财务管理试题5

5I.DEFINITIONSTopic:ANNUITY1.Anannuitystreamofcashflowpaymentsis:A)Asetoflevelcashflowsoccurringeachtimeperiodforafixedlengthoftime.B)Asetoflevelcashflowsoccurringeachtimeperiodforever.C)Asetofincreasingcashflowsoccurringeachtimeperiodforafixedlengthoftime.D)Asetofincreasingcashflowsoccurringeachtimeperiodforever.E)Asetofarbitrarycashflowsoccurringeachtimeperiodfornomorethan10years.Answer:ATopic:PRESENTVALUEFACTORFORANNUITIES2.Thepresentvaluefactorforannuitiesiscalculatedas:A)(1+presentvaluefactor)/rB)(1–presentvaluefactor)/rC)Presentvaluefactor+(1/r)D)(Presentvaluefactor*r)+(1/r)Answer:BTopic:FUTUREVALUEFACTORFORANNUITIES3.Thefuturevaluefactorforannuitiesiscalculatedas:A)Futurevaluefactor+rB)(1/r)+(futurevaluefactor*r)C)(1/r)+futurevaluefactorD)(Futurevaluefactor–1)/rE)(Futurevaluefactor+1)/rAnswer:DTopic:ANNUITIESDUE4.Annuitieswherethepaymentsoccurattheendofeachtimeperiodarecalled___________,whereas__________refertoannuitystreamswithpaymentsoccuringatthebeginningofeachtimeperiod.A)ordinaryannuities;earlyannuitiesB)lateannuities;straightannuitiesC)straightannuities;lateannuitiesD)annuitiesdue;ordinaryannuitiesE)ordinaryannuities;annuitiesdueAnswer:EEssentials4/eTopic:PERPETUITY5.Anannuitystreamwherethepaymentsoccurforeveriscalleda(n)____________.A)annuitydueB)indemnityC)perpetuityD)amortizedcashflowstreamE)amortizationtableAnswer:CTopic:STATEDINTERESTRATES6.Theinterestrateexpressedintermsoftheinterestpaymentmadeeachperiodiscalledthe:A)Statedinterestrate.B)Compoundinterestrate.C)Effectiveannualrate.D)Periodicinterestrate.E)Dailyinterestrate.Answer:ATopic:EFFECTIVEANNUALRATE7.Theinterestrateexpressedasifitwerecompoundedonceperyeariscalledthe:A)Statedinterestrate.B)Compoundinterestrate.C)Effectiveannualrate.D)Periodicinterestrate.E)Dailyinterestrate.Answer:CTopic:ANNUALPERCENTAGERATE8.Theinterestratechargedperperiodmultipliedbythenumberofperiodsperyeariscalledthe:A)Effectiveannualrate(EAR).B)Annualpercentagerate(APR).C)Periodicinterestrate.D)Compoundinterestrate.E)Dailyinterestrate.Answer:BTopic:PUREDISCOUNTLOAN9.Aloanwheretheborrowerreceivesmoneytodayandrepaysasinglelumpsumatsometimeinthefutureiscalleda(n)_____________loan.A)amortizedB)continuousC)balloonD)purediscountE)interest-onlyAnswer:DEssentials4/eTopic:INTEREST-ONLYLOAN10.Aloanwheretheborrowerpaysinteresteachperiodandrepaystheentireprincipaloftheloanatsomepointinthefutureiscalleda(n)_________loan.A)amortizedB)continuousC)balloonD)purediscountE)interest-onlyAnswer:ETopic:AMORTIZEDLOAN11.Aloanwheretheborrowerpaysinteresteachperiod,andrepayssomeoralloftheprincipaloftheloanovertimeiscalleda(n)_________loan.A)amortizedB)continuousC)balloonD)purediscountE)interest-onlyAnswer:ATopic:BALLOONLOAN12.Aloanwheretheborrowerpaysinteresteachperiod,repayspartoftheprincipaloftheloanovertime,andrepaystheremainderoftheprincipalattheendoftheloan,iscalleda(n)_______________loan.A)amortizedB)continuousC)balloonD)purediscountE)interest-onlyAnswer:CIICONCEPTSTopic:EFFECTIVEANNUALRATE13.Youaretryingtocomparethedesirabilityoftwoalternativeinvestmentswithratesofreturnquotedusingdifferentcompoundingperiods.Tomaketheproperdecision,youshould:A)Converteachquotedreturntoaneffectiveannualrate.B)Converteachquotedreturntoanannualnominalrate.C)Converteachquotedreturntoamonthlynominalrate.D)Comparetheinvestmentsbyusingthequotedreturns.E)ConverteachquotedreturntoanAPR.Answer:AEssentials4/eTopic:ANNUALPERCENTAGERATE14.WhichofthefollowingstatementsisFALSE?A)Whencomparinginvestmentsitisbestnottorelysolelyonquotedrates.B)Compoundingtypicallyleadstodifferencesbetweenquotedandeffectiverates.C)TheAPRonaloanwithmonthlypaymentsislessthantheannualinterestyouactuallypay.D)TheAPRistheinterestrateperperiodmultipliedbythenumberofperiodsperyear.E)Withmonthlycompounding,theAPRwillbelargerthantheeffectiveannualrate.Answer:ETopic:PERPETUITY15.WhichofthefollowingCANNOTbecalculated?A)Thepresentvalueofaperpetuity.B)Theinterestrateonaperpetuitygiventhepresentvalueandpaymentamount.C)Thepresentvalueofanannuitydue.D)Thefuturevalueofanannuitydue.E)Thefuturevalueofaperpetuity.Answer:ETopic:PRESENTVALUEPERPETUITY16.Youareconsideringtwoperpetuitieswhichareidenticalineveryway,exceptthatperpetuityAwillbeginmakingannualpaymentsof$Ptoyoutwoyearsfromtodaywhilethefirst$PpaymentforperpetuityBwilloccuroneyearfromtoday.Itmustbetruethatthepresentvalueofperpetuity:A)AisgreaterthanthatofBby$P.B)BisgreaterthanthatofAby$P.C)BisequaltothatofperpetuityA.D)AexceedsthatofBbythePVof$Pforoneyear.E)BexceedsthatofAbythePVof$Pforoneyear.Answer:ETopic:COMPARINGSAVINGSACCOUNTS17.Youhave$800thatyouwouldliketoinvest.Youhave2choices:SavingsaccountAwhichearns8%compoundedannually,orsavingsaccountBwhichearns7.90%compoundedsemiannually.Whichwouldyouchooseandwhy?A)Abecauseithasahighereffectiveannualrate.B)Abecauseithasthehigherquotedrate.C)Bbecauseithasahighereffectiveannualrate.D)Bbecausethefuturevalueinoneyearislower.E)Bbecauseithasthehigherquotedrate.Answer:CEssentials4/eTopic:COMPARINGSAVINGSACCOUNTS18.Youhave$800thatyouwouldliketoinvest.Youhave2choices:SavingsaccountAwhichearns8%compoundedannually,orsavingsaccountBwhichearns7.70%compoundedmonthly.Whichwouldyouchooseandwhy?A)Abecauseithasahighereffectiveannualrate.B)Abecausethefuturevalueinoneyearislower.C)Bbecauseithasahighereffectiveannualrate.D)Bbecausethefuturevalueinoneyearislower.E)Abecauseithasthehigherquotedrate.Answer:ATopic:COMPARINGSAVINGSACCOUNTS19.YouareplanningtosaveyourChristmasbonusesfromworkandarecomparingsavingsaccounts:AccountAcompoundssemiannuallywhileaccountBcompoundsmonthly.Ifbothaccountshavethesamequotedannualrateofinterestandyouplaceonlythebonusesintheaccount,youshouldchoose_______________.A)accountAbecauseithasahigherAPRB)accountBbecauseithasahigherAPRC)accountBbecauseitiscompoundedmoreoftenD)accountAbecauseyouwillpaylessintaxesE)eitheraccount,sincebothquotethesamerateofinterestAnswer:CTopic:INTERPRETINGINTERESTRATES20.Whichofthefollowingstatementsistrue?A)Presentvaluesanddiscountratesmoveinthesamedirectionwithoneanother.B)Onloanswithmonthlycompounding,theAPRwillexceedtheEAR.C)Compoundingessentiallymeansearninginterestoninterest.D)Futurevaluesdecreasewithincreasesininterestrates.E)Allelsethesame,thelongerthetermofaloanthelowerwillbethetotalinterestyoupayonit.Answer:CTopic:COMPARINGLOANS21.Youwanttoborrowmoneytobuyanewcar,andyouaretryingtodecidewhethertoborrowshort-term(24months)orlong-term(60months).WhichofthefollowingwouldbeIRRELEVANTtoyourborrowingdecision?A)TheEARsonthetwoalternativeloans.B)TheAPRsonthetwoalternativeloans.C)Theinterestyoucouldearnbyinvestingthedifferencebetweenthetwoloanpayments.D)Thefactthatyoumustmake48morepaymentsonthelongertermloan.E)Theamountofmoneytobeborrowed.Answer:EEssentials4/eTopic:PRESENTVALUEANNUITY22.Youaregoingtoinvest$500attheendofeachyearfortenyears.Givenaninterestrate,youcanfindthepresentvalueofthisinvestmentby:I.Addingthecashflowstogetherandfindingthepresentvalueofthesumusingtheappropriatepresentvaluefactor.II.Applyingtheproperpresentvaluefactortoeachcashflow,thenaddingupthesepresentvalues.III.Findingthefuturevalueofeachcashflow,addingallofthefuturevaluestogether,thenfindingthediscountedpresentvalueofthisfuturevaluesum.IV.Findingthefuturevalueoftheentirepaymentstream.A)IIonlyB)IIIonlyC)IIandIIIonlyD)I,II,andIVonlyE)II,III,andIVonlyAnswer:CTopic:ANNUITIESDUE23.Youareevaluatingtwoannuities.Theyareidenticalineveryway,exceptthatoneisanordinaryannuityandoneisanannuitydue.WhichofthefollowingisFALSE?A)Theordinaryannuitymusthavealowerpresentvaluethantheannuitydue.B)Theordinaryannuitymusthavealowerfuturevaluethantheannuitydue.C)Theannuityduemusthavethesamepresentvalueastheordinaryannuity.D)Thetwoannuitieswilldifferinpresentvaluebytheamount(1+r).E)Theannuitydueandtheordinaryannuitywillmakethesamenumberoftotalpaymentsovertime.Answer:CIII.PROBLEMSTopic:PRESENTVALUEUNEVENCASHFLOWS24.Whatisthetotalpresentvalueof$80receivedinoneyear,$300receivedintwoyears,and$700receivedinsixyearsifthediscountrateis7%?A)$582.72B)$681.68C)$757.25D)$803.24E)$852.83Answer:D26Response:PV=$80/1.07+300/1.07+700/1.07=$803.24Essentials4/eTopic:FUTUREVALUEUNEVENCASHFLOWS25.Whatisthetotalfuturevaluesixyearsfromnowof$80receivedinoneyear,$300receivedintwoyears,and$700receivedinsixyearsifthediscountrateis7%?A)$1,080.00B)$1,047.15C)$1,205.44D)$1,254.44E)$1,299.15Answer:C54Response:FV=$80(1.07)+300(1.07)+700=$1,205.44Topic:PRESENTVALUEUNEVENCASHFLOWS26.Giventhefollowingcashflows,whatisthepresentvalueifthediscountrateis8%?Year1234CashFlow$400$250$900$1925A)$1,415.07B)$2,714.09C)$2,865.70D)$3,058.96E)$3,222.62Answer:BResponse:PV=$400/1.08+250/1.082+900/1.083+1,925/1.084=$2,714.09Topic:PRESENTVALUEUNEVENCASHFLOWS27.Whatisthepresentvalueofthefollowingsetofcashflowsatan10%discountrate?Year1234CashFlow$800?800$800?800A)$0.00B)$120.76C)$173.31D)$379.41E)$3,312.13Answer:B234Response:PV=$800/1.1-800/1.1+800/1.1-800/1.1=$120.76Essentials4/eTopic:FUTUREVALUEUNEVENCASHFLOWS28.Whatisthefuturevalueattheendofyear4ofthefollowingsetofcashflows?Assumeaninterestrateof10%.Year1234CashFlow$800?800$800?800A)$0.00B)$127.38C)$176.80D)$379.41E)$3,312.13Answer:C32Response:FV=$800(1.1)-800(1.1)+800(1.1)-800=$176.80Topic:FUTUREVALUEUNEVENCASHFLOWS29.Whatisthefuturevalueofthefollowingsetofcashflows4yearsfromnow?Assumeaninterestrateof6.5%.Year01234CashFlow?700$300$600$400$500A)$555.18B)$785.72C)$942.12D)$1,068.39E)$1,100.00Answer:D432Response:FV=-$700(1.065)+300(1.065)+600(1.065)+400(1.065)+500=$1,068.39Topic:INTERESTRATE30.Giventhefollowingcashflows,whatistheimplicitdiscountrateifthepresentvalueis$2,450?Year123CashFlow$700$950$1400A)5.45%B)8.72%C)10.48%D)12.89%E)15.91%Answer:C23Response:$2,450=$700/(1+r)+950/(1+r)+1,400/(1+r);r=10.48%Essentials4/eTopic:INTERESTRATE31.Giventhefollowingcashflows,whatistheinterestrateifthefuturevalueattheendofyear3isequalto$3,218?Year123CashFlowA)4%$700$950$1400B)5%C)6%D)7%E)8%Answer:D2Response:$3,218=$700(1+r)+950(1+r)+1,400;r=7.0%Topic:ANNUITYPAYMENT32.Youneedtoborrow$23,000tobuyatruck.Thecurrentloanrateis7.9%compoundedmonthlyandyouwanttopaytheloanoffinequalmonthlypaymentsover5years.Whatisthesizeofyourmonthlypayment?A)$323.39B)$374.04C)$465.26D)$494.69E)$555.66Answer:C60Response:$23,000=C[1-(1/1.00658)]/.00658;C=$465.26Topic:PRESENTVALUEANNUITY33.Themonthlymortgagepaymentonyourhouseis$821.69.Itisa30yearmortgageat6.5%compoundedmonthly.Howmuchdidyouborrow?A)$85,000B)$100,000C)$115,000D)$130,000E)$140,000Answer:D360Response:PVA=$821.69[1-(1/1.0054]/.0054=$130,000Topic:PRESENTVALUEPERPETUITY34.Youjustwonthelottery.Youandyourheirswillreceive$40,000peryearforever,beginningoneyearfromnow.Whatisthepresentvalueofyourwinningsatan10%discountrate?A)$44,000B)$300,000C)$387,500D)$400,000E)$437,500Answer:DResponse:PVP=$40,000/.10=$400,000Essentials4/eTopic:PERPETUITYINTERESTRATE35.Youjustwonthelottery.Youandyourheirswillreceive$40,000peryearforever,beginningoneyearfromnow.Ifthepresentvalueofthelotteryis$500,000,whatisthediscountrateusedtovaluethisperpetuity?A)6%B)7%C)8%D)9%E)10%Answer:CResponse:$500,000=$40,000/r;r=8%Topic:PRESENTVALUEPERPETUITYDUE36.Youjustwonthelottery.Youandyourheirswillreceive$40,000peryearforever,withthefirstpaymentreceivedimmediately.Whatisthepresentvalueata9%discountrate?A)$182,500B)$375,222C)$400,000D)$444,444E)$484,444Answer:EResponse:PV=$40,000+$40,000/.09=$484,444Topic:EFFECTIVEANNUALRATE37.Whatistheeffectiveannualrateof6%compoundedquarterly?A)5.37%B)6.00%C)6.14%D)7.50%E)24.00%Answer:C4Response:EAR=[1+(.06/4)]-1=6.14%Topic:EFFECTIVEANNUALRATE38.Whatistheeffectiveannualrateof11%compoundedsemiannually?A)11.00%B)11.15%C)11.30%D)11.84%E)12.16%Answer:C2Response:EAR=[1+(.11/2)]-1=11.30%Essentials4/eTopic:EFFECTIVEANNUALRATE39.Whatistheeffectiveannualrateof10%compoundedmonthly?A)9.27%B)10.00%C)10.25%D)10.38%E)10.47%Answer:E12Response:EAR=[1+(.10/12)]-1=10.47%Topic:EFFECTIVEANNUALRATECOMPOUNDING40.Agivenrateisquotedas12%APR,buthasanEARof12.55%.Whatistherateofcompoundingduringtheyear?A)AnnuallyB)SemiannuallyC)QuarterlyD)MonthlyE)DailyAnswer:CmResponse:.1255=[1+(1+)]-1;m=4orquarterlyTopic:FUTUREVALUEANNUITYDUE41.Whatisthefuturevaluein12yearsof$800paymentsreceivedatthebeginningofeachyearforthenext12years?Assumeaninterestrateof8.25%.A)$14,259.63B)$15,408.65C)$16,679.86D)$18,495.48E)$20,782.15Answer:C12Response:FVAdue=$800[(1.0825-1)/.0825](1.0825)=$16,679.86Topic:PRESENTVALUEANNUITYDUE42.Whatisthepresentvalueof$1,500paymentsreceivedatthebeginningofeachyearforthenext10years?Assumeaninterestrateof6.525%.A)$978.75B)$7,093.62C)$10,770.64D)$11,473.43E)$15,000.00Answer:D10Response:PVAdue=$1,500{[1-(1/1.06525)]/.06525}(1.06525)=$11,473.43Essentials4/eTopic:LOANPAYMENTS43.FastEddie'sUsedCarswillsellyoua1989MazdaMiatafor$5,000withnomoneydown.Youagreetomakeweeklypaymentsfor2years,beginningoneweekafteryoubuythecar.Thestatedrateontheloanis13%.Howmuchiseachpayment?A)$42.96B)$54.66C)$68.19D)$75.90E)$99.65Answer:B104Response:$5,000=C{[1-(1/1.0025)]/.0025};C=$54.66Topic:PRESENTVALUEANNUITY44.Youwinthelotteryandaregiventheoptionofreceiving$250,000noworanannuityof$25,000attheendofeachyearfor30years.Whichofthefollowingiscorrect?(Ignoretaxes)A)Youcannotchoosebetweenthetwowithoutfirstcalculatingfuturevalues.B)Youwillalwayschoosethelumpregardlessofinterestrates.C)Youwillchoosetheannuitypaymentiftheinterestrateis7%.D)Youwillalwayschoosetheannuity.E)Comparingthefuturevalueofthetwoalternativeswillleadtoadifferentdecisionthanyouwillreachfromacomparisonofthepresentvalues.Answer:C30Response:PVA=$25,000{[1-(1/1.07)]/.07}=$310,226;chooseannuityTopic:PRESENTVALUEANNUITY45.Youaregoingtowithdraw$5,000attheendofeachyearforthenextfouryearsfromanaccountthatpaysinterestatarateof9%compoundedannually.Howmuchmusttherebeintheaccounttodayinorderfortheaccounttoreducetoabalanceofzeroafterthelastwithdrawal?A)$14,793.83B)$16,198.60C)$18,602.29D)$19,713.75E)$20,000.00Answer:B4Response:PVA=$5,000{[1-(1/1.09)]/.09}=$16,198.60Essentials4/eTopic:PRESENTVALUEANNUITY46.Youaregoingtowithdraw$5,000attheendofeachyearforthenextfouryearsfromanaccountthatpaysinterestatarateof9%compoundedannually.Theaccountbalancewillreducetozerowhenthelastwithdrawalismade.Howmuchmoneywillbeintheaccountimmediatelyafterthethirdwithdrawalismade?A)$4,587.16B)$4,977.10C)$5,000.00D)$6,982.29E)$10,000.00Answer:AResponse:PV=$5,000/1.09=$4,587.16Topic:ANNUITYINTEREST47.Youaregoingtowithdraw$5,000attheendofeachyearforthenextfouryearsfromanaccountthatpaysinterestatarateof9%compoundedannually.Theaccountbalancewillreducetozerowhenthelastwithdrawalismade.Howmuchinterestwillyouearnontheaccountoverthefouryearlife?A)$0.00B)$2,409.60C)$3,801.40D)$4,000.00E)$5,711.20Answer:CResponse:4PVA=$5,000{[1-(1/1.09)]/.09}=$16,198.60;interest=$20,000-16,198.60=$3,801.40Topic:PRESENTVALUEANNUITY48.Attheendofeachyearforthenext8yearsyouwillreceivecashflowsof$500.Iftheappropriatediscountrateis7.5%,howmuchwouldyoupayforthisannuity?A)$4,000.00B)$5,841.22C)$1,259.47D)$2,928.65E)$3,148.30Answer:D8Response:PVA=$500{[1-(1/1.075)]/.075}=$2,928.65Essentials4/eTopic:RETURNONANNUITY49.Attheendofeachyearforthenext8yearsyouwillreceivecashflowsof$500.Theinitialinvestmentis$2,500.Whatrateofreturnareyouexpectingfromthisinvestment?A)11.81%B)10.27%C)9.01%D)8.28%E)7.21%Answer:A8Response:$2,500=$500{[1-1/(1+r)]/r};r=11.81%Topic:ANNUITYPAYMENT50.Youareconsideringinvesting$400ina12-yearannuity.Therateofreturnyourequireis9%.Whatannualcashflowfromtheannuitywillprovidetherequiredreturn?A)$10.77B)$42.96C)$55.86D)$78.31E)$129.27Answer:C12Response:$400=C{[1-(1/1.09)]/.09};C=$55.86Topic:EFFECTIVEANNUALRATE51.Youareconsideringaninvestmentwithaquotedreturnof10%peryear.Ifinterestiscompoundeddaily,whatistheeffectivereturnonthisinvestment?A)1.11%B)10.00%C)10.25%D)10.47%E)10.52%Answer:EResponse:EAR=[1+(.10/365-1=10.52%Topic:NUMBEROFPERIODS52.Youborrowed$1,200at8%compoundedannually.Yourpaymentsare$96attheendofeachyear.Howmanyyearswillyoumakepaymentsontheloan?A)9yearsB)10yearsC)11yearsD)12yearsE)foreverAnswer:EResponse:annualinterest=$1,200x.08=$96;youareonlymakinginterestpaymentsandwillneverrepaytheprincipalEssentials4/eTopic:APR/EAR53.Youagreetoloanyourparents$32,000tobuyanewvan.Theyagreetopayyou$650amonthfor5years.The________________.A)interestrateontheloanis0.75%permonthB)APRontheloanis7.87%C)EARontheloanis8.08%D)APRontheloanis8.22%E)EARontheloanis8.38%Answer:E6012Response:$32,000=$650{[1-1/(1+r)]/r};r=.6730%;EAR=(1+.006730)-1=8.38%Topic:PRESENTVALUEANNUITY54.Yourbrother-in-lawborrowed$3,000fromyou5yearsagoandthendisappeared.Yesterdayhereturnedandexpressedadesiretopaybacktheloan,includingtheinterestaccrued.Assumingthatyouhadagreedtochargehim12%,andassumingthathewishestomake5equalannualpaymentsbeginninginoneyear,howmuchwouldyourbrother-in-lawhavetopayyouannuallyinordertopayoffthedebt?(Assumethattheloancontinuestoaccrueinterestat12%peryear.)A)$941.89B)$1,200.00C)$1,322.33D)$1,466.67E)$3,002.56Answer:DResponse:5FV=$3,000(1.12)=$5,287.03istheamountyouarecurrentlyowed5PVA=$5,287.03=C{[1-(1/1.12)]/.12};C=$1,466.67Topic:PRESENTVALUEANNUITY55.A"NameThatTune"contesthasagrandprizeof$500,000.However,theconteststipulatesthatthewinnerwillreceivejust$200,000immediately,and$30,000attheendofeachofthenext10years.Assumingthatonecanearn8%ontheirmoney,howmuchhasthecontestwinneractuallywon?A)$250,000.00B)$309,225.11C)$365,826.02D)$401,302.44E)$500,000.00Answer:D10Response:PV=$200,000+30,000{[1-(1/1.08)]/.08}=$401,302.44Essentials4/eTopic:ANNUITYPAYMENT56.Denzelwishestosavemoneytoprovideforhisretirement.Beginningonemonthfromnow,hewillbegindepositingafixedamountintoaretirementsavingsaccountthatwillearn10%compoundedmonthly.Hewillmake420suchdeposits.Then,oneyearaftermakinghisfinaldeposit,hewillwithdraw$75,000annuallyfor20years.Thefundwillcontinuetoearn10%compoundedmonthly.Howmuchshouldthemonthlydepositsbeforhisretirementplan?A)$119.11B)$149.58C)$162.92D)$184.89E)$209.38Answer:CResponse:12EAR=[1+(.10/12)]-1=10.47%20PVA=$75,000{[1-(1/1.1047)]/.1047}=$618,557.45FVA=$618,557.45=C4201)/.0083];C=$162.92Topic:COMPARINGRATES57.Youhave$100,000toinvest.Yourbankoffersone-yearcertificatesofdepositwithastatedrateof3.50%compoundedquarterly.Whatratecompoundedsemiannuallywouldprovideyouwiththesameamountofmoneyattheendofoneyear?A)3.485%B)3.500%C)3.505%D)3.510%E)3.515%Answer:EResponse:42EAR=[1+(.035/4)]-1=3.5462%;EAR=.035462=[1+(r/2)]-1;r=3.5153%Topic:ANNUALPERCENTAGERATE58.VitoCorleonewillloanyoumoneyona"four-for-five"arrangement;i.e.,forevery$4hegivesyoutoday,yougivehim$5oneweekfromnow.WhatistheAPRofthisloan?A)250%B)869%C)1,000%D)1,300%E)1,800%Answer:DResponse:$5=$4(1+r);r=25%perweek;APR=25%x52=1,300%Essentials4/eTopic:EFFECTIVEANNUALRATE59.VitoCorleonewillloanyoumoneyona"four-for-five"arrangement;i.e.,forevery$4hegivesyoutoday,yougivehim$5oneweekfromnow.WhatistheEARofthisloan?A)250%B)869%C)1,095%D)109,475%E)10,947,544%Answer:EResponse:$5=$4(1+r);r=25%perweek;APR=25%x52=1,300%52EAR=[1+(13/52)]-1=10,947,544%Topic:PRESENTVALUEPERPETUITY60.YouownabondissuedbytheCanadianPacificrailroadthatpromisestopaytheholder$50annuallyforever.Youplantosellthebond10yearsfromnow.Ifsimilarinvestmentsyield7%atthattime,howmuchwillthebondbeworth?A)$350.00B)$592.17C)$714.29D)$825.00E)$938.44Answer:CResponse:PVP=$50/.07=$714.29Topic:COMPARINGPRESENTVALUES61.Moepurchasesa$50,30-yearannuity.Larrypurchasesa$50perpetuity.Inbothcases,paymentsbegininoneyear,andtheappropriateinterestrateis12.5%.WhatisthepresentvalueofLarry'spaymentsthatwilloccurfromyear31onwards?A)$11.68B)$68.11C)$91.27D)$124.40E)Morethan$150Answer:AResponse:30PVP=$50/.125=$400;PVA=$50{[1-(1/1.125)]/.125}=$388.32;difference=$11.68Essentials4/eTopic:COMPARINGPRESENTVALUES62.Moepurchasesa$50annualperpetuityforwhichpaymentsbegininoneyear.Larrypurchasesa$50annualperpetuityforwhichpaymentsbeginimmediately.Ifa12.5%interestrateisappropriateforbothcashflowstreams,whichofthefollowingstatementsistrue?A)Moe'sperpetuityisworth$50morethanLarry's.B)Larry'sperpetuityisworth$50morethanMoe's.C)Theperpetuitiesareofequalvaluetoday.D)Larry'sperpetuityisworth$44.44morethanMoe's.E)Moe'sperpetuityisworth$44.44morethanLarry's.Answer:BResponse:Moe:PVP=$50/.125=$400;Larry:PV=$50+50/.125=$450Topic:PRESENTVALUEANNUITYDUE63.Inordertohelpyouthroughcollege,yourparentsjustdeposited$20,000intoabankaccountpaying6%interest.Startingtomorrow,youplantowithdrawequalamountsfromtheaccountatthebeginningofeachofthenextfouryears.WhatistheMOSTyoucanwithdrawannually?A)$5,136.91B)$5,445.12C)$5,771.83D)$6,101.88E)$6,395.88Answer:B4Response:PVAdue=$20,000=C{[1-(1/1.06)]/.06}(1.06);C=$5,445.12Topic:PRESENTVALUEANNUITY64.Inordertohelpyouthroughcollege,yourparentsjustdeposited$20,000intoabankaccountpaying6%interest.Startingnextyear,youplantowithdrawequalamountsfromtheaccountattheendofeachofthenextfouryears.WhatistheMOSTyoucanwithdrawannually?A)$5,136.91B)$5,445.12C)$5,771.83D)$6,101.88E)$6,395.88Answer:C4Response:PVA=$20,000=C{[1-(1/1.06)]/.06};C=$5,771.83Essentials4/eTopic:PRESENTVALUEOFUNEVENCASHFLOWS65.AnalystsexpectPlacerCorp.topayshareholders$2.25pershareannuallyforthenextfiveyears.Afterthat,thedividendwillbe$3.50annuallyforever.Givenadiscountrateof12%,whatisthevalueofthestocktoday?A)$16.55B)$19.87C)$22.37D)$24.66E)$27.88Answer:DResponse:PVP=$3.50/.12=$29.17;PV=$29.17/1.125=$16.555PVA=$2.25{[1-(1/1.12)]/.12}=$8.11;Price=$16.55+8.11=$24.66Topic:PERPETUITYRETURN66.ThepreferredstockofPlacerCorp.currentlysellsfor$44.44pershare.Theannualdividendof$4isfixed.Assumingaconstantdividendforever,whatistherateofreturnonthisstock?A)7.0%B)8.0%C)9.0%D)10.0%E)11.0%Answer:CResponse:$44.44=$4/r;r=9.0%Topic:EARLOANRATE67.FastEddie'sUsedCarswillsellyoua1989MazdaMiatafor$5,000withnomoneydown.Youagreetomakeweeklypaymentsof$60.00for2years,beginningoneweekafteryoubuythecar.WhatistheEARofthisloan?A)20.04%B)22.85%C)25.61%D)32.34%E)43.01%Answer:CResponse:104$5,000=$60{[1-1/(1+r)]/r};r=.4394%;APR=.4394x52=22.85%52EAR=(1+.004394)-1=25.61%Essentials4/eTopic:PRESENTVALUEANNUITYDUEWITHEAR68.Whatisthepresentvalueof$600paymentsreceivedatthebeginningofeachyearforthenext10years?Assumeaninterestrateof8%compoundedmonthly.A)$3,069.13B)$3,972.13C)$4,026.05D)$4,301.82E)$4,955.26Answer:DResponse:12EAR=[1+(.08/12)]-1=8.30%10)PVAdue=$600{[1-(1/1.083]/.083}(1.083)=$4,301.82Topic:PRESENTVALUEPERPETUITY69.Fiveyearsfromnowyouwillbegintoreceivecashflowsof$125peryear.Thesecashflowswillcontinueforever.Ifthediscountrateis10%,whatisthepresentvalueofthesecashflows?A)$776.15B)$853.77C)$934.07D)$1,136.36E)$1,250.00Answer:B4Response:PVP=$125/.1=$1,250;PV=$1,250/(1.1)=$853.77Topic:MULTIPLERATES70.Fouryearsfromnowyouwillreceivethefirstofsevenannual$6,000payments.Thecurrentinterestrateis8%,butbythebeginningofyear4,theratewillriseto10%.Whatisthepresentvalueofthiscashflowstream?A)$1