. discounted value of the loan payments

B. compounded value of the loan payments

C. future value of the loan payments
D. sum of the loan payments

4. An annuity in which the payments are made at the beginning of each period is
A. an annuity due
B. an ordinary annuity
C. a growing annuity

D. a perpetual annuity

5. Evelyn is saving for her retirement. She will make a deposit into her IRA account at the end of each quarter for the next 36
years. The expected return on the account is 8%. How much will she have to deposit each quarter to have $650,000 in the
account when she retires 36 years from today?
A. $260.34
B. $796.81

C. $2702.61

D. $4,513.89

6. You plan to buy a new car. The price is $30,000 and you will make a down payment of $4,000. Your annual interest rate is 10%
and you intend to pay for the car over five years. What will be your monthly payment?
A. $433.33
B. $552.42

C. $566.67
D. $637.41

7. To determine the monthly payment on a one-year loan, divide the amount of the loan by 12.
A. True
B. False

8. An annuity due is a series of equal cash flows where a cash flow occurs at the end each period.

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A. True

B. False

9. A perpetuity bond pays a coupon of $68 per year and has a required rate of return of 7%. What is the market value of the bond?
A. $63.55
B. $72.76

C. $971.43

D. $1,117.34

10. What is the market value a stock that paid a dividend of $1.90 last year if the dividend is increasing at 5% annually and the
required rate of return on the stock is 20%?
A. $9.50
B. $9.98

C. $12.67
D. $13.30

11. Clear Care has 50 years remaining on a service contract with Bridgeport, Inc. Today, Bridgeport paid $120,000 for services
received last year and the annual payment increases by 2.5% each year. The firm's required rate of return is 15%. What is the
value of the contract to Clear Care?
A. $974,634
B. $980,851

C. $987,131

D. $6,150,000

12. The annual percentage rate (APR) and effective annual interest rate (EAR) are equal for a one period loan.
A. True
B. False

13. The Truth-in-Lending Act requires that the EAR be provided to borrowers for all consumer loans.
A. True
B. False

14. The simple interest rate per period multiplied by the number of payment periods per year gives the:
A. simple interest rate
B. compound interest rate
C. annual percentage rate

D. effective annual interest rate

15. An investment pays 9 percent interest compounded semiannually. What is the effective annual interest rate?
A. 8.9%
B. 9%

C. 9.2%

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D. 9.3%

16. Which of the following problems involve calculating the future value of multiple cash flows?
A. Calculating the price of a bond.
B. Choosing between alternative capital budgeting proposals.
C. Planning a retirement nest egg.
D. Amortizing a home mortgage.

17. You are starting college this month, and your favorite aunt has agreed to give you $2000 at the end of each of your four years
and you can save $4000 at the end of each year for the first two years after you graduate. If all of these amounts are invested
at 7%, how much will you have to start graduate school, six years from now (Round to the nearest dollar)?
A. $ 10,167
B. $ 13,160

C. $ 18,447
D. $ 18,727

18. To calculate the future value of a series of cash flows we can add up all the cash flows and then calculate their compounded
value at the given rate of interest.
A. True
B. False

19. In a typical loan amortization schedule involving a consumer loan the amount of each loan payment is fixed.
A. True
B. False

20. You have won the lottery and will receive 20 annual payments of $10,000 starting today! If you can invest these payments at
8.5%, what is the present value of your winnings (Round to the nearest dollar)?
A. $ 94,633
B. $ 102,667

C. $ 200,000
D. $ 524,891

This is the end of the test. When you have completed all the questions and reviewed your answers, press the button below to
grade the test.

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100% (20 out of 20 correct)

Responses to questions are indicated by the

symbol.

1. An appropriate method for evaluating different cash flow scenarios is to compare their present values.
A. True

B. False
Comparing the present values of different cash flow scenarios is a good way of evaluating these scenarios.
2. Aaron earns 10% interest compounded annually on his savings. He will deposit $750 today, $825 one year from today,
and $910 two years from today. What will be the account balance three years from today?
A. $2,486.00
B. $2,642.50

C. $2,733.50
D. $3006.50

3. The amount borrowed on a loan equals the

A. discounted value of the loan payments

B. compounded value of the loan payments

C. future value of the loan payments
D. sum of the loan payments

The discounted value of the loan payments equals the amount borrowed on the loan.
4. An annuity in which the payments are made at the beginning of each period is
A. an annuity due

B. an ordinary annuity
C. a growing annuity

D. a perpetual annuity
An annuity due is an annuity in which payments are made at the beginning of each period.
5. Evelyn is saving for her retirement. She will make a deposit into her IRA account at the end of each quarter for the next
36 years. The expected return on the account is 8%. How much will she have to deposit each quarter to have $650,000
in the account when she retires 36 years from today?
A. $260.34
B. $796.81

C. $2702.61

D. $4,513.89

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6. You plan to buy a new car. The price is $30,000 and you will make a down payment of $4,000. Your annual interest rate
is 10% and you intend to pay for the car over five years. What will be your monthly payment?
A. $433.33
B. $552.42

C. $566.67
D. $637.41

7. To determine the monthly payment on a one-year loan, divide the amount of the loan by 12.
A. True

B. False

8. An annuity due is a series of equal cash flows where a cash flow occurs at the end each period.
A. True

B. False
With an annuity due, payments are made at the beginning of each period.
9. A perpetuity bond pays a coupon of $68 per year and has a required rate of return of 7%. What is the market value of the
bond?
A. $63.55
B. $72.76

C. $971.43

D. $1,117.34

10. What is the market value a stock that paid a dividend of $1.90 last year if the dividend is increasing at 5% annually and
the required rate of return on the stock is 20%?
A. $9.50
B. $9.98

C. $12.67
D. $13.30

11. Clear Care has 50 years remaining on a service contract with Bridgeport, Inc. Today, Bridgeport paid $120,000 for
services received last year and the annual payment increases by 2.5% each year. The firm's required rate of return is
15%. What is the value of the contract to Clear Care?
A. $974,634
B. $980,851

C. $987,131

D. $6,150,000

3 of 4

12. The annual percentage rate (APR) and effective annual interest rate (EAR) are equal for a one period loan.
A. True

B. False
The annual percentage rate (APR) and effective annual interest rate (EAR) are equal for a one period loan.
13. The Truth-in-Lending Act requires that the EAR be provided to borrowers for all consumer loans.
A. True

B. False
The Truth-in-Lending Act requires lenders to fully inform borrowers of important information related to loans,
including the annual percentage rate charged.
14. The simple interest rate per period multiplied by the number of payment periods per year gives the:
A. simple interest rate

B. compound interest rate

C. annual percentage rate

D. effective annual interest rate

APR is the simple interest rate charged per period multiplied by the number of periods per year.
15. An investment pays 9 percent interest compounded semiannually. What is the effective annual interest rate?
A. 8.9%
B. 9%

C. 9.2%
D. 9.3%

16. Which of the following problems involve calculating the future value of multiple cash flows?
A. Calculating the price of a bond.

B. Choosing between alternative capital budgeting proposals.

C. Planning a retirement nest egg.
D. Amortizing a home mortgage.

Planning a retirement nest egg requires calculating the future value of multiple cash flows.
17. You are starting college this month, and your favorite aunt has agreed to give you $2000 at the end of each of your four
years and you can save $4000 at the end of each year for the first two years after you graduate. If all of these amounts
are invested at 7%, how much will you have to start graduate school, six years from now (Round to the nearest dollar)?
A. $ 10,167

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B. $ 13,160

C. $ 18,447
D. $ 18,727

18. To calculate the future value of a series of cash flows we can add up all the cash flows and then calculate their
compounded value at the given rate of interest.
A. True

B. False

19. In a typical loan amortization schedule involving a consumer loan the amount of each loan payment is fixed.
A. True

B. False
In a typical loan amortization schedule involving a consumer loan the amount of each loan payment is fixed
20. You have won the lottery and will receive 20 annual payments of $10,000 starting today! If you can invest these
payments at 8.5%, what is the present value of your winnings (Round to the nearest dollar)?
A. $ 94,633

B. $ 102,667

C. $ 200,000
D. $ 524,891

Retake Test