Ross12e Chapter 06 TB Answer Key

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Ross12e Chapter 06 TB Answer Key
The Department of Business Adiministration (Chung-Ang University)
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Fundamentals of Corporate Finance, 12e (Ross)

Chapter 6 Discounted Cash Flow Valuation
1) Which one of the following statements correctly defines a time value of money relationship?
A) Time and future values are inversely related, all else held constant.
B) Interest rates and time are positively related, all else held constant.
C) An increase in a positive discount rate increases the present value.
D) An increase in time increases the future value given a zero rate of interest.
E) Time and present value are inversely related, all else held constant.
Answer: E
Difficulty: 1 Easy
Topic: Time value of money
Learning Objective: 06-01 Determine the future and present value of investments with multiple
cash flows.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively.
Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively.
Which one of the following statements is true concerning these two projects given a positive
discount rate? (No calculations needed)
A) Both projects have the same future value at the end of Year 4.
B) Both projects have the same value at Time 0.
C) Both projects are ordinary annuities.
D) Project Y has a higher present value than Project X.
E) Project X has both a higher present and a higher future value than Project Y.
Answer: E
Difficulty: 1 Easy
Topic: Present value - multiple cash flows
cash flows.
Bloom's: Understand
1
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3) Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively.
Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively.
Which one of the following statements is correct assuming the discount rate is positive? (No
calculations needed)
A) The cash flows for Project B are an annuity, but those of Project A are not.
B) Both sets of cash flows have equal present values as of Time 0.
C) The present value at Time 0 of the final cash flow for Project A will be discounted using an
exponent of three.
D) Both projects have equal values at any point in time since they both pay the same total
amount.
E) Project B is worth less today than Project A.
Answer: E
Difficulty: 1 Easy
cash flows.
Bloom's: Understand
4) You are comparing two investment options that each pay 6 percent interest, compounded
annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first
year followed by two annual payments of $5,000 each. Option B pays three annual payments of
$4,000 each. Which one of the following statements is correct given these two investment
options? Assume a positive discount rate. (No calculations needed.)
A) Both options are of equal value since they both provide $12,000 of income.
B) Option A has the higher future value at the end of Year 3.
C) Option B has a higher present value at Time 0.
D) Option B is a perpetuity.
E) Option A is an annuity.
Answer: C
Difficulty: 1 Easy
cash flows.
Bloom's: Understand
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5) Which one of the following statements related to annuities and perpetuities is correct?
A) An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10
years at 7 percent interest, compounded annually.
B) A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100
monthly payments provided the discount rates are equal.
C) Most loans are a form of a perpetuity.
D) The present value of a perpetuity cannot be computed but the future value can.
E) Perpetuities are finite but annuities are not.
Answer: B
Difficulty: 1 Easy
Topic: Perpetuities
cash flows.
Bloom's: Understand
6) Which one of these statements related to growing annuities and perpetuities is correct?
A) You can compute the present value of a growing annuity but not a growing perpetuity.
B) In computing the present value of a growing annuity, you discount the cash flows using the
growth rate as the discount rate.
C) The future value of an annuity will decrease if the growth rate is increased.
D) An increase in the rate of growth will decrease the present value of an annuity.
E) The present value of a growing perpetuity will decrease if the discount rate is increased.
Answer: E
Difficulty: 1 Easy
Topic: Perpetuities
cash flows.
Bloom's: Understand
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7) You are comparing two annuities that offer regular payments of $2,500 for five years and
pay .75 percent interest per month. You will purchase one of these today with a single lump sum
payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly,
starting one month from today. Which one of the following statements is correct concerning
these two annuities?
A) These annuities have equal present values but unequal future values.
B) These two annuities have both equal present and equal future values.
C) Annuity B is an annuity due.
D) Annuity A has a smaller future value than annuity B.
E) Annuity B has a smaller present value than annuity A.
Answer: E
Difficulty: 1 Easy
Topic: Annuities
cash flows.
Bloom's: Understand
8) An ordinary annuity is best defined as:

A) increasing payments paid for a definitive period of time.
B) increasing payments paid forever.
C) equal payments paid at the end of regular intervals over a stated time period.
D) equal payments paid at the beginning of regular intervals for a limited time period.
E) equal payments that occur at set intervals for an unlimited period of time.
Answer: C
Difficulty: 1 Easy
Topic: Annuities
cash flows.
Bloom's: Remember
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9) A perpetuity is defined as:

A) a limited number of equal payments paid in even time increments.
B) payments of equal amounts that are paid irregularly but indefinitely.
C) varying amounts that are paid at even intervals forever.
D) unending equal payments paid at equal time intervals.
E) unending equal payments paid at either equal or unequal time intervals.
Answer: D
Difficulty: 1 Easy
Topic: Perpetuities
cash flows.
Bloom's: Remember
10) A Canadian consol is best categorized as a(n):

A) ordinary annuity.
B) amortized cash flow.
C) annuity due.
D) discounted loan.
E) perpetuity.
Answer: E
Difficulty: 1 Easy
Topic: Perpetuities
cash flows.
Bloom's: Remember
11) The interest rate that is most commonly quoted by a lender is referred to as the:
A) annual percentage rate.
B) compound rate.
C) effective annual rate.
D) simple rate.
E) common rate.
Answer: A
Difficulty: 1 Easy
Topic: Loan interest and rates
Learning Objective: 06-04 Show how interest rates are quoted (and misquoted).
Bloom's: Remember
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12) The actual interest rate on a loan that is compounded monthly but expressed as an annual rate
is referred to as the ________ rate.
A) stated
B) discounted annual
C) effective annual
D) periodic monthly
E) consolidated monthly
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
13) Your credit card charges you .85 percent interest per month. This rate when multiplied by 12
is called the ________ rate.
A) effective annual
B) annual percentage
C) periodic interest
D) compound interest
E) episodic interest
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
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14) Which one of the following statements related to loan interest rates is correct?
A) The annual percentage rate considers the compounding of interest.
B) When comparing loans you should compare the effective annual rates.
C) Lenders are most apt to quote the effective annual rate.
D) Regardless of the compounding period, the effective annual rate will always be higher than
the annual percentage rate.
E) The more frequent the compounding period, the lower the effective annual rate given a fixed
annual percentage rate.
Answer: B
Difficulty: 1 Easy
Bloom's: Understand
15) Which one of the following statements concerning interest rates is correct?
A) Savers would prefer annual compounding over monthly compounding given the same annual
percentage rate.
B) The effective annual rate decreases as the number of compounding periods per year
increases.
C) The effective annual rate equals the annual percentage rate when interest is compounded
annually.
D) Borrowers would prefer monthly compounding over annual compounding given the same
annual percentage rate.
E) For any positive rate of interest, the annual percentage rate will always exceed the effective
annual rate.
Answer: C
Difficulty: 1 Easy
Topic: Interest rates
Bloom's: Understand
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16) Which one of the following compounding periods will yield the lowest effective annual rate
given a stated future value at Year 5 and an annual percentage rate of 10 percent?
A) Annual
B) Semi-annual
C) Monthly
D) Daily
E) Continuous
Answer: A
Difficulty: 1 Easy
Bloom's: Understand
17) A loan where the borrower receives money today and repays a single lump sum on a future
date is called a(n) ________ loan.
A) amortized
B) continuous
C) balloon
D) pure discount
E) interest-only
Answer: D
Difficulty: 1 Easy
Topic: Types of loans
Learning Objective: 06-03 Describe how loans are amortized or paid off.
Bloom's: Remember
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18) A loan that calls for periodic interest payments and a lump sum principal payment is referred
to as a(n) ________ loan.
A) amortized
B) modified
C) balloon
D) pure discount
E) interest-only
Answer: E
Difficulty: 1 Easy
Bloom's: Remember
19) Amortized loans must have which one of these characteristics over its life?
A) Either equal or unequal principal payments
B) One lump-sum principal payment
C) Increasing payments
D) Equal interest payments
E) Declining periodic payments
Answer: A
Difficulty: 1 Easy
Bloom's: Understand
20) A(n) ________ loan has regular payments that include both principal and interest but these
payments are insufficient to pay off the loan.
A) perpetual
B) continuing
C) balloon
D) pure discount
E) interest-only
Answer: C
Difficulty: 1 Easy
Bloom's: Understand
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21) The entire repayment of a(n) ________ loan is computed simply by computing one single
future value.
A) interest-only
B) balloon
C) amortized
D) pure discount
E) bullet
Answer: D
Difficulty: 1 Easy
Bloom's: Understand
22) With an interest-only loan the principal is:

A) forgiven over the loan period; thus it does not have to be repaid.
B) repaid in decreasing increments and included in each loan payment.
C) repaid in one lump sum at the end of the loan period.
D) repaid in equal annual payments.
E) repaid in increasing increments through regular monthly payments.
Answer: C
Difficulty: 1 Easy
Bloom's: Understand
23) An amortized loan:

A) requires the principal amount to be repaid in even increments over the life of the loan.
B) may have equal or increasing amounts applied to the principal from each loan payment.
C) requires that all interest be repaid on a monthly basis while the principal is repaid at the end
of the loan term.
D) requires that all payments be equal in amount and include both principal and interest.
E) repays both the principal and the interest in one lump sum at the end of the loan term.
Answer: B
Difficulty: 1 Easy
Bloom's: Understand
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24) You need $25,000 today and have decided to take out a loan at 7 percent interest for five
years. Which one of the following loans would be the least expensive for you? Assume all loans
require monthly payments and that interest is compounded on a monthly basis.
A) Interest-only loan
B) Amortized loan with equal principal payments
C) Amortized loan with equal loan payments
D) Discount loan
E) Balloon loan where 50 percent of the principal is repaid as a balloon payment
Answer: B
Difficulty: 1 Easy
Bloom's: Understand
25) Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday
Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three
years, respectively. After that time, they feel the business will be worthless. If the desired rate of
return is 14.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday
Vacations?
A) $519,799.59
B) $538,615.08
C) $545,920.61
D) $595,170.53
E) $538,407.71
Answer: A
Explanation: PVA = $218,000/1.145 + $224,000/1.1452 + $238,000/1.1453
PV = $519,799.59
Difficulty: 2 Medium
cash flows.
Bloom's: Apply
AACSB: Knowledge Application
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26) You are considering two savings options. Both options offer a rate of return of 7.6 percent.
The first option is to save $2,500, $2,500, and $3,000 at the end of each year for the next three
years, respectively. The other option is to save one lump sum amount today. You want to have the
same balance in your savings account at the end of the three years, regardless of the savings
method you select. If you select the lump sum method, how much do you need to save today?
A) $7,414.59
B) $6,289.74
C) $6,660.00
D) $6,890.89
E) $6,784.20
Answer: D
Explanation: PV = $2,500/1.076 + $2,500/1.0762 + $3,000/1.0763
PV = $6,890.89
cash flows.
Bloom's: Apply
27) Your parents have made you two offers. The first offer includes annual gifts of $5,000,
$6,000, and $8,000 at the end of each of the next three years, respectively. The other offer is the
payment of one lump sum amount today. You are trying to decide which offer to accept given the
fact that your discount rate is 6.2 percent. What is the minimum amount that you will accept
today if you are to select the lump sum offer?
A) $16,707.06
B) $16,407.78
C) $16,360.42
D) $17,709.48
E) $17,856.42
Answer: A
Explanation: PV = $5,000/1.062 + $6,000/1.0622 + $8,000/1.0623
PV = $16,707.06
cash flows.
Bloom's: Apply
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28) You want to start a business that you believe can produce cash flows of $5,600, $48,200, and
$125,000 at the end of each of the next three years, respectively. At the end of three years you
think you can sell the business for $250,000. At a discount rate of 16 percent, what is this
business worth today?
A) $258,803.02
B) $314,011.33
C) $280,894.67
D) $325,837.81
E) $297,077.17
Answer: C
Explanation: PV = $5,600/1.16 + $48,200/1.162 + ($125,000 + 250,000)/1.163
PV = $280,894.67
cash flows.
Bloom's: Apply
29) You are considering a project with cash flows of $16,500, $25,700, and $18,000 at the end of
each year for the next three years, respectively. What is the present value of these cash flows,
given a discount rate of 7.9 percent?
A) $54,877.02
B) $51,695.15
C) $55,429.08
D) $46,388.78
E) $53,566.67
Answer: B
Explanation: PV = $16,500/1.079 + $25,700/1.0792 + $18,000/1.0793
PV = $51,695.15
cash flows.
Bloom's: Apply
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30) You just signed a consulting contract that will pay you $38,000, $42,000, and $45,000
annually at the end of the next three years, respectively. What is the present value of this contract
given a discount rate of 10.5?
A) $102,138.76
B) $108,307.67
C) $112,860.33
D) $92,433.27
E) $96,422.15
Answer: A
Explanation: PV = $38,000/1.105 + $42,000/1.1052 + $45,000/1.1053
PV = $102,138.76
cash flows.
Bloom's: Apply
31) You have some property for sale and have received two offers. The first offer is for $89,500
today in cash. The second offer is the payment of $35,000 today and an additional guaranteed
$70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should
you accept and why?
A) You should accept the $89,500 today because it has the higher net present value.
B) You should accept the $89,500 today because it has the lower future value.
C) You should accept the first offer as it is a lump sum payment.
D) You should accept the second offer because it has the larger net present value.
E) It does not matter which offer you accept as they are equally valuable.
Answer: D
Explanation: Offer A: PV = $89,500
Offer B: PV = $35,000 + $70,000/1.1152

PV = $91,305.17
cash flows.
Bloom's: Analyze
AACSB: Analytical Thinking
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32) Your anticipated wedding is three years from today. You don't know who your spouse will be
but you do know that you are saving $10,000 today and $17,000 one year from today for this
purpose. You also plan to pay the final $12,000 of anticipated costs on your wedding day. At a
discount rate of 5.5 percent, what is the current cost of your upcoming wedding?
A) $36,333.11
B) $41,065.25
C) $36,895.17
D) $38,411.08
E) $35,248.16
Answer: A
Explanation: PV = $10,000 + $17,000/1.055 + $12,000/1.0553
PV = $36,333.11
cash flows.
Bloom's: Analyze
33) One year ago, JK Mfg. deposited $12,000 in an investment account for the purpose of buying
new equipment four years from today. Today, it is adding another $15,000 to this account. The
company plans on making a final deposit of $10,000 to the account one year from today. How
much cash will be available when the company is ready to buy the equipment assuming an
interest rate of 5.5 percent?
A) $43,609.77
B) $45,208.61
C) $44,007.50
D) $46,008.30
E) $47,138.09
Answer: D
Explanation: FV = $12,000(1.0555) + $15,000(1.0554) + $10,000(1.0553)
FV = $46,008.30
Topic: Future value - multiple cash flows
cash flows.
Bloom's: Analyze
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34) Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will
receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end
of Year 6 if the interest rate is 8 percent?
A) $38,418.80
B) $32,907.67
C) $36,121.08
D) $39,010.77
E) $33,445.44
Answer: C
Explanation: FV = $7,500(1.084) + $9,000(1.083) + $12,500(1.082)
FV = $36,121.08
cash flows.
Bloom's: Analyze
35) Sue plans to save $4,500, $0, and $5,500 at the end of Years 1 to 3, respectively. What will
her investment account be worth at the end of the Year 3 if she earns an annual rate of 4.15
percent?
A) $10,583.82
B) $10,381.25
C) $10,609.50
D) $11,526.50
E) $10,812.07
Answer: B
Explanation: FV = $4,500(1.04152) + $5,500
FV = $10,381.25
cash flows.
Bloom's: Analyze
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36) A proposed project has cash flows of $2,000, $?, $1,750, and $1,250 at the end of Years 1 to
4. The discount rate is 7.2 percent and the present value of the four cash flows is $6,669.25.
What is the value of the Year 2 cash flow?
A) $2,450
B) $2,750
C) $2,500
D) $2,250
E) $2,800
Answer: E
Explanation: PVCF2 = $6,669.25 − $2,000/1.072 − $1,750/1.0723 − $1,250/1.0724
PVCF2 = $2,436.52
CF2 = $2,436.52(1.0722)
CF2 = $2,800
cash flows.
Bloom's: Analyze
37) Waldo expects to save the following amounts: Year 1 = $50,000; Year 2 = $28,000; Year 3 =
$12,000. If he can earn an average annual return of 10.5 percent, how much will he have saved in
this account exactly 25 years from the time of the first deposit?
A) $1,172,373
B) $935,334
C) $806,311
D) $947,509
E) $1,033,545
Answer: E
Explanation: FV = $50,000(1.10525) + $28,000(1.10524) + $12,000(1.10523)
FV = $1,033,545
cash flows.
Bloom's: Analyze
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38) A charity plans to invest annual payments of $60,000, $70,000, $75,000, and $50,000,
respectively, over the next four years. The first payment will be invested one year from today.
Assuming the investment earns 5.5 percent annually, how much will the charity have available
four years from now?
A) $263,025
B) $236,875
C) $277,491
D) $328,572
E) $285,737
Answer: C
Explanation: FV = $60,000(1.0553) + $70,000(1.0552) + $75,000(1.055) + $50,000
FV = $277,491
cash flows.
Bloom's: Analyze
39) Your broker is offering 1.2 percent compounded daily on its money market account. If you
deposit $7,500 today, how much will you have in your account 15 years from now?
A) $8,979.10
B) $9,714.06
C) $8,204.50
D) $9,336.81
E) $9,414.14
Answer: A
Explanation: FV = $7,500[1 + (.012/365)](15)(365)
FV = $8,979.10
Topic: Future value - single cash flow
cash flows.
Bloom's: Analyze
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40) Your grandmother will be gifting you $150 at the end of each month for four years while you
attend college. At a discount rate of 3.7 percent, what are these payments worth to you on the day
you enter college?
A) $6,201.16
B) $6,682.99
C) $6,539.14
D) $6,608.87
E) $6,870.23
Answer: B
Explanation: PVA = $150({1 − [1/(1 + .037/12)(4)(12)]}/(.037/12))
PVA = $6,682.99
Topic: Present value - annuity
cash flows.
Bloom's: Analyze
41) You just won the grand prize in a national writing contest! As your prize, you will receive
$500 a month for 50 months. If you can earn 7 percent on your money, what is this prize worth to
you today?
A) $21,629.93
B) $18,411.06
C) $21,338.40
D) $20,333.33
E) $19,450.25
Answer: A
Explanation: PVA = $500({1 – [1/(1 + .07/12)50]}/(.07/12))
PVA = $21,629.93
cash flows.
Bloom's: Analyze
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42) Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent,
how much can he afford to borrow to purchase a car?
A) $11,750.00
B) $12,348.03
C) $11,697.88
D) $10,266.67
E) $10,400.00
Answer: C
Explanation: PVA = $240({1 − [1/(1 + .085/12)(5)(12)]}/(.085/12))
PVA = $11,697.88
cash flows.
Bloom's: Analyze
43) As the beneficiary of a life insurance policy, you have two options for receiving the
insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of
$1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you
take and why?
A) You should accept the payments because they are worth $202,414 to you today.
B) You should accept the payments because they are worth $201,846 to you today.
C) You should accept the payments because they are worth $201,210 to you today.
D) You should accept the $200,000 because the payments are only worth $189,311 to you today.
E) You should accept the $200,000 because the payments are only worth $195,413 to you today.
Answer: E
Explanation: PVA = $1,400({1 − [1/(1 + .06/12)(20)(12)]}/(.06/12))
PVA = $195,413
cash flows.
Bloom's: Analyze
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44) Assume you work for an employer who will contribute $60 a week for the next 20 years into
a retirement plan for your benefit. At a discount rate of 9 percent, what is this employee benefit
worth to you today?
A) $28,927.38
B) $27,618.46
C) $29,211.11
D) $25,306.16
E) $25,987.74
Answer: A
Explanation: PVA = $60({1 − [1/(1 + .09/52)(20)(52)]}(.09/52))
PVA = $28,927.38
cash flows.
Bloom's: Analyze
45) The Distribution Point plans to save $2,000 a month for the next 3 years for future
emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit will
be made today. What would today's deposit amount have to be if the firm opted for one lump
sum deposit that would yield the same amount of savings as the monthly deposits after 3 years?
A) $70,459.07
B) $67,485.97
C) $69,068.18
D) $69,333.33
E) $67,233.84
Answer: B
Explanation: PVADue = $2,000({1 − [1/(1 + .045/12)(3)(12)]}(.045/12))[1 + (.045/12)]
PVADue = $67,485.97
cash flows.
Bloom's: Analyze
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46) You need some money today and the only friend you have that has any is a miser. He agrees
to loan you the money you need, if you make payments of $30 a month for the next six months.
In keeping with his reputation, he requires that the first payment be paid today. He also charges
you 2 percent interest per month. How much total interest is he charging?
A) $4.50
B) $3.60
C) $9.50
D) $4.68
E) $8.60
Answer: E
Explanation: PVADue = $30{[1 − (1/1.026)]/.02(1.02)
PVADue = $171.40
Total payments = $30(6)

Total payments = $180
Total interest = $180 − 171.40

Total interest = $8.60
Learning Objective: 06-02 Explain how loan payments are calculated and how to find the
interest rate on a loan.
Bloom's: Analyze
47) Sue just purchased an annuity that will pay $24,000 a year for 25 years, starting today. What
was the purchase price if the discount rate is 8.5 percent?
A) $241,309
B) $245,621
C) $251,409
D) $258,319
E) $266,498
Answer: E
Explanation: PVADue = $24,000{[1 − (1/1.08525)]/.085}(1.085)
PVADue = $266,498
cash flows.
Bloom's: Analyze
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lOMoARcPSD|20538678
48) Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The
discount rate is 8 percent. What is the difference in the present value if these payments are paid
at the beginning of each year rather than at the end of each year?
A) $2,170.39
B) $2,511.07
C) $2,021.18
D) $2,027.94
E) $2,304.96
Answer: A
Explanation: PVADue = $3,600{[1 − (1/1.0812)]/.08}(1.08)
PVADue = $29,300.27
PVA = $3,600{[1 − (1/1.0812)]/.08}

PVA = $27,129.88
Difference = $29,300.27 − 27,129.88

Difference = $2,170.39
cash flows.
Bloom's: Analyze
49) Two annuities have equal present values and an applicable discount rate of 7.25 percent. One
annuity pays $2,500 on the first day of each year for 15 years. How much does the second
annuity pay each year for 15 years if it pays at the end of each year?
A) $2,331.00
B) $2,266.67
C) $2,500.00
D) $2,390.50
E) $2,681.25
Answer: E
Explanation: PaymentEnd = $2,500(1.0725)
PaymentEnd = $2,681.25
Topic: Annuities
Bloom's: Analyze
23

lOMoARcPSD|20538678
50) Trish receives $450 on the first of each month. Josh receives $450 on the last day of each
month. Both Trish and Josh will receive payments for next four years. At a discount rate of 9.5
percent, what is the difference in the present value of these two sets of payments?
A) $141.80
B) $151.06
C) $154.30
D) $159.08
E) $162.50
Answer: A
Explanation: PVADue = $450[(1 − {1/[1 + (.095/12)](4)(12)})/(.095/12)][1 + (.095/12)]
PVADue = $18,053.58
PVA = $450[(1 − {1/[1 + (.095/12)](4)(12)})/(.095/12)]

PVA = $17,911.78
Difference = $18,053.58 − 17,911.78

Difference = $141.80
cash flows.
Bloom's: Analyze
51) What is the future value of $1,575 a year for 25 years at 6.3 percent interest, compounded
annually?
A) $76,919.04
B) $72,545.78
C) $90,152.04
D) $92,006.08
E) $91,315.09
Answer: C
Explanation: FVA = $1,575[(1.06325 − 1)/.063]
FVA = $90,152.04
Topic: Future value - annuity
cash flows.
Bloom's: Analyze
24

lOMoARcPSD|20538678
25

lOMoARcPSD|20538678
52) What is the future value of $8,500 a year for 40 years at 10.8 percent interest, compounded
annually?
A) $3,278,406.16
B) $4,681,062.12
C) $2,711,414.14
D) $3,989,476.67
E) $4,021,223.33
Answer: B
Explanation: FVA = $8,500[(1.10840 − 1)/.108]
FVA = $4,681,062.12
cash flows.
Bloom's: Analyze
53) Rosina plans on saving $2,000 a year and expects to earn an annual rate of 6.9 percent. How
much will she have in her account at the end of 37 years?
A) $406,429.10
B) $338,369.09
C) $297,407.17
D) $313,274.38
E) $308,316.67
Answer: D
Explanation: FVA = $2,000[(1.06937 − 1)/.069]
FVA = $313,274.38
cash flows.
Bloom's: Analyze
26

lOMoARcPSD|20538678
54) Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500
to his savings account on the last day of each year. They both earn 6.5 percent annual interest.
What is the difference in their savings account balances at the end of 35 years?
A) $12,093.38
B) $12,113.33
C) $12,127.04
D) $12,211.12
E) $12,219.46
Answer: A
Explanation: FVADue = $1,500[(1.06535 − 1)/.065](1.065)
FVADue = $198,145.42
FVA = $1,500[(1.06535 − 1)/.065]

FVA = $186,052.04
Difference = $198,145.42 − 186,052.04

Difference = $12,093.38
cash flows.
Bloom's: Analyze
55) You just obtained a loan of $16,700 with monthly payments for four years at 6.35 percent
interest, compounded monthly. What is the amount of each payment?
A) $387.71
B) $391.40
C) $401.12
D) $419.76
E) $394.89
Answer: E
Explanation: PVA = $16,700 = C[(1 − {1/[1 + (.0635/12)](4)(12)})/(.0635/12)]
C = $394.89
Topic: Loan payments
Bloom's: Analyze
27

lOMoARcPSD|20538678
56) You borrowed $185,000 for 30 years to buy a house. The interest rate is 4.35 percent,
compounded monthly. If you pay all of your monthly payments as agreed, how much total
interest will you pay on this mortgage? (Round the monthly payment to the nearest whole cent.)
A) $150,408
B) $147,027
C) $146,542
D) $154,319
E) $141,406
Answer: C
C = $920.95
Total interest = $920.95(30)(12) − 185,000

Total interest = $146,542
Bloom's: Analyze
57) Travis International has a one-time expense of $1.13 million that must be paid two years
from today. The firm can earn 4.3 percent, compounded monthly, on its savings. How much must
the firm save each month to fund this expense if the firm starts investing equal amounts each
month starting at the end of this month?
A) $38,416.20
B) $45,172.02
C) $51,300.05
D) $47,411.08
E) $53,901.15
Answer: B
Explanation: FVA = $1.13 million = C({[1 + (.043/12)](2)(12) − 1}/(.043/12))
C = $45,172.02
Topic: Annuities
Bloom's: Analyze
28

lOMoARcPSD|20538678
58) Nadine is retiring today and has $96,000 in her retirement savings. She expects to earn 5.5
percent, compounded monthly. How much can she withdraw from her retirement savings each
month if she plans to spend her last penny 18 years from now?
A) $809.92
B) $847.78
C) $919.46
D) $616.08
E) $701.10
Answer: E
C = $701.10
Topic: Annuities
Bloom's: Analyze
59) Island News purchased a piece of property for $1.79 million. The firm paid a down payment
of 20 percent in cash and financed the balance. The loan terms require monthly payments for 20
years at an APR of 4.75 percent, compounded monthly. What is the amount of each mortgage
payment?
A) $9,253.92
B) $10,419.97
C) $8,607.11
D) $11,567.40
E) $12,301.16
Answer: A
Explanation: PVA = [$1.79m(1 − .20)] = C[(1 − {1/[1 + (.0475/12)](20)(12)})/(.0475/12)]
C = $9,253.92
Bloom's: Analyze
29

lOMoARcPSD|20538678
60) You estimate that you will owe $40,200 in student loans by the time you graduate. If you
want to have this debt paid in full within 10 years, how much must you pay each month if the
interest rate is 4.35 percent, compounded monthly?
A) $411.09
B) $413.73
C) $414.28
D) $436.05
E) $442.50
Answer: B
C = $413.73
Bloom's: Analyze
61) Phil purchased a car today at a price of $8,500. He paid $300 down in cash and financed the
balance for 36 months at 5.75 percent, compounded monthly. What is the amount of each
monthly loan payment?
A) $248.53
B) $270.23
C) $318.47
D) $305.37
E) $257.62
Answer: A
Explanation: PVA = ($8,500 − 300) = C [(1 − {1/[1 + (.0575/12)]36})/(.0575/12)]
C = $248.53
Bloom's: Analyze
30

lOMoARcPSD|20538678
62) An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a
rate of return of 6.5 percent, compounded quarterly, what is the most you are willing to pay as a
lump sum today to obtain this annuity?
A) $32,008.24
B) $34,208.16
C) $44,591.11
D) $43,008.80
E) $38,927.59
Answer: C
Explanation: PVA = $1,000[(1 − {1/[1 + (.065/4)](20)(4)})(.065/4)]
PVA = $44,591.11
cash flows.
Bloom's: Analyze
63) Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments
are due on the first day of each month starting with the day you sign the lease contract. If your
cost of money is 6.5 percent, what is the current value of the lease?
A) $10,331.03
B) $6,232.80
C) $9,197.74
D) $7,203.14
E) $11,008.31
Answer: B
Explanation: PVADue = $190[(1 − {1/[1 + (.065/12)]36})/(.065/12)][1 + (.065/12)]
PVADue = $6,232.80
cash flows.
Bloom's: Analyze
31

lOMoARcPSD|20538678
64) Your great aunt left you an inheritance in the form of a trust. The trust agreement states that
you are to receive $2,500 on the first day of each year, starting immediately and continuing for
20 years. What is the value of this inheritance today if the applicable discount rate is 4.75
percent?
A) $24,890.88
B) $31,311.16
C) $33,338.44
D) $28,909.29
E) $29,333.33
Answer: C
Explanation: PVADue = $2,500({1 − [1/(1.0475)20]}/.0475)(1.0475)
PVADue = $33,338.44
cash flows.
Bloom's: Analyze
32

lOMoARcPSD|20538678
65) Chris has three options for settling an insurance claim. Option A will provide $1,500 a month
for 6 years. Option B will pay $1,025 a month for 10 years. Option C offers $85,000 as a lump
sum payment today. The applicable discount rate is 6.8 percent, compounded monthly. Which
option should Chris select, and why, if he is only concerned with the financial aspects of the
offers?
A) Option A: It provides the largest monthly payment.
B) Option B: It pays the largest total amount.
C) Option C: It is all paid today.
D) Option B: It pays the greatest number of payments.
E) Option B: It has the largest value today.
Answer: E
Explanation:
Option A: PVA = $1,500({1 − [1/(1 + .068/12)(6 )(12)]}/(.068/12))
PVA = $88,479.23
Option B: PVA = $1,025({1 − [1/(1 + .068/12)(10)(12)]}/(.068/12))

PVA = $89,068.22
Option C: PV = $85,000
Your decision should be based on present value.

cash flows.
Bloom's: Analyze
33

lOMoARcPSD|20538678
66) Racing Motors wants to save $825,000 to buy some new equipment three years from now.
The plan is to set aside an equal amount of money on the first day of each quarter starting today.
How much does the company need to save each quarter to achieve its goal if it can earn 4.45
percent on its savings?
A) $63,932.91
B) $62,969.70
C) $63,192.05
D) $62,925.00
E) $64,644.17
Answer: A
Explanation: FVADue = $825,000 = C{[(1 + .0445/4)(3)(4) − 1]/(.0445/4)}(1 + .0445/4)
C = $63,932.91
Topic: Annuities
Bloom's: Analyze
67) Stephanie is going to contribute $160 on the first of each month, starting today, to her
retirement account. Her employer will provide a match of 50 percent. In other words, her
employer will add $80 to the amount Stephanie saves. If both Stephanie and her employer
continue to do this and she can earn a monthly interest rate of .45 percent, how much will she
have in her retirement account 35 years from now?
A) $336,264.14
B) $204,286.67
C) $199,312.04
D) $268,418.78
E) $299,547.97
Answer: E
Explanation: FVADue = ($160 + 80){[(1.0045)(35)(12) − 1]/.0045}(1.0045)
FVADue = $299,547.97
cash flows.
Bloom's: Analyze
34

lOMoARcPSD|20538678
68) An annuity that pays $12,500 a year at an annual interest rate of 5.45 percent costs $150,000
today. What is the length of the annuity time period?
A) 25 years
B) 18 years
C) 15 years
D) 20 years
E) 22 years
Answer: D
Explanation: PVA = $150,000 = $12,500({1 − [1/(1.0545)t]}/.0545)
t = 20 years
cash flows.
Bloom's: Analyze
69) You want to be a millionaire when you retire in 30 years and expect to earn 8.5 percent,
compounded monthly. How much more will you have to save each month if you wait 10 years to
start saving versus if you start saving at the end of this month?
A) $947.22
B) $1,046.80
C) $808.47
D) $841.15
E) $989.10
Answer: E
Explanation: FVA30 years = $1,000,000 = C{[(1 + .085/12)(30)(12) − 1]/(.085/12)}
C = $605.80
FVA20 years = $1,000,000 = C{[(1 + .085/12)(20)(12) − 1]/(.085/12)}

C = $1,594.90
Difference = $1,594.90 − 605.80

Difference = $989.10
Topic: Annuities
cash flows.
Bloom's: Analyze
35

lOMoARcPSD|20538678
70) You are the recipient of a gift that will pay you $25,000 one year from now and every year
thereafter for the following 24 years. The payments will increase in value by 2.5 percent each
year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift?
A) $416,667
B) $316,172
C) $409,613
D) $311,406
E) $386,101
Answer: B
Explanation: GAPV = $25,000({1 − [(1.025)/(1.085)]25}/(.085 − .025))
GAPV = $316,172
cash flows.
Bloom's: Analyze
71) You are preparing to make monthly payments of $100, beginning at the end of this month,
into an account that pays 5 percent interest, compounded monthly. How many payments will you
have made when your account balance reaches $10,000?
A) 97.30
B) 83.77
C) 89.46
D) 100.00
E) 91.12
Answer: B
Explanation: FVA = $10,000 = $100({[1 + (.05/12)]t − 1}/(.05/12))
t = 83.77 payments
cash flows.
Bloom's: Analyze
36

lOMoARcPSD|20538678
72) You want to borrow $27,500 and can afford monthly payments of $650 for 48 months, but no
more. Assume monthly compounding. What is the highest APR rate you can afford?
A) 6.33 percent
B) 6.67 percent
C) 5.82 percent
D) 7.01 percent
E) 7.18 percent
Answer: A
Explanation: PVA = $27,500 = $650[(1 − {1/[1 + (APR/12)]48})/(APR/12)]
APR = .0633, or 6.33%
Bloom's: Analyze
73) Today, you borrowed $3,200 on a credit card that charges an interest rate of 12.9 percent,
compounded monthly. How long will it take you to pay off this debt assuming that you do not
charge anything else and make regular monthly payments of $60?
A) 6.87 years
B) 6.28 years
C) 6.64 years
D) 7.23 years
E) 7.31 years
Answer: C
Explanation: PVA = $3,200 = $60[(1 − {1/[1 + (.129/12)]t })/(.129/12)]
t = 79.66 months, or 6.64 years
Bloom's: Analyze
37

lOMoARcPSD|20538678
74) The Rodriquez family is determined to purchase a $250,000 home without incurring any
debt. The family plans to save $2,500 a quarter for this purpose and expects to earn 6.65 percent,
compounded quarterly. How long will it be until the family can purchase a home?
A) 23.09 years
B) 14.85 years
C) 35.46 years
D) 48.82 years
E) 59.39 years
Answer: B
Explanation: FVA = $250,000 = $2,500({[1 + (.0665/4)]t − 1}/(.0665/4))
t = 59.39 quarters, or 14.85 years
Bloom's: Analyze
75) Today, you are retiring. You have a total of $289,416 in your retirement savings. You want to
withdraw $2,500 at the beginning of every month, starting today and expect to earn 4.6 percent,
compounded monthly. How long will it be until you run out of money?
A) 29.97 years
B) 8.56 years
C) 22.03 years
D) 12.71 years
E) 18.99 years
Answer: D
Explanation: PVADue = $289,416 = $2,500[(1 − {1/[1 + (.046/12)]t })/(.046/12)][1 + (.046/12)]
t = 152.52 months, or 12.71 years
cash flows.
Bloom's: Analyze
38

lOMoARcPSD|20538678
76) The Art Gallery is notoriously known as a slow-payer. The firm currently needs to borrow
$25,000 and only one company will loan to them. The terms of the loan call for weekly payments
of $500 at a weekly interest rate of .45%. What is the loan term?
A) 42.5 weeks
B) 45.00 weeks
C) 56.77 weeks
D) 50.11 weeks
E) 43.33 weeks
Answer: C
Explanation: PVA = $25,000 = $500{[1 − (1/1.0045t)]/.0045}
t = 56.77 weeks
Bloom's: Analyze
77) Jogging Gear is considering a project with an initial cash requirement of $238,400. The
project will yield cash flows of $4,930 monthly for 65 months. What is the rate of return on this
project?
A) 9.97 percent
B) 11.38 percent
C) 14.28 percent
D) 13.41 percent
E) 10.56 percent
Answer: B
Explanation: PVA = $238,400 = $4,930[(1 − {1/[1 + (r/12)]65})/(r/12)]
r = .1138, or 11.38%
Bloom's: Analyze
39

lOMoARcPSD|20538678
78) Your insurance agent is trying to sell you an annuity that costs $50,000 today. By buying this
annuity, your agent promises that you will receive payments of $250 a month for the next 20
years. What is the rate of return on this investment?
A) 3.75 percent
B) 2.47 percent
C) 1.88 percent
D) 2.45 percent
E) 3.67 percent
Answer: C
Explanation: PVA = $50,000 = $250[(1 − {1/[1 + (r/12)](20)(12)})/(r/12)]
r = .0188, or 1.88%
Bloom's: Analyze
79) You have been investing $300 a month for the last 8 years. Today, your investment account is
worth $43,262. What is your average rate of return on your investments?
A) 9.69 percent
B) 7.23 percent
C) 9.36 percent
D) 8.41 percent
E) 7.78 percent
Answer: A
Explanation: FVA = $43,262 = $300({[1 + (r/12)](8)(12) − 1}/(r/12))
r = .0969, or 9.69%
Bloom's: Analyze
40

lOMoARcPSD|20538678
80) You have been purchasing $12,000 worth of stock annually for the past eight years and now
have a portfolio valued at $87,881. What is your annual rate of return?
A) 4.32 percent
B) 2.54 percent
C) 3.29 percent
D) − 4.32 percent
E) − 2.54 percent
Answer: E
Explanation: FVA = $87,881 = $12,000{[(1 + r)8 − 1]/r}
r = −.0254, or −2.54%
Topic: Time value of money - interest rates and inflation
Bloom's: Analyze
81) Your father helped you start saving $25 a month beginning on your fifth birthday. He always
made you deposit the money into your savings account on the first day of each month just to
"start the month out right." Today completes your 15th year of saving and you now have
$6,528.91 in this account. What is the rate of return on your savings?
A) 4.67 percent
B) 5.30 percent
C) 5.87 percent
D) 4.98 percent
E) 6.12 percent
Answer: A
Explanation: FVADue = $6,528.91 = $25({[1 + (r/12)](15)(12) − 1}/(r/12))(1 + r/12)
r = .0467, or 4.67%
Bloom's: Analyze
41

lOMoARcPSD|20538678
82) Today, you turn 21. Your birthday wish is that you will be a millionaire by your 40th
birthday. In an attempt to reach this goal, you decide to save $75 a day, every day, until you turn
40. You open an investment account and deposit your first $75 today. What rate of return must
you earn to achieve your goal? Note: Ignore Leap Years.
A) 7.67 percent
B) 6.27 percent
C) 9.20 percent
D) 7.06 percent
E) 8.54 percent
Answer: B
Explanation: FVADue = $1m = $75({[1 + (r/365)](19)(365) − 1}/(r/365))(1 + r/365)
r = .0627, or 6.27%
Bloom's: Analyze
83) You just settled an insurance claim that calls for increasing payments over a 10-year period.
The first payment will be paid one year from now in the amount of $5,000. The following
payments will increase by 3.5 percent annually. What is the value of this settlement to you today
if you can earn 6.5 percent on your investments?
A) $42,023.05
B) $36,408.28
C) $34,141.14
D) $41,422.89
E) $38,008.16
Answer: D
Explanation: GAPV = $5,000{[1 − (1.035/1.065)10]/(.065 − .035)}
GAPV = $41,422.89
cash flows.
Bloom's: Analyze
42

lOMoARcPSD|20538678
84) Your grandfather left you an inheritance that will provide an annual income for the next 20
years. You will receive the first payment one year from now in the amount of $2,500. Every year
after that, the payment amount will increase by 5 percent. What is your inheritance worth to you
today if you can earn 7.5 percent on your investments?
A) $37,537.88
B) $28,667.40
C) $23,211.00
D) $35,612.20
E) $30,974.92
Answer: A
Explanation: GAPV = $2,500{[1 −(1.05/1.075)20]/(.075 − .05)}
GAPV = $37,537.88
cash flows.
Bloom's: Analyze
85) You just won the magazine sweepstakes and opted to take unending payments. The first
payment will be $50,000 and will be paid one year from today. Every year thereafter, the
payments will increase by 2.5 percent annually. What is the present value of your prize at a
discount rate of 7.9 percent?
A) $1,350,000.00
B) $1,348,409.50
C) $925,925.93
D) $891,006.67
E) $846,918.22
Answer: C
Explanation: GPPV = $50,000/(.079 − .025)
GPPV = $925,925.93
Topic: Perpetuities
cash flows.
Bloom's: Analyze
43

lOMoARcPSD|20538678
86) You want to buy a new sports car for $55,000. The contract is in the form of a 60-month
annuity due at an APR of 5.6 percent, compounded monthly. What will be your monthly
payment?
A) $1,047.90
B) $1,053.87
C) $1,048.21
D) $1,063.30
E) $1,072.11
Answer: C
Explanation: PVADue = $55,000 = C({1 − [1/(1 + .056/12)60]}/(.056/12))(1 + .056/12)
C = $1,048.21
Bloom's: Analyze
87) A one-time gift to your college will provide $25,000 in scholarship funds next year with that
amount increasing by 2 percent annually thereafter. If the discount rate is 5.5 percent, what is the
current value of this perpetual gift?
A) $777,777.78
B) $748,602.49
C) $726,849.29
D) $714,285.71
E) $725,000.00
Answer: D
Explanation: GPPV = $25,000/(.055 − .02)
GPPV = $714,285.71
Topic: Perpetuities
cash flows.
Bloom's: Analyze
44

lOMoARcPSD|20538678
88) For the next 20 years, you plan to invest $600 a month in a stock account earning 7 percent
and $400 a month in a bond account earning 4 percent. When you retire in 20 years, you will
combine your money into an account with a return of 5 percent. How much can you withdraw
each month during retirement assuming a 30-year withdrawal period?
A) $2,636.19
B) $2,904.11
C) $3,008.21
D) $2,465.44
E) $3,206.97
Answer: D
Explanation: FVA = $600{[(1 + .07/12)(20)( 12) − 1]/(.07/12)} + $400{[(1 + .04/12) (20)(12) − 1]/
(.04/12)}
FVA = $459,265.85
PVA = $459,265.85 = C({1 − [1/(1 + .05/12)(30)(12)]}/(.05/12))

C = $2,465.44
Topic: Annuities
Bloom's: Analyze
45

lOMoARcPSD|20538678
89) Jones Stoneware has a liability of $75,000 due four years from today. The company is
planning to make an initial deposit today into a savings account and then deposit an additional
$10,000 at the end of each of the next four years. The account pays interest of 4.5 percent. How
much does the firm need to deposit today for its savings to be sufficient to pay this debt?
A) $28,299.95
B) $19,469.64
C) $21,400.33
D) $27,016.84
E) $22,218.09
Answer: D
Explanation: FVA = $10,000[(1.0454 − 1)/.045]
FVA = $42,781.91
Additional FV needed = $75,000 − 42,781.91

Additional FV needed = $32,218.09
Initial deposit = $32,218.09/1.0454

Initial deposit = $27,016.84
cash flows.
Bloom's: Analyze
46

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90) What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment
is received 7 years from now and you receive a total of 25 annual payments?
A) $9,417.69
B) $9,238.87
C) $9,333.33
D) $9,420.12
E) $9,881.72
Answer: A
Explanation: PVA6 = $1,400{[1 − (1/1.0825)]/.08}
PVA6 = $14,944.69
PV = $14,944.69/1.086
PV = $9,417.69
cash flows.
Bloom's: Analyze
91) Sara wants to establish a trust fund to provide $75,000 in scholarships each year and earn a
fixed 6.15 percent rate of return. How much money must she contribute to the fund assuming
that only the interest income is distributed?
A) $987,450
B) $1,478,023
C) $1,333,333
D) $1,219,512
E) $1,500,000
Answer: D
Explanation: PV = $75,000/.0615
PV = $1,219,512
Topic: Perpetuities
cash flows.
Bloom's: Apply
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92) A preferred stock pays an annual dividend of $5.20. What is one share of this stock worth
today if the rate of return is 10.44 percent?
A) $51.48
B) $41.18
C) $49.81
D) $39.87
E) $42.90
Answer: C
Explanation: PV = $5.20/.1044
PV = $49.81
Topic: Perpetuities
cash flows.
Bloom's: Apply
93) You would like to provide $125,000 a year forever for your heirs. How much money must
you deposit today to fund this goal if you can earn a guaranteed 4.5 percent rate of return?
A) $2,777,778
B) $2,521,212
C) $2,666,667
D) $2,858,122
E) $2,850,000
Answer: A
Explanation: PV = $125,000/.045
PV = $2,777,778
Topic: Perpetuities
cash flows.
Bloom's: Apply
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94) You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year
forever. What rate of return are you earning on this policy?
A) 3.650 percent
B) 3.100 percent
C) 2.875 percent
D) 3.125 percent
E) 4.255 percent
Answer: D
Explanation: r = $15,000/$480,000
r = .03125, or 3.125%
Topic: Perpetuities
Bloom's: Apply
95) Beginning three months from now, you will need $1,500 each quarter for the next four years
to cover expenses. How much do you need to have saved today to meet these needs if you can
earn .35 percent interest per quarter?
A) $23,300.75
B) $26,847.15
C) $21,068.00
D) $22,319.54
E) $26,069.79
Answer: A
Explanation: PV = $1,500{[1 − (1/1.0035(4)(4))]/.0035}
PV = $23,300.75
cash flows.
Bloom's: Analyze
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96) You grandfather invested $16,600 years ago to provide annual payments of $700 a year to his
heirs forever. What is the rate of return?
A) 3.65 percent
B) 4.22 percent
C) 4.10 percent
D) 4.25 percent
E) 4.33 percent
Answer: B
Explanation: r = $700/$16,600
r = .0422, or 4.22%
Topic: Perpetuities
Bloom's: Apply
97) DLM preferred stock has a dividend yield of 5.2 percent. The stock is currently priced at
$43.40 per share. What is the amount of the annual dividend?
A) $2.33
B) $2.07
C) $2.40
D) $2.26
E) $1.98
Answer: D
Explanation: C = $43.40(.052)
C = $2.26
Topic: Perpetuities
Bloom's: Apply
50

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98) You just received an offer in the mail to transfer the $5,000 balance from your current credit
card, which charges an annual rate of 18.7 percent, to a new credit card charging a rate of 7.9
percent. You plan to make payments of $250 a month on this debt. How many fewer payments
will you have to make to pay off this debt if you transfer the balance to the new card?
A) 2.48 payments
B) 2.63 payments
C) 3.10 payments
D) 2.79 payments
E) 2.86 payments
Answer: B
Explanation: $5,000 = $250({1 − [1/(1 + .187/12)t]}/(.187/12))
t = 24.15
$5,000 = $250({1 − [1/(1 + .079/12)t]}/(.079/12))

t = 21.52
Difference = 24.15 − 21.52

Difference = 2.63 payments
Bloom's: Analyze
99) Western Bank offers you a $12,000, 6-year term loan at 7 percent annual interest. What is the
amount of your annual loan payment?
A) $2,483.33
B) $2,517.55
C) $2,066.67
D) $1,901.18
E) $1,811.07
Answer: B
Explanation: $12,000 = C{[1 − (1/1.076)]/.07}
C = $2,517.55
Bloom's: Analyze
51

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100) Your credit card company charges you 1.15 percent interest per month. What is the APR?
A) 18.92 percent
B) 13.80 percent
C) 15.95 percent
D) 17.25 percent
E) 14.71 percent
Answer: B
Explanation: APR = .0115(12)
APR = .1380, or 13.80%
Bloom's: Apply
101) What is the APR on a loan with a stated rate of 2.35 percent per quarter?
A) 9.40 percent
B) 8.69 percent
C) 8.38 percent
D) 8.90 percent
E) 9.74 percent
Answer: A
Explanation: APR = .0235(4)
APR = .0940, or 9.40%
Bloom's: Apply
52

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102) You are paying an EAR of 16.78 percent on your credit card. The interest is compounded
monthly. What is the annual percentage rate on this account?
A) 15.61 percent
B) 13.97 percent
C) 14.98 percent
D) 15.75 percent
E) 16.35 percent
Answer: A
Explanation: APR = 12(1.16781/12 − 1)
APR = .1561, or 15.61%
Bloom's: Analyze
103) What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly?
A) 7.91 percent
B) 8.38 percent
C) 8.02 percent
D) 7.87 percent
E) 8.11 percent
Answer: D
Explanation: EAR = (1 + .0765/4)4 − 1
EAR = .0787, or 7.87%
Bloom's: Analyze
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104) How much would you need to invest today as a lump sum at 10.5 percent, compounded
continuously, to have $200,000 in five years?
A) $108,206.67
B) $118,311.07
C) $124,318.08
D) $114,407.17
E) $131,008.15
Answer: B
Explanation: PV = $200,000e−1(.105)( 5)
PV = $118,311.07
Topic: Continuous compounding
cash flows.
Bloom's: Analyze
105) Mr. Rich arranged for a mortgage loan for 65 percent of the $2.5 million purchase price of a
home. The monthly payment will be $10,400 and the mortgage term is 30 years. What is the
EAR on this loan?
A) 6.82 percent
B) 6.25 percent
C) 6.46 percent
D) 6.91 percent
E) 6.62 percent
Answer: A
Explanation: Loan amount = $2,500,000(.65)
Loan amount = $1,625,000
PVA = $1,625,000 = $10,400[(1 − {1/[1 + (r/12)](30)(12)})/(r/12)]

r = .0662, or 6.62%
EAR = (1 + .0662/12)12 − 1
EAR = .0682, or 6.82%
Bloom's: Analyze
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106) A credit card company quotes you an APR of 18.9 percent. What is the actual rate of
interest you are paying if interest is computed monthly?
A) 18.90 percent
B) 19.21 percent
C) 20.63 percent
D) 19.57 percent
E) 20.72 percent
Answer: C
Explanation: EAR = (1 + .189/12)12 − 1
EAR = .2063, or 20.63%
Bloom's: Analyze
107) Your local pawn shop loans money at an annual rate of 24 percent and compounds interest
weekly. What is the actual rate being charged on these loans?
A) 25.16 percent
B) 27.05 percent
C) 26.49 percent
D) 27.56 percent
E) 28.64 percent
Answer: B
Explanation: EAR = (1 + .24/52)52 − 1
EAR = .2705, or 27.05%
Bloom's: Analyze
55

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108) A new sports coupe costs $41,750 and the finance office has quoted you an APR of 7.7
compounded monthly, for 36 months. What is the EAR?
A) 7.81 percent
B) 8.02 percent
C) 7.94 percent
D) 8.13 percent
E) 7.98 percent
Answer: E
Explanation: EAR = (1 + .077/12)12 − 1
EAR = .0798, or 7.98%
Bloom's: Analyze
109) What is the EAR of 14.9 percent compounded continuously?

A) 15.59 percent
B) 15.62 percent
C) 15.69 percent
D) 15.84 percent
E) 16.07 percent
Answer: E
Explanation: EAR = e.149 − 1
EAR = .1607, or 16.07%
Bloom's: Apply
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110) What is the EAR of 18.9 percent compounded continuously?

A) 19.06 percent
B) 20.80 percent
C) 19.43 percent
D) 19.89 percent
E) 21.38 percent
Answer: B
EAR = .2080, or 20.80%
Bloom's: Apply
111) First City Bank offers an APR of 7.65 percent on its loans. What is the maximum rate the
bank can actually earn based on the quoted rate?
A) 7.95 percent
B) 8.14 percent
C) 8.21 percent
D) 7.78 percent
E) 7.87 percent
Answer: A
EAR = .0795, or 7.95%
Bloom's: Apply
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112) Assume a 1-year loan for $6,000 has an interest rate of 4.5 percent, compounded annually.
How much additional interest would be charged if the rate had compounded continuously rather
than annually?
A) $5.84
B) $6.17
C) $6.10
D) $5.93
E) $6.28
Answer: B
EAR = .046028, or 4.6028%
Additional interest = $6,000(.046028 − .045)

Additional interest = $6.17
Bloom's: Analyze
113) The Friendly Bank wants to earn an EAR of 12 percent on its consumer loans. The bank
uses daily compounding. What rate is the bank most apt to quote on these loans?
A) 11.76 percent
B) 11.38 percent
C) 11.33 percent
D) 12.12 percent
E) 12.00 percent
Answer: C
Explanation: APR = 365(1.121/365 − 1)
APR = .1133, or 11.33%
Bloom's: Analyze
58

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114) You borrow money today at 6.65 percent, compounded annually, and repay the principal
and interest in one lump sum of $12,800 two years from today. How much are you borrowing?
A) $9,900.00
B) $10,211.16
C) $11,253.52
D) $11,401.16
E) $11,250.00
Answer: C
Explanation: PV = $12,800/1.06652
PV = $11,253.52
Topic: Present value – single cash flow
Bloom's: Apply
115) This morning, you borrowed $12,700 at an APR of 6.9 percent. If you repay the loan in one
lump sum three years from today, how much will you have to repay?
A) $15,514.47
B) $15,808.13
C) $15,313.00
D) $15,324.60
E) $16,441.20
Answer: A
Explanation: FV = $12,700(1.0693)
FV = $15,514.47
Topic: Future value - single cash flow
Bloom's: Apply
59

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116) On this date last year, you borrowed $3,900. You have to repay the loan with a lump sum
payment of $6,000 six years from now. What is the interest rate?
A) 6.01 percent
B) 6.35 percent
C) 6.78 percent
D) 5.47 percent
E) 5.38 percent
Answer: B
Explanation: r = ($6,000/$3,900)1/7 − 1
r = .0635, or 6.35%
Bloom's: Analyze
117) John's Auto Repair just obtained an interest-only loan of $35,000 with annual payments for
10 years and an interest rate of 8 percent. What is the amount of the loan payment in Year 8?
A) $5,216.03
B) $4,918.07
C) $4,280.00
D) $5,211.06
E) $2,800.00
Answer: E
Explanation: PaymentYear 8 = $35,000(.08)
PaymentYear 8 = $2,800
Bloom's: Apply
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118) Kris borrowed $25,000 with an interest-only, 4-year loan at 4.75 percent. What is the
amount of the loan payment in Year 4 if payments are made annually?
A) $26,187.50
B) $25,296.88
C) $7,009.40
D) $1,187.50
E) $296.88
Answer: A
Explanation: PaymentYear 2 = $25,000 + $25,000(.0475)
PaymentYear 2 = $26,187.50
Bloom's: Apply
119) Assume you borrow $30,000 at an interest rate of 5.35 percent. The terms stipulate that the
principal is due in full in 5 years and interest is to be paid annually at the end of each year. How
much total interest will you pay on this loan assuming you pay as agreed?
A) $4,982
B) $7,400
C) $8,025
D) $8,500
E) $1,605
Answer: C
Explanation: Total interest paid= $30,000(.0535)(5)
Total interest paid = $8,025
Bloom's: Apply
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120) You just acquired a home mortgage for 30 years in the amount of $184,500 at 4.65 percent
interest, compounded monthly. How much of the first payment will be interest if the loan is
repaid in equal monthly payments?
A) $725.20
B) $706.16
C) $714.94
D) $736.36
E) $710.46
Answer: C
Explanation: InterestMonth 1 = $184,500(.0465/12)
InterestMonth 1 = $714.94
Topic: Amortization
Bloom's: Apply
121) Al obtained a mortgage of $195,000 at 5.25 percent for 15 years. How much of the second
monthly payment is applied to interest?
A) $850.00
B) $852.09
C) $849.16
D) $853.13
E) $848.08
Answer: A
Explanation: $195,000 = C({1 – [1/(1 + .0525/12)(15)(12)]}/(.0525/12))
C = $1,567.56
InterestMonth 1 = $195,000(.0525/12)
PrincipalMonth 1 = $1,567.56 − 853.13

PrincipalMonth 1 = $714.43
InterestMonth 2 = ($195,000 − 714.43)(.0525/12)

Topic: Amortization
Bloom's: Analyze
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122) This morning, you borrowed $162,000 to buy a house. The mortgage rate is 4.35 percent.
The loan is to be repaid in equal monthly payments over 20 years with the first payment due one
month from today. Assume each month is equal to 1/12 of a year and all taxes and insurance
premiums are paid separately. How much of the second payment applies to the principal
balance?
A) $568.84
B) $426.11
C) $424.57
D) $587.25
E) $585.71
Answer: B
Explanation: $162,000 = C({1 − [1/(1 + .0435/12)(20)(12)]}/(.0435/12))
C = $1,011.82
InterestMonth 1 = $162,000(.0435/12)
PrincipalMonth 1 = $1,011.82 − 587.25

Principal balanceMonth 1 = $162,000 − 424.57

Principal balanceMonth 1 = $161,575.43
InterestMonth 2 = $161,575.43(.0435/12)
PrincipalMonth 2 = $1,011.82 − 585.71

Topic: Amortization
Bloom's: Analyze
63

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123) You are seeking a fixed-rate mortgage of $195,000 with a term of 30 years. Your bank
quotes an APR of 6.2 percent, compounded monthly. You can only afford monthly payments of
$1,000, so you offer to pay off any remaining loan balance at the end of the loan term in the form
of a single balloon payment. What will be the amount of the balloon payment?
A) $232,191.91
B) $173,316.67
C) $194,480.18
D) $202,828.59
E) $226,315.07
Answer: D
Explanation: PVA = $1,000[(1 − {1/[1 + (.062/12)](30)(12)})/(.062/12)]
PVA = $163,273.58
Remaining principal in today's dollars = $195,000 − 163,273.58

Remaining principal in today's dollars = $31,726.42
FV = $31,726.42(1 + .062/12)(30)(12)
FV = $202,828.59
Bloom's: Analyze
124) Al's obtained a discount loan of $68,500 today that requires a repayment of $88,000, 3 years
from today. What is the APR?
A) 7.87 percent
B) 8.01 percent
C) 8.71 percent
D) 8.57 percent
E) 8.90 percent
Answer: C
Explanation: $88,000 = $68,500(1 + r)3
r = ($88,000/$68,500)1/3 − 1
r = .0871, or 8.71%
Bloom's: Analyze
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125) A 1-year loan of $15,000 is quoted at 6.7 percent plus 3 points. This loan is to be repaid in
one lump sum. What is the actual cost of this loan?
A) 11.86 percent
B) 6.91 percent
C) 12.55 percent
D) 10.00 percent
E) 9.70 percent
Answer: D
Explanation: Loan amount received = $15,000(1 − .03)
Loan amount received = $14,550
Loan repayment amount = $15,000(1.067)

Loan repayment amount = $16,005
$16,005 = $14,550(1 + r)1

r = .1000, or 10.00%
Bloom's: Analyze
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Ross12e Chapter 06 TB Answer Key

The Department of Business Adiministration (Chung-Ang University)

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Fundamentals of Corporate Finance, 12e (Ross)

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8) An ordinary annuity is best defined as:

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9) A perpetuity is defined as:

10) A Canadian consol is best categorized as a(n):

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22) With an interest-only loan the principal is:

23) An amortized loan:

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Offer B: PV = $35,000 + $70,000/1.1152

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Total payments = $30(6)

Total interest = $180 − 171.40

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PVA = $3,600{[1 − (1/1.0812)]/.08}

Difference = $29,300.27 − 27,129.88

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Accessibility: Keyboard Navigation

PVA = $450[(1 − {1/[1 + (.095/12)](4)(12)})/(.095/12)]

Difference = $18,053.58 − 17,911.78

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FVA = $1,500[(1.06535 − 1)/.065]

Difference = $198,145.42 − 186,052.04

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Total interest = $920.95(30)(12) − 185,000

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Option B: PVA = $1,025({1 − [1/(1 + .068/12)(10)(12)]}/(.068/12))

Your decision should be based on present value.

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