Question 1

Dixie's Markets offers credit to its customers and charges interest of 1.2 percent per month.What is the effective annual rate?

Accepted Answer

A)  15.39 percent
B)  14.61 percent
C)  15.10 percent
D)  15.51 percent
E)  15.73 percentF) A) and E)
G) A) and B)

Question 2

What effective annual rate can a bank earn on an APR of 10.5 percent, compounded monthly?

Accepted Answer

A)  10.50 percent
B)  10.76 percent
C)  11.84 percent
D)  11.02 percent
E)  13.08 percentF) C) and E)
G) B) and C)

Question 3

Which one of the following statements is correct?

Accepted Answer

A)  The APR is equal to the EAR for a loan that charges interest monthly.
B)  The EAR is always greater than the APR.
C)  The APR on a monthly loan is equal to (1 + monthly interest rate) 12- 1.
D)  The APR is the best measure of the actual rate you are paying on a loan.
E)  The EAR, rather than the APR, should be used to compare both investment and loan options.F) None of the above
G) A) and E)

Question 4

How much money does Yvette need to have in her retirement savings account today if she wishes to withdraw $36,000 a year for 30 years? She expects to earn an average rate of return of 8.25 percent.(

Accepted Answer

A)  $393,388.77
B)  $405,280.20
C)  $339,752,80
D)  $354,049.89
E)  $395,904.99F) B) and C)
G) None of the above

Question 5

What is the future value of $25 a week for 40 years at 8.5 percent interest? Assume the first payment occurs at the end of this week.

Accepted Answer

A)  $441,710.03
B)  $414,361.08
C)  $469,727.15
D)  $350,003.14
E)  $335,221.18F) None of the above
G) B) and C)

Question 6

Karley's setting aside $32,000 each quarter, starting today, for the next three years for an expansion project.How much money will the firm have at the end of the three years if it can earn an average of 5.45 percent on its savings?

Accepted Answer

A)  $428,409.29
B)  $414,123.86
C)  $390,411.20
D)  $419,766.30
E)  $362,009.14F) D) and E)
G) None of the above

Question 7

Alfa Life Insurance Co.is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever.If the guaranteed rate of return on this investment is 3.6 percent, how much will you pay for the policy?

Accepted Answer

A)  $266,576.83
B)  $277,777.78
C)  $254,211.50
D)  $267,119.02
E)  $241,160.91F) A) and B)
G) B) and E)

Question 8

All else held constant, the present value of an annuity will decrease if you:

Accepted Answer

A)  increase the annuity's future value.
B)  increase the payment amount.
C)  increase the time period.
D)  decrease the discount rate.
E)  decrease the annuity payment.F) B) and E)
G) A) and D)

Question 9

Anna pays .85 percent interest monthly on her credit card account.When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:

Accepted Answer

A)  annual percentage rate.
B)  simplified rate.
C)  quoted rate.
D)  stated rate.
E)  effective annual rate.F) A) and E)
G) A) and B)

Question 10

What is the effective annual rate of 14.9 percent compounded quarterly?

Accepted Answer

A)  14.48 percent
B)  14.67 percent
C)  15.23 percent
D)  15.54 percent
E)  15.75 percentF) All of the above
G) B) and E)

Question 11

Which one of the following qualifies as an annuity payment?

Accepted Answer

A)  Weekly grocery bill
B)  Clothing purchases
C)  Car repairs
D)  Auto loan payment
E)  Medical billsF) All of the above
G) C) and D)

Question 12

Which one of the following features distinguishes an ordinary annuity from an annuity due?

Accepted Answer

A)  Number of equal payments
B)  Amount of each payment
C)  Frequency of the payments
D)  Annuity interest rate
E)  Timing of the annuity paymentsF) A) and B)
G) C) and E)

Question 13

Cromwell is acquiring some land for $1,200,000 in exchange for semiannual payments of $75,000 at an interest rate of 6.35 percent.How many years will it take Cromwell to pay for this purchase?

Accepted Answer

A)  11.00 years
B)  12.00 years
C)  11.35 years
D)  10.47 years
E)  11.80 yearsF) C) and D)
G) A) and E)

Question 14

You will receive annual payments of $800 at the end of each year for 12 years.The first payment will be received in Year 3.What is the present value of these payments if the discount rate is 7 percent?

Accepted Answer

A)  $5,465.20
B)  $6,018.52
C)  $6,299.80
D)  $5,549.96
E)  $6,856.60F) A) and C)
G) B) and C)

Question 15

Forni's Furniture is offering a bedroom suite for $2,700.The credit terms are 60 months at $73.00 per month.What is the interest rate on this offer?

Accepted Answer

A)  20.97 percent
B)  20.05 percent
C)  19.26 percent
D)  21.75 percent
E)  1.75 percentF) A) and D)
G) B) and C)

Question 16

Assume you pay $24,000 today in exchange for an annuity with monthly payments, an APR of 6.75 percent, and a life of 15 years.What is the payment amount?

Accepted Answer

A)  $319.27
B)  $266.67
C)  $212.38
D)  $203.16
E)  $338.09F) A) and B)
G) A) and E)

Question 17

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years.What type of loan did you obtain?

Accepted Answer

A)  Interest-only
B)  Amortized
C)  Perpetual
D)  Pure discount
E)  Lump sumF) C) and D)
G) A) and B)

Question 18

E-Z Loans is offering a special on one-year loans.The company will loan you $1,500 today with no waiting and no credit check, in exchange for one payment of $2,000 one year from now.What is the APR on this loan?

Accepted Answer

A)  30.63 percent
B)  21.20 percent
C)  25.63 percent
D)  17.93 percent
E)  33.33 percentF) D) and E)
G) A) and E)

Question 19

A perpetuity in Canada is frequently referred to as:

Accepted Answer

A)  a consul.
B)  an infinity.
C)  forever cash.
D)  a dowry.
E)  a forevermore.F) A) and E)
G) D) and E)

Question 20

Standards Life Insurance offers a perpetuity that pays annual payments of $12,000.This contract sells for $250,000 today.What is the interest rate?

Accepted Answer

A)  4.80 percent
B)  3.87 percent
C)  4.10 percent
D)  4.21 percent
E)  4.39 percentF) B) and C)
G) A) and B)

Exam 5: Discounted Cash Flow Valuation

What effective annual rate can a bank earn on an APR of 10.5 percent, compounded monthly?

Correct AnswerverifiedShow Answer

Which one of the following features distinguishes an ordinary annuity from an annuity due?

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How much money does Yvette need to have in her retirement savings account today if she wishes to withdraw $36,000 a year for 30 years? She expects to earn an average rate of return of 8.25 percent.(

Correct AnswerverifiedShow Answer

Which one of the following qualifies as an annuity payment?

Correct AnswerverifiedShow Answer

What is the effective annual rate of 14.9 percent compounded quarterly?

Correct AnswerverifiedShow Answer

All else held constant, the present value of an annuity will decrease if you:

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

Dixie's Markets offers credit to its customers and charges interest of 1.2 percent per month.What is the effective annual rate?

Correct AnswerverifiedShow Answer

E-Z Loans is offering a special on one-year loans.The company will loan you $1,500 today with no waiting and no credit check, in exchange for one payment of $2,000 one year from now.What is the APR on this loan?

Correct AnswerverifiedShow Answer

What is the future value of $25 a week for 40 years at 8.5 percent interest? Assume the first payment occurs at the end of this week.

Correct AnswerverifiedShow Answer

Karley's setting aside $32,000 each quarter, starting today, for the next three years for an expansion project.How much money will the firm have at the end of the three years if it can earn an average of 5.45 percent on its savings?

Correct AnswerverifiedShow Answer

Forni's Furniture is offering a bedroom suite for $2,700.The credit terms are 60 months at $73.00 per month.What is the interest rate on this offer?

Correct AnswerverifiedShow Answer

You will receive annual payments of $800 at the end of each year for 12 years.The first payment will be received in Year 3.What is the present value of these payments if the discount rate is 7 percent?

Correct AnswerverifiedShow Answer

Alfa Life Insurance Co.is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever.If the guaranteed rate of return on this investment is 3.6 percent, how much will you pay for the policy?

Correct AnswerverifiedShow Answer

Standards Life Insurance offers a perpetuity that pays annual payments of $12,000.This contract sells for $250,000 today.What is the interest rate?

Correct AnswerverifiedShow Answer

Assume you pay $24,000 today in exchange for an annuity with monthly payments, an APR of 6.75 percent, and a life of 15 years.What is the payment amount?

Correct AnswerverifiedShow Answer

Cromwell is acquiring some land for $1,200,000 in exchange for semiannual payments of $75,000 at an interest rate of 6.35 percent.How many years will it take Cromwell to pay for this purchase?

Correct AnswerverifiedShow Answer

Anna pays .85 percent interest monthly on her credit card account.When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:

Correct AnswerverifiedShow Answer

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years.What type of loan did you obtain?

Correct AnswerverifiedShow Answer

A perpetuity in Canada is frequently referred to as:

Correct AnswerverifiedShow Answer

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