award:

1. 0.77 points

What is the future value of $10,000 on deposit for five years at 6 percent simple interest?
$7,472.58
$10,303.62
→ $13,000.00
$13,382.26

FV = PV + (PV x r x t)
(10,000) + ((10,000 x .06) x 5) = $13,000.00

award:

2. 0.77 points

How much will accumulate in an account with an initial deposit of $100, and which earns 10 percent interest compounded quarterly for three years?
$107.69
$133.10
→ $134.49
$313.84

FV = PV (1 + r)2
100 (1.025)12 = 134.49

award:

3. 0.77 points

How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9 percent interest compounded annually for
40 years?
$87,200.00
→ $675,764.89
$736,583.73
$802,876.27

PV = 2000

= 2000 x 337.8824
= $675,764.89

award:

4. 0.77 points

What EAR is being earned on a deposit of $5,000 made ten years ago today if the deposit is worth $9,948.94 today? The deposit pays interest semi-annually.
3.56 percent
6.76 percent
→ 7.00 percent
7.12 percent

$9,948.94 = $5,000

1.9898 =

1.035 =

.035 =

7% = i

award:

5. 0.77 points

1 of 26
 Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?
The interest rate is very high
The investment period is very long
The compounding is annually
→ This is not possible with positive interest rates

award:

6. 0.77 points

The concept of compound interest refers to:

Earning interest on the original investment
→ Payment of interest on previously earned interest
Investing for a multi-year period of time
Determining the APR of the investment

award:

7. 0.77 points

When an investment pays only simple interest, this means:

The interest rate is lower than on comparable investments
The future value of the investment will be low
The earned interest is non-taxable to the investor
→ Interest is earned only on the original investment

award:

8. 0.77 points

How much interest is earned in the third year on a $1,000 deposit that earns 7 percent interest compounded annually?
$70.00
→ $80.14
$105.62
$140.00

100 x (1.07)2 = $1,144.90 after 2 years.

$1,144.90 x .07 = $80.14

award:

9. 0.77 points

How much interest will be earned in the next year on an investment paying 12 percent compounded annually if $100 was just credited to the account for interest?
$88
$100
→ $112
$200

The investment will again pay $100 plus interest on the previous interest:
$100 x 1.12 = $112.00

award:

10. 0.77 points

Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account
paying 8 percent compounded annually to cover this amount?
$952
$1,600
$1,728
→ $3,973

21
$20,000 = x(1.08)
$20,000 = 5.0338x
$3,973.12 = x

award:

11. 0.77 points

2 of 26
 How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8 percent compounded annually?
9
→ 14
22
25

n
$3,000 = 1,000(1.08)
3 = (1.08)n
14.27, or approx. 14 yrs. = N
Solved with financial calculator; can also be solved with tables or logarithms.

award:

12. 0.77 points

What will be the approximate population of the United States, if its current population of 275 million grows at a compound rate of 2 percent annually for 25 years?
413 million
430 million
→ 451 million
466 million

275 million x (1.02)25 = 451.17 million ≈ 451 million

award:

13. 0.77 points

An interest rate that has been annualized using compound interest is termed the:
simple interest rate
Annual percentage rate
Discounted interest rate
→ Effective annual interest rate

award:

14. 0.77 points

A credit card account that charges interest at the rate of 1.25 percent per month would have an annually compounded rate of _______ and an APR of _______.
→ 16.08 percent; 15.00 percent
14.55 percent; 16.08 percent
12.68 percent; 15.00 percent
15.00 percent; 14.55 percent

Annually compounded rate = (1.0125)12-1 = 16.08%

APR = 1.25% x 12 = 15.0%

award:

15. 0.77 points

In most cases it will save money for consumers to select their loans based on the lowest:
Annual percentage rate
→ Effective annual rate
Number of compounding periods per year
Simple interest rate

award:

16. 0.77 points

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth in lending laws for a loan requiring monthly
payments?
→ The APR is lower than the annually compounded rate
The APR is higher than the annually compounded rate
The APR equals the annually compounded rate
The answer depends on the interest rate

award:

17. 0.77 points

3 of 26
 What is the APR on a loan that charges interest at the rate of 1.4 percent per month?
10.20 percent
14.00 percent
→ 16.80 percent
18.16 percent

1.4% monthly X 12 = 16.8% APR

award:

18. 0.77 points

How much interest can be accumulated during one year on a $1,000 deposit paying continuously compounded interest at an APR of 10 percent?
$100.00
→ $105.17
$110.50
$115.70

Interest = $1,000 x e.1 - $1,000

= $1,000 x 1.1052 - $1,000
= $1,105.17 - $1,000
= $105.17

award:

19. 0.77 points

If interest is paid m times per year, then the per-period interest rate equals the:
Effective annual rate divided by m
Compound interest rate times m
Effective annual rate
→ Annual percentage rate divided by m

award:

20. 0.77 points

If the effective annual rate of interest is known to be 16.08 percent on a debt that has quarterly payments, what is the annual percentage rate?
4.02 percent
10.02 percent
14.50 percent
→ 15.19 percent

(1.1608).25 = 1 + quarterly rate

1.0380 - 1 = quarterly rate
.0380 = quarterly rate
.1519 = quarterly rate x 4

award:

21. 0.77 points

Which account would be preferred by a depositor: an 8 percent APR with monthly compounding or 8.5 percent APR with semi-annual compounding?
8 percent with monthly compounding
→ 8.5 percent with semi-annual compounding
The depositor would be indifferent
The time period must be known to select the preferred account

(1.0667)12-1 = 8.3%
(1.0425)2-1 = 8.68%

Therefore, 'B' is preferred.

award:

22. 0.77 points

What is the annually compounded rate of interest on an account with an APR of 10 percent and monthly compounding?
10.00 percent
→ 10.47 percent
10.52 percent
11.05 percent

4 of 26
 (1.00833) 12-1 = 10.47%

award:

23. 0.77 points

What is the APR on a loan with an effective annual rate of 15.01 percent and weekly compounding of interest?
12.00 percent
12.50 percent
13.00 percent
→ 14.00 percent

1.1501 =

1.0027 =

14% = APR

award:

24. 0.77 points

What is the effective annual interest rate on a 9 percent APR automobile loan that has monthly payments?
9.00 percent
→ 9.38 percent
9.81 percent
10.94 percent

12
Effective rate = (1 + (.09 + 12)) -1
= (1.0075)12-1
= 1.0938-1
= 9.38%

award:

25. 0.77 points

Other things being equal, the more frequent the compounding period, the:
Higher the APR
Lower the APR
→ Higher the effective annual interest rate
Lower the effective annual interest rate

award:

26. 0.77 points

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13 percent rate?
$130.00
→ $138.83
$169.00
$353.34

13
1000 (e. ) =
1000 x 1.1388 = $1,138.83
Thus, $138.83 was earned in interest.

award:

27. 0.77 points

What is the present value of $100 to be deposited today into an account paying 8.0 percent, compounded semi-annually for two years?
$85.48
→ $100.00
$116.00
$116.99

0
$100 x (1.0375) = $100

5 of 26
 award:

28. 0.77 points

If a borrower promises to pay you $1,900 nine years from now in return for a loan of $1,000 today, what effective annual interest rate is being offered?
5.26 percent
→ 7.39 percent
9.00 percent
10.00 percent

PV =

1,000 =

(1 + i)9 = 1.9
1.0739 = 1 + i
7.39% = i

award:

29. 0.77 points

What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today) and earns 10 percent compounded annually?
$25,000.00
→ $25,657.91
$28,223.70
$29,411.76

PV =

= $25,657.91

award:

30. 0.77 points

What is the discount factor for $1 to be received in 5 years at a discount rate of 8 percent?
.4693
.5500
.6000
→ .6806

Discount factor = 1/ (1.08)5

= 1/1.4693
= .6806

award:

31. 0.77 points

How much more would you be willing to pay today for an investment offering $10,000 in four years rather than the normally advertised five-year period? Your discount rate is 8
percent.
→ $544.47
$681.48
$740.74
$800.00

PV =

Vs.

PV = ;

$7,350.30 vs. $6,805.83

$544.47 difference

award:

32. 0.77 points

"Give me $5,000 today and I'll return $20,000 to you in five years," offers the investment broker. To the nearest percent, what annual interest rate is being offered?
25 percent

6 of 26
 29 percent
→ 32 percent
60 percent

$5,000 =

$5,000 (1+ i)5 = 20,000

(1+ i)5 = 4
(1+ i) = 1.3195
i = 31.95%

award:

33. 0.77 points

In calculating the present value of $1,000 to be received 5 years from today, the discount factor has been calculated to be 7008. What is the apparent interest rate?
5.43 percent
→ 7.37 percent
8.00 percent
9.50 percent

discount factor =

.7008 =

7.37% = i

award:

34. 0.77 points

Given a set future value, which of the following will contribute to a lower present value?
→ Higher discount rate
Fewer time periods
Less frequent discounting
Lower discount factor

award:

35. 0.77 points

An APR will be equal to an effective annual rate if:

Simple interest is used
Compounding occurs continuously
→ Compounding occurs annually
An error has occurred; these terms cannot be equal

award:

36. 0.77 points

Cash flows occurring in different periods should not be compared unless:

Interest rates are expected to be stable
The flows occur no more than one year from each other
High rates of interest can be earned on the flows
→ The flows have been discounted to a common date

award:

37. 0.77 points

What is the present value of the following payment stream, discounted at 8 percent annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of
year 3?
→ $5,022.11
$5,144.03
$5,423.87
$5,520.00

7 of 26
 PV =

= 925.93 + 1,714.68 + 2,381.50

= $5,022.11

award:

38. 0.77 points

The present value of the following cash flows is known to be $6,939.91; $500 today, $2,000 in one year, and $5,000 in two years. What discount rate is being used?
3 percent
4 percent
→ 5 percent
6 percent

$6,939.91 = $500/(1 + i)0 + $2,000/(1 + i)1 + $5,000/(1 + i)2

i = 5% by financial calculator

award:

39. 0.77 points

What is the present value of the following set of cash flows at an interest rate of 7 percent; $1,000 today, $2,000 at end of year one, $4,000 at end of year three, and $6,000 at
end of year five?
$9,731
→ $10,412
$10,524
$11,524

PV = $1,000/(1.07)0 + $2,000/(1.07)1 = $4,000/(1.07)3 + $6,000/(1.07)5

= $1,000 + 1,869.16 + 3,265.19 + 4,277.92
= $10,412.27

award:

40. 0.77 points

A cash-strapped young professional offers to buy your car with four, equal annual payments of $3,000, beginning two years from today. Assuming you're indifferent to cash
versus credit, that you can invest at 10 percent, and that you want to receive $9,000 for the car, should you accept?
Yes; present value is $9,510
Yes; present value is $11,372
→ No; present value is $8,645
No; present value is $7,461

4
PV = $3,000 [1/.1-1/(.1 (1.1) )]/1.1
= $3,000 [10-6.8301]/1.1
= $3,000 [3.1699]/1.1
= $9,509.60/1.1
= $8,645.09

award:

41. 0.77 points

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume a 10 percent interest rate and cash flows at end of period.
$297.29
→ $1,486.44
$1,635.08
$2,000.00

Difference= $1,000/.10 - $1,000[1/.10-1/.10(1.10)20]

= $10,000 - $8,513.56
= $1,486.44

award:

42. 0.77 points

A stream of equal cash payments lasting forever is termed:

An annuity
An annuity due
An installment plan
→ A perpetuity

8 of 26
 award:

43. 0.77 points

Which of the following factors is fixed and thus cannot change for a specific perpetuity?
PV of a perpetuity
→ Cash payment of a perpetuity
Interest rate on a perpetuity
Discount rate of a perpetuity

award:

44. 0.77 points

The present value of a perpetuity can be determined by:

Multiplying the payment by the interest rate
Dividing the interest rate by the payment
Multiplying the payment by the number of payments to be made
→ Dividing the payment by the interest rate

award:

45. 0.77 points

A perpetuity of $5,000 per year beginning today is said to offer a 15 percent interest rate. What is its present value?
$33,333.33
$37,681.16
→ $38,333.33
$65,217.39

PV = $5,000 +

= $5,000 + $33,333.33
= $38,333.33

award:

46. 0.77 points

What is the present value of a four-period annuity of $100 per year that begins two years from today if the discount rate is 9 percent?
→ $297.21
$323.86
$356.85
$388.97

PV1 = 100

= 100 [11.111-7.8714]
PV1 = 323.97

PV0 =

= $297.21

award:

47. 0.77 points

How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12 percent?
→ $3,604,78
$3,746.25
$4,037.35
$4,604.78

PV =

= 3,604.78

9 of 26
 award:

48. 0.77 points

$50,000 is borrowed, to be repaid in three equal, annual payments with 10% interest. Approximately how much principal is amortized with the first payment?
$201.06
$500.00
→ $1,510.57
$2,010.57

award:

49. 0.77 points

A car dealer offers payments of $522.59 per month for 48 months on an $25,000 car after making a $4,000 down payment. What is the loan's APR?
6 percent
→ 9 percent
11 percent
12 percent

21,000 = 522.59

40.1848 =

r = .0075; or 9% annualized rate

award:

50. 0.77 points

A corporation has promised to pay $1,000 twenty years from today for each bond sold now. No interest will be paid on the bonds during the twenty years, and the bonds are
said to offer a 7 percent interest rate. Approximately how much should an investor pay for each bond?
$70.00
→ $258.42
$629.56
$857.43

PV = $1,000/(1.07)20
= $1,000/3.8697
= $258.42

award:

51. 0.77 points

A furniture store is offering free credit on purchases of over $1,000. You observe that a big-screen television can be purchased for nothing down and $4,000 due in one year.
The store next door offers an identical television for $3,650 but does not offer credit terms. Which statement below best describes the "free" credit?
→ The "free" credit costs about 8.75 percent
The "free" credit costs about 9.13 percent
The "free" credit costs about 9.59 percent
The "free" credit effectively costs zero percent

$350/$4,000 = 8.75%

award:

52. 0.77 points

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year. The annual interest rate is 12 percent and
payments begin in one month. What is the present value of this two-year loan?
→ $6,246.34
$6,389.78
$6,428.57
$6,753.05

PV = $200

= 200 [100.0-88.7449] + 400

= $2,251.02 + $3,995.32

10 of 26
 = $6,246.34

award:

53. 0.77 points

The salesperson offers, "Buy this new car for $25,000 cash or, with appropriate down payment, pay $500 per month for 48 months at 8 percent interest." Assuming that the
salesperson does not offer a free lunch, calculate the "appropriate" down payment.
$1,000.00
→ $4,520.64
$5,127.24
$8,000.00

PV = $500

= $500 [149.925-108.9663]
= $500 [40.9587]
= $20,479.36
A difference of $4,520.64 exists between cash price and loan value. This should be the down payment.

award:

54. 0.77 points

Which of the following will increase the present value of an annuity, other things equal?
Increasing the interest rate
→ Decreasing the interest rate
Decreasing the number of payments
Decreasing the amount of the payment

award:

55. 0.77 points

What is the present value of a five period annuity of $3,000 if the interest rate is 12 percent and the first payment is made today?
$9,655.65
$10,814.33
→ $12,112.05
$13,200.00

PV = 3,000 +3000

= 3,000 [8.33-5.296) + 3,000

= $12,112.05

award:

56. 0.77 points

$3,000 is deposited into an account paying 10 percent annually, to provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account
after the second payment has been withdrawn?
$1,326.97
$1,206.34
→ $1,096.67
$587.32

award:

57. 0.77 points

If $120,000 is borrowed for a home mortgage, to be repaid at 9 percent interest over 30 years with monthly payments of $965.55, how much interest is paid over the life of the
loan?
$120,000
$162,000
$181,458
→ $227,598

11 of 26
 (965.55 x 360)-120,000 = $227,598

award:

58. 0.77 points

How many monthly payments remain to be paid on an 8 percent mortgage with a 30-year amortization and monthly payments of $733.76, when the balance reaches one-half of
the initial $100,000 amount?
Approximately 268 payments
Approximately 180 payments
→ Approximately 92 payments
Approximately 68 payments

$50,000 = $733.76 [1/.08-1/.08 (1.0067) n

N ≈ 92 by financial calculator

award:

59. 0.77 points

According to the Rule of 72, what approximate interest rate is being offered on a deposit that doubles in value over an eight-year period?
7.2 percent
8.0 percent
→ 9.0 percent
12.5 percent

72/8 = 9.0%

award:

60. 0.77 points

An amortizing loan is one in which:

Payments are made monthly
Accrued interest is paid regularly
The maturity of the loan is known
→ The principal balance is reduced with each payment

award:

61. 0.77 points

You're ready to make the last of four equal, annual payments on a $1,000 loan with a 10 percent interest rate. If the amount of the payment is $315.47, how much of that
payment is accrued interest?
→ $28.68
$31.55
$100.00
$315.47

$315.47 - ($315.47/1.1) = $28.68

award:

62. 0.77 points

What will be the monthly payment on a home mortgage of $75,000 at 12 percent interest, to be amortized over 30 years?
→ $771.46
$775.90
$1,028.61
$1,034.53

75,000 = PMT

PMT [100-2.7817]
75,000 = 97.2183 PMT
771.46 = PMT

award:

63. 0.77 points

12 of 26
 Your real estate agent mentions that homes in your price range require a payment of approximately $1,200 per month over 30 years at 9 percent interest. What is the
approximate size of the mortgage with these terms?
$128,035
$147,940
→ $149,140
$393,120

PV = $1,200

= $1,200 [133.333-9.052]
= $1,200 [124.281]
= $149,140

award:

64. 0.77 points

Which of the following characteristics applies to the amortization of a loan such as a home mortgage?
The amortization decreases with each payment
→ The amortization increases with each payment
The amortization is constant throughout the loan
The amortization fluctuates monthly with changes in interest rates

award:

65. 0.77 points

With $1.5 million in an account expected to earn 8 percent annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today?
$112,150
$120,000
$123,371
→ $133,241

$1,500,000 = pmt 1.08

= pmt [12.5-1.2422] 1.08

= pmt 11.2575 x 1.08
= pmt 12.1584
$123,371 = pmt

award:

66. 0.77 points

How much must be saved annually, beginning one year from now, in order to accumulate $50,000 over the next 10 years, earning 9 percent annually?
→ $3,291
$3,587
$4,500
$4,587

$50,000 = pmt

= pmt

= pmt [15.1929]
$3,291.00 = pmt

award:

67. 0.77 points

If inflation in Wonderland averaged about 20% per month in 2008, what was the annual inflation rate?
20%
240%
→ 790%
890%

13 of 26
 award:

68. 0.77 points

Your retirement account has a current balance of $50,000. What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding
$6,000 annually?
5.02 percent
→ 7.24 percent
9.80 percent
10.07 percent

i = 7.24% by financial calculator

award:

69. 0.77 points

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years, during which time the fund will earn
8 percent interest with monthly compounding?
$261,500.00
→ $323,800.00
$578,700.00
$690,000.00

PV = $2,500

= $2,500 [149.925-20.405]
= $2,500 [129.52]
= $323,800.04

award:

70. 0.77 points

The present value of an annuity stream of $100 per year is $614 when valued at a 10 percent rate. By approximately how much would the value change if these were annuities
due?
An increase of $10
→ An increase of $61
An increase of $100
Unknown without knowing number of payments.

Difference = $614(1.1) - $614 = $61

award:

71. 0.77 points

Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8 percent annually, and the first
payment occurs one year from now?
→ $1,067,000
$1,250,000
$2,315,000
$2,500,000

PV = $100,000

= $100,000 x (12.5 -1.8252)

= 1,067,477.62 ≈ $1,067,000

award:

72. 0.77 points

Assume your uncle recorded his salary history during a 40-year career and found that it had increased ten-fold. If inflation averaged 5 percent annually during the period, how
would you describe his purchasing power, on average?
His purchasing power remained on par with inflation
→ He "beat" inflation by nearly 1 percent annually
He "beat" inflation by slightly over 2 percent annually
He "beat" inflation by 5 percent annually

10 = 1(1 + i)40, i = 5.925% by financial calculator

14 of 26
 award:

73. 0.77 points

Which of the following statements best describes the real interest rate?
Real interest rates exceed inflation rates
Real interest rates can decline only to zero
→ Real interest rates can be negative, zero, or positive
Real interest rates traditionally exceed nominal rates

award:

74. 0.77 points

How much must be deposited today in an account earning 6 percent annually to accumulate a 20 percent down payment to use in purchasing a car one year from now,
assuming that the car's current price is $20,000, and inflation will be 4 percent?
$3,774
$3,782
→ $3,925
$4,080

Need $20,800 x .2 = $4,160

PV = $4,160/(1.06)
= $3,924.55

award:

75. 0.77 points

Which of the following strategies will allow real retirement spending to remain approximately equal, assuming savings of $1,000,000 invested at 8 percent, a 25-year horizon,
and 4 percent expected inflation?
→ Spend approximately $63,000 annually
Spend approximately $78,225 annually
Spend approximately $93,680 annually
Spend approximately $127,500 annually

Real Rate = -1 = 3.85%

$1,000,000 = pmt

$63,001 = pmt

award:

76. 0.77 points

Considering the past economic history of Canada, high rates of price inflation are typically accompanied by:
Low nominal interest rates
→ High nominal interest rates
Negative nominal interest rates
No correlation with nominal interest rates

award:

77. 0.77 points

What is the expected real rate of interest for an account that offers a 12 percent nominal rate of return when the rate of inflation is 6 percent annually?
5.00 percent
→ 5.66 percent
6.00 percent
9.46 percent

1 + real rate = 1.12/1.06

Real rate = 5.66%

award:

78. 0.77 points

What happens over time to the real cost of purchasing a home, if the mortgage payments are fixed in nominal terms and inflation is in existence?
The real cost is constant
The real cost is increasing
→ The real cost is decreasing

15 of 26
 The price index must be known to answer this question

award:

79. 0.77 points

What is the minimum nominal rate of return should you accept, if you require a 4 percent real rate of return and the rate of inflation is expected to average 3.5 percent during the
investment period?
7.36 percent
7.50 percent
→ 7.64 percent
8.01 percent

1.04 =

7.64% = nominal rate

award:

80. 0.77 points

Appleton University seeks to setup a scholarship for its students in perpetuity. Every six months, $5,000 will be provided to students. If interest is 4.8% compounded monthly,
determine the amount that must be invested in order to deliver on the semi-annual scholarship.
→ $206,260
$210,505
$212,222
$219,905

Data entry using the BAII Plus Calculator:

award:

81. 0.77 points

Through fundraising efforts, Kwantlen University has raised $2 million. Determine the annual scholarship value that can be provided to students in perpetuity if the investment
rate is 2.5% compounded quarterly.
$40,470
→ $50,470
$60,470
$70,470

Data entry using the BAII Plus Calculator:

award:

82. 0.77 points

Jackson purchased a $40,000 sports car through a 60 month financing plan. The interest rate was 4.95% compounded monthly. At the end of year 3, Jackson wanted to pay off
the outstanding balance. Determine the amount that must be paid off by Jackson
$11,194
$14,194
→ $17,194
$20,194

16 of 26
 Data entry using the BAII Plus Calculator:

award:

83. 0.77 points

Ahmed purchased a new vehicle costing $28,500 through the dealer's financing promotion. Monthly payments were made at the beginning of each month for 6 years at a rate of
5.5% compounded quarterly. Determine the total amount of interest paid over the 6 year period.
$9,109
$6,920
$5,245
→ $4,849

Data entry using the BAII Plus Calculator:

award:

84. 0.77 points

Franco has been given the option of making $600 quarterly contributions to an investment plan earning 2.95% interest compounded monthly for 10 years. Determine how much
more Franco will earn if contributions are made at the beginning of each quarter versus end of each quarter.
$506
$406
$306

17 of 26
 → $206

Data entry using the BAII Plus Calculator:

award:

85. 0.77 points

Determine the amount that must be deposited today in order for an investor to withdraw $400 per month for 3 years and have $10,500 remaining. Interest is assumed to be
6.45% compounded annually.
$19,190
$20,694
→ $21,801
$22,522

Data entry using the BAII Plus Calculator:

award:

86. 0.77 points

Anna wishes to have $800,000 in her retirement fund in 20 years. If she contributes $2,000 per month at the start of each month for 20 years, what must she deposit now to
achieve this goal? Assume interest is 9.2% compounded semi-annually.
→ $91,127
$101,656
$102,443
$103,982

Data entry using the BAII Plus Calculator:

18 of 26
 award:

87. 0.77 points

A famous athlete went bankrupt by spending his $30 million fortune in 15 years. Given that his investments were earning him 7.45% compounded monthly, determine his annual
spending that allowed him to be penniless in 15 years.
$2,443,012
→ $3,443,012
$4,443,012
$5,443,012

Data entry using the BAII Plus Calculator:

award:

88. 0.77 points

You make a $10,000 initial deposit and make semi-annual contributions of $950. If your investment earns you 2.6% compounded annually, how long will it take before you have
$60,000?
20 years
19 years
→ 18 years
17 years

Data entry using the BAII Plus Calculator:

36 semi-annual is the same as 18 years.

award:

89. 0.77 points

You invest $10,000 in an investment earning 10.57% interest compounded annually. You also withdraw $200 per year. How many years will it take to double your initial
investment to $20,000?
5 years
6 years
7 years
→ 8 years

Data entry using the BAII Plus Calculator:

19 of 26
 award:

90. 0.77 points

Compound interest pays interest for each time period on the original investment plus the accumulated interest.
→ True
False

award:

91. 0.77 points

An effective annual rate must be greater than an annual percentage rate.

True
→ False

award:

92. 0.77 points

A dollar tomorrow is worth more than a dollar today.

True
→ False

award:

93. 0.77 points

The more frequent the compounding, the higher the future value, other things equal.
→ True
False

award:

94. 0.77 points

For a given amount, the lower the discount rate, the less the present value.
True
→ False

award:

95. 0.77 points

When money is invested at compound interest, the growth rate is the interest rate.
→ True
False

award:

96. 0.77 points

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.
→ True
False

20 of 26
 award:

97. 0.77 points

A perpetuity is a special form of an annuity.
→ True
False

award:

98. 0.77 points

An annuity factor represents the future value of $1 that is deposited today.

True
→ False

award:

99. 0.77 points

The Rule of 72 states that the time it will take for an investment to double in value equals approximately 72/r, where r is expressed as a percentage.
→ True
False

award:

100.0.77 points
Converting an annuity to an annuity due decreases the present value.
True
→ False

award:

101.0.77 points
The more frequent the compounding, the higher the future value, other things being equal.
→ True
False

award:

102.0.77 points
Accrued interest declines with each payment on an amortizing loan.
→ True
False

award:

103.0.77 points
The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.
True
→ False

award:

104.0.77 points
The term "constant dollars" refers to equal payments for amortizing a loan.
True
→ False

award:

105.0.77 points
Nominal dollars refer to the amount of purchasing power.
True
→ False

21 of 26
 award:

106.0.77 points
An annual percentage rate (APR) is determined by annualizing the rate using compound interest.
True
→ False

award:

107.0.77 points
If four years of college is expected to cost $150,000 18 years from now, how much must be deposited now into an account that will average 8 percent annually in order to save
the $150,000? By how much would your answer change if you expected 11 percent annually?

FV = PV (1 + i)n
18
$150,000 = PV (1.08)
$150,000 = PV x 3.996
$37,537.35 = PV
If the interest rate increases to 11 percent, the necessary deposit is reduced to $22,923.33.

award:

108.0.77 points
Would you prefer a savings account that paid 7 percent interest, compounded quarterly, over an account that paid 7.5 percent with annual compounding if you had $1,000 to
deposit? Would the answer change if you had $100,000 to deposit?

FV = (1 + i)n for simple interest.

nxm
FV = (1 + i/m) for compound interest.
1x4
Then, FV = (1 + .07/4) = 1.0719
versus FV = (1 = 0.75)1 = 1.075

Thus, the 7.5 percent account will earn $3.10 more in the first year than the 7 percent account with quarterly compounding. The amount to be deposited will not change your
preference: In this case the compounding is not enough to overcome the difference in APR.

award:

109.0.77 points
Discuss the statement, "It is always preferred to select an account that offers compound interest over an account that offers simple interest."

This statement is true if the APRs are equal on the different accounts, and if the compounding occurs more frequently than annually. The statement may be false if the APRs
are not equal, however. A point is reached where the benefit of more frequent compounding is overshadowed by the reduction in APR.

award:

110.0.77 points
After reading the fine print in your credit card agreement, you find that the "low" interest rate is actually an 18 percent APR, or 1.5 percent per month. Now, to make you feel
even worse, calculate the effective annual interest rate.

1 + effective rate =

effective rate - -1

= (1.015)12-1
= 1.1956-1
= .1956-19.56%

award:

111. 0.77 points

Prizes are often not "worth" as much as claimed. Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning
today. Assume an interest rate of 7 percent over the 20 years.

22 of 26
 PV = PMT + PMT (for annuities due)

= 250,000 + 250,000

= 250,000 + 250,000 [14.2857-3.9501]

= 250,000 + 250,000 [10.3356]
= $2,833,900

award:

112.0.77 points
Show numerically that a savings account with a current balance of $1,000 that earns interest at 9 percent annually is precisely sufficient to make the payments on a three-year
loan of $1,000 that carries equal annual payments at 9 percent interest.

The loan payments are:

$1,000 = PMT

= PMT [11.1111-8.5798]
PMT x 2.5313
$395.06 = PMT

After the first year's addition of interest, the account has $1090 and $395.06 is withdrawn to make the first payment. The balance of $694.94 grows to $757.48 at the end of
the second year. After making the second payment of $395.06, $362.42 is left in the account. This amount grows to $395.04 by the end of the third year, which is within a 2
cents rounding error of making the final payment.

award:

113.0.77 points
A loan officer states, "Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year
mortgage at 9 percent interest versus a 15-year mortgage with 8.5 percent interest. Both mortgages are for $100,000 and have monthly payments. What is the difference in
total dollars that will be paid to the lender under each loan?

$100,000 = PMT

PMT [133.3333-9.0515]
= PMT x 124.2818
804.62 = PMT

100,000 = PMT

= PMT [141.1831-39.6286]
= PMT x 101.5545
984.69 = PMT

Difference in total dollars

= (804.62 x 360)-(984.69 x 180)
= 289,663.20-177,244.20
= $112,419

award:

114.0.77 points
Discuss the statement, "Money has a time value."

Money has a time value due to the concept of opportunity cost. In other words, if receipt of funds is forgone until a later period, you lose the opportunity to earn a return on
the funds in the interim. Thus, cash flows that occur in different periods cannot be directly compared without adjusting for these opportunity costs. Discounting cash flows to
a common period adjusts for the time value, and makes cash flows comparable.

award:

115.0.77 points
Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?

Evaluating a project by APR alone ignores the potential significant effects that accrue as a result of compounding on a more frequent than annual basis. For example, over a
long period of time there is a significant difference to the value of an account that carries monthly as opposed to annual compounding. In a similar manner, the cost of a loan

23 of 26
 can best be evaluated through the effective annual rate that considers the cost of payments occurring more frequently than annually.

award:

116.0.77 points
What problem can be caused by "mixing" real and nominal cash flows in discounting exercises?

One of the primary components of a nominal interest rate is a premium for the rate of inflation that is expected during the time period that the interest rate is in effect. On the
other hand, the adjustment that takes a nominal rate to a real rate is typically a downward adjustment that "backs out" the expected impact of inflation. Thus, to discount real
flows with a nominal rate would be overcompensate for the effects of inflation. Alternatively, to discount nominal flows with a real rate would be to under-compensate for
inflationary impact. The only safe, correct method is to discount nominal flows with nominal rates, or discount real flows with real rates.

award:

117.0.77 points
If you were a bank which would you quote, the nominal interest rate or the effective annual interest rate? Why?

Banks would prefer to quote nominal interest rates because, if the nominal rate is compounded more than once a year, then the nominal rate will be lower than the effective
annual rate.

award:

118.0.77 points
Explain the difference between a regular annuity and an annuity due.

The regular annuity assumes all payments are made at the end of the period, whereas the annuity due assumes all payments are made at the beginning of the period.

award:

119.0.77 points
Explain the difference between a very long annuity and a perpetuity.

There is very little difference between a very long annuity and a perpetuity.

award:

120.0.77 points
What three pieces of information do you need to calculate the future value of an annuity?

You need the amount of the payment, the interest rate per period, and the number of periods.

award:

121.0.77 points
What is the difference between the effective annual rate and the nominal rate if the nominal rate is compounded annually?

There is no difference. They are the same thing.

award:

122.0.77 points
Describe the process for determining the present and future values associated with multiple cash flows that are received or paid through time.

There are 3 basic steps:

1. Choose a particular point in time as the basis for economic comparison.

2. Shift all cash flows that occur at different times into economically equivalent amounts at the chosen point in time through compounding or discounting.

24 of 26
 3. Add or subtract all of these equivalent cash flows to obtain a net total.

award:

123.0.77 points
What is the difference between real and nominal cash flows and between real and nominal interest rates?

A dollar is a dollar but the amount of goods that a dollar can buy is eroded by inflation. If prices double, the real value of a dollar halves. Financial managers and economists
often find it helpful to re-express future cash flows in terms of real dollars—that is, dollars of constant purchasing power.
Be careful to distinguish the nominal interest rate and the real interest rate—that is, the rate at which the real value of the investment grows. Discount nominal cash flows
(that is, cash flows measured in current dollars) at nominal interest rates. Discount real cash flows (cash flows measured in constant dollars) at real interest rates. Never mix
and match nominal and real.

award:

124.0.77 points
Mrs. Brown is considering setting up a college fund for her grandson. Mrs. Brown wants to pay her grandson's tuition fees of $5,000 each year for four years. Assume that she
saves an equal amount each year, and the first deposit is made one year from now. Interest rates will remain constant at 8 percent. How much must Mrs. Brown save each
year? Assume her grandson will go to college in 18 years and tuition fees are paid once a year at the beginning of the year.

At the end of 18 years from now, the balance in the college fund must be equal to
4
$5,000 ÷ 0.08 × (1-1 ÷ 1.08 ) × 1.08 = $17,885.48
Therefore, the annual savings required must satisfy the following condition:
18
FV = $17,885.48 = A ÷ 0.08 × (1.08 -1)
A = $477.58/year

award:

125.0.77 points
In 1973 Gordon Moore one of Intel's founders predicted that the number of transistors that could be placed on a single silicon chip would double every 18 months, equivalent to
an annual growth of 59 percent (i.e., 1.591.5 = 2.0). The first microprocessor was built in 1971 and had 2,250 transistors. By 2003 Intel chips contained 410 million transistors,
over 182,000 times the number thirty-two years earlier. What has been the annual compound rate of growth in processing power? How does it compare with the prediction of
Moore's Law?

Call g the annual growth rate of transistors over the 32-year period between 1971 and 2003. Then
32
2,250 x (1 + g) = 410,000,000
32
(1 + g) = 182,222
1 + g = 182,2221/32 = 1.46

So the actual growth rate has been g = .46, or 46 percent, not quite as high as Moore's prediction, but not so shabby either.

award:

126.0.77 points
Lincoln wants to buy a new Mercedes-Benz Jeep. He will need to borrow $20,000 to go with his down payment in order to afford this car. If car loans are available at a 6
percent annual interest rate, what will Lincoln's monthly payment be on a four-year loan?

$20,000=PMT x [1-(1/1.00548)]/0.005
$20,000 = PMT x42.5803
PMT = $469.70

award:

127.0.77 points
How should we compare interest rates quoted over different time intervals—for example, monthly versus annual rates?

Interest rates for short time periods are often quoted as annual rates by multiplying the period rate by the number of periods in a year. These annual percentage rates (APRs)
do not recognize the effect of compound interest, that is, they annualize assuming simple interest. The effective annual rate annualizes using compound interest. It equals the
rate of interest per period compounded for the number of periods in a year.

25 of 26
 award:

128.0.77 points
Marjorie is investing $5,000 in an eight-year certificate of deposit (GIC) that pays 6 percent annual interest with annual compounding. How much will she have when the CD
matures?

FV = $5,000 x 1.068 = $7,969.24 (Marjorie's balance when the eight-year GIC matures)

award:

129.0.77 points
Some home loans involve "points," which are fees charged by the lender. Each point charged means that the borrower must pay 1 percent of the loan amount as a fee. For
example, if 0.5 point is charged on a $100,000 loan, the loan repayment schedule is calculated on the $100,000 loan, but the net amount the borrower receives is only $99,500.
What is the effective annual interest rate charged on such a loan, assuming that loan repayment occurs over 360 months, and that the interest rate is 1 percent per month?

Since the monthly payment is based on a $100,000 loan:

mortgage payment × annuity factor(1%, 360) = 100,000
⇒ monthly mortgage payment = $1,028.61
The net amount received is $99,500. Therefore:
$1,028.61 × annuity factor(r, 360) = $99,500
⇒ r = 1.006% per month
The effective annual rate is: (1.01006) 12 - 1 = 0.1276 = 12.76%

26 of 26