Question 1

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?

Accepted Answer

A)   3.65 percent 
B)   4.22 percent 
C)   4.10 percent 
D)   4.25 percent 
E)   4.33 percent F) All of the above
G) None of the above

Question 2

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?

Accepted Answer

A)   $11,750.00 
B)   $12,348.03 
C)   $11,697.88 
D)   $10,266.67 
E)   $10,400.00 F) B) and C)
G) None of the above

Question 3

The interest rate that is most commonly quoted by a lender is referred to as the:

Accepted Answer

A)   annual percentage rate. 
B)   compound rate. 
C)   effective annual rate. 
D)   simple rate.
E)   common rate.F) C) and D)
G) B) and D)

Question 4

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?

Accepted Answer

A)   $5,216.03 
B)   $4,918.07 
C)   $4,280.00 
D)   $5,211.06 
E)   $2,800.00 F) C) and D)
G) A) and D)

Question 5

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?

Accepted Answer

A)   $2.33 
B)   $2.07 
C)   $2.40 
D)   $2.26 
E)   $1.98 F) D) and E)
G) A) and D)

Question 6

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?

Accepted Answer

A)   $725.20 
B)   $706.16
C)   $714.94 
D)   $736.36 
E)   $710.46 F) A) and B)
G) None of the above

Question 7

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?

Accepted Answer

A)   $32,008.24 
B)   $34,208.16 
C)   $44,591.11 
D)   $43,008.80 
E)   $38,927.59 F) B) and E)
G) None of the above

Question 8

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?

Accepted Answer

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. F) None of the above
G) A) and D)

Question 9

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?

Accepted Answer

A)   $38,418.80 
B)   $32,907.67 
C)   $36,121.08 
D)   $39,010.77 
E)   $33,445.44 F) B) and E)
G) C) and E)

Question 10

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?

Accepted Answer

A)   $12,093.38 
B)   $12,113.33 
C)   $12,127.04 
D)   $12,211.12 
E)   $12,219.46 F) A) and E)
G) D) and E)

Question 11

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?

Accepted Answer

A)   $5.84 
B)   $6.17 
C)   $6.10 
D)   $5.93 
E)   $6.28 F) A) and D)
G) All of the above

Question 12

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.

Accepted Answer

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 F) A) and E)
G) D) and E)

Question 13

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?

Accepted Answer

A)   $42,023.05 
B)   $36,408.28 
C)   $34,141.14 
D)   $41,422.89 
E)   $38,008.16 F) B) and D)
G) B) and C)

Question 14

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ________ rate.

Accepted Answer

A)   effective annual 
B)   annual percentage 
C)   periodic interest 
D)   compound interest 
E)   episodic interest F) B) and C)
G) B) and D)

Question 15

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?

Accepted Answer

A)   $1,350,000.00 
B)   $1,348,409.50 
C)   $925,925.93 
D)   $891,006.67 
E)   $846,918.22 F) None of the above
G) C) and E)

Question 16

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n)  ________ loan.

Accepted Answer

A)   amortized 
B)   continuous
C)   balloon 
D)   pure discount 
E)   interest-only F) A) and D)
G) B) and E)

Question 17

Your credit card company charges you 1.15 percent interest per month. What is the APR?

Accepted Answer

A)   18.92 percent 
B)   13.80 percent 
C)   15.95 percent 
D)   17.25 percent 
E)   14.71 percent F) B) and D)
G) A) and E)

Question 18

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?

Accepted Answer

A)   $37,537.88 
B)   $28,667.40 
C)   $23,211.00 
D)   $35,612.20 
E)   $30,974.92 F) C) and D)
G) B) and D)

Question 19

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?

Accepted Answer

A)   $2,777,778 
B)   $2,521,212 
C)   $2,666,667 
D)   $2,858,122 
E)   $2,850,000 F) C) and E)
G) B) and C)

Question 20

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?

Accepted Answer

A)   $28,299.95 
B)   $19,469.64 
C)   $21,400.33 
D)   $27,016.84 
E)   $22,218.09 F) C) and E)
G) A) and E)

Exam 6: Discounted Cash Flow Valuation

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.

Correct Answer
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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?

Correct Answer
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A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) ________ loan.

Correct Answer
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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?

Correct Answer
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Correct Answer
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Correct Answer
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Your credit card company charges you 1.15 percent interest per month. What is the APR?

Correct Answer
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Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ________ rate.

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
verified

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?

Correct Answer
verified

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?

Correct Answer
verified

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?

Correct Answer
verified

The interest rate that is most commonly quoted by a lender is referred to as the:

Correct Answer
verified

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?

Correct Answer
verified

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?

Correct Answer
verified

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?

Correct Answer
verified

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?

Correct Answer
verified

Correct Answer
verified

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?

Correct Answer
verified

Exam 6: Discounted Cash Flow Valuation

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.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) ________ loan.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Your credit card company charges you 1.15 percent interest per month. What is the APR?

Correct AnswerverifiedShow Answer

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ________ rate.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The interest rate that is most commonly quoted by a lender is referred to as the:

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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