Question 1
When you pay off the principal and all of the interest at one time at the maturity date of the loan, we call this type of loan a(n):
A. amortized loan.
B. interest-only loan.
C. discount loan.
D. compound loan.
Question 2
The furniture store offers you no-money-down on a new set of living room furniture. Further, you may pay for the furniture in three equal annual end-of-the-year payments of $1,000 each with the first payment to be made one year from today. If the discount rate is 6%, what is the present value of the furniture payments?
A. $3,183.60
B. $3,000
C. $2,833.39
D. $2,673.01
Question 3
Your parents have an investment portfolio of $400,000, and they wish to take out cash flows of $50,000 per year as an ordinary annuity. How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%? Use a calculator to determine your answer.
A. 8 years
B. 9.10 years
C. 9.60 years
D. 10.14 years
Question 4
What is the present value of a lottery paid as an annuity due for 20 years if the cash flows are $250,000 per year and the appropriate discount rate is 7.50%?
A. $5,000,000.00
B. $3,186,045.39
C. $2,739,769.55
D. $2,548,622.84
Question 5
What is the present value of a stream of annual end-of-the-year annuity cash flows if the discount rate is 0%, and the cash flows of $50 last for 20 years?
A. Less than $1,000
B. Exactly $1,000
C. More than $1,000
D. This question cannot be answered because we have an interest rate of 0%.
Question 6
If you borrow $100,000 at an annual rate of 8% for a 10-year period and repay with 10 equal annual end-of-the-year payments of $14,902.95, then you have just repaid what type of loan?
A. Amortized loan
B. Interest-only loan
C. Discount loan
D. Compound loan
Question 7
What is the future value in Year 12 of an ordinary annuity cash flow of $6,000 per year at an interest rate of 4% per year?
A. $90,154.83
B. $93,761.02
C. $28,675.97
D. $32,117.08
Question 8
Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. How large is the payment at the end of Year 10 if the crane is financed at a rate of 8.50% as a discount loan?
A. $228,611.56
B. $127,500
C. $3,391,475.16
D. There is not enough information to answer this question.
Question 9
You just won the Publisher's Clearing House Sweepstakes and the right to 20 after-tax ordinary annuity cash flows of $163,291.18. Assuming a discount rate of 7.50%, what is the present value of your lottery winnings? Use a calculator to determine your answer.
A. $3,265,823.60
B. $1,789,520.81
C. $1,664,670.52
D. There is not enough information to answer this question.
Question 10
You currently have $67,000 in an interest-earning account. From this account, you wish to make 20 year-end payments of $5,000 each. What annual rate of return must you make on this account to meet your objective?
A. 4.16%
B. 5.03%
C. 6.42%
D. 7.32%
Question 11
A/An __________ is a series of equal end-of-the-period cash flows.
A. annuity
B. annuity due
C. perpetuity due
D. None of the above
Question 12
Which is greater, the present value of a $1,000 five-year ordinary annuity discounted at 10%, or the present value of a $1,000 five-year annuity due discounted at 10%?
A. The ordinary annuity is worth more with a present value of $3,790.79.
B. The annuity due is worth more with a present value of $4,169.87.
C. The ordinary annuity is worth more with a present value of $4,169.87.
D. The annuity due is worth more with a present value of $4,586.85.
Question 13
Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. What is the size of the first payment if the crane is financed with an interest-only loan at an annual rate of 8.50%?
A. $228,611.56
B. $127,500
C. $3,391,475.16
D. There is not enough information to answer this question.
Question 14
If you borrow $50,000 at an annual interest rate of 12% for six years, what is the annual payment (prior to maturity) on a discount loan?
A. $0
B. $6,000
C. $8,333.33
D. $12,161.29
Question 15
If you borrow $100,000 at an annual rate of 8% for a 10-year period and repay the total amount of principal and interest due of $215,892.50 at the end of 10 years, what type of loan did you have?
A. Amortized loan
B. Interest-only loan
C. Discount loan
D. Compound loan
Question 16
Your department at work places $10,000 every year-end into an account earning 5%. The money is used when the corporate office fails to fully finance your profitable projects. The money has not been touched since a deposit was made exactly five years ago. If the most recent deposit was made today, how much money is currently in the account?
A. $55,256.31
B. $60,000
C. $65,256.31
D. $68,019.13
Question 17
Randy W. recently won the Western States Lottery of $6,500,000. The lottery pays either a total of twenty $325,000 payments per year with the first payment today (i.e., an annuity due), or $3,500,000 today. At what interest rate would Randy be financially indifferent between these two payout choices?
A. 5.37%
B. 7.36%
C. 7.76%
D. 8.00%
Question 18
What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date?
A. Amortized loan
B. Interest-only loan
C. Discount loan
D. Compound loan
Question 19
An annuity is a series of:
A. variable cash payments at regular intervals across time.
B. equal cash payments at regular intervals across time.
C. variable cash payments at different intervals across time.
D. equal cash payments at different intervals across time.
Question 20
You have saved $47,000 for college and wish to use $15,000 per year. If you use the money as an ordinary annuity and earn 6.15% on your investment, how many years will your annuity last? Use a calculator to determine your answer.
A. 4.27 years
B. 3.13 years
C. 3.59 years
D. 3.36 years
Question 21
A company selling a bond is __________ money.
A. borrowing
B. lending
C. taking
D. reinvesting
Question 22
Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5%. What is your investment worth in one year?
A. $1,025.00
B. $1,500.95
C. $1,025.27
D. $1,050.95
Question 23
Suppose you invest $2,000 today, compounded monthly, with an annual interest rate of 7.5%. What is your investment worth in one year?
A. $2,150
B. $2,152.81
C. $2,155.27
D. $2,154.77
Question 24
The real rate is 2.5% and inflation is 3.25%. What is the approximate nominal rate?
A. 5.75%
B. 5.25%
C. 3.25%
D. 1.25%
Question 25
The phrase "price to rent money" is sometimes used to refer to:
A. historical prices.
B. compound rates.
C. discount rates.
D. interest rates.
Question 26
Which of the following statements is true if you increase your monthly payment above the required loan payment?
A. The extra portion of the payment does not go to the principal.
B. You can significantly increase the number of payments needed to pay off the loan.
C. The extra portion of the payment increases the principal.
D. You can significantly reduce the number of payments needed to pay off the loan.
Question 27
Assume that Don is 45 years old and has 20 years for saving until he retires. He expects an APR of 8.5% on his investments. How much does he need to save if he puts money away annually in equal end-of-the-year amounts to achieve a future value of $1 million in 20 years' time?
A. $20,570.00
B. $20,670.97
C. $20,770.90
D. $20,800.00
Question 28
James is a rational investor wishing to maximize his return over a 20-year period. The current yield curve is inverted with one-year rates at 5% and 20-year rates at 3.5%. James will invest in the lower-rate 20-year bonds if:
A. he thinks rates will fall in the future and locking in long-term rates today may provide the highest long-run average return.
B. he thinks rates will rise in the future and locking in long-term rates today may provide the lowest long-run average return.
C. he thinks rates will remain flat at 5% in the future and locking in long-term rates today will prevent him from appearing greedy to those without this investment opportunity.
D. James has no idea what to do and should just skip this question.
Question 29
What is the EAR if the APR is 10.52% and compounding is daily?
A. Slightly above 10.09%
B. Slightly below 11.09%
C. Slightly above 11.09%
D. Over 11.25%
Question 30
Which of the following statements is true?
A. On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the EAR rate.
B. On many calculators the TVM key for interest is Y/I; this is Interest per Year, or the APR rate.
C. On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the APR rate.
D. On many calculators the TVM key for a period is I/Y.
Question 31
The __________ compensates the investor for the additional risk that the loan will not be repaid in full.
A. default premium
B. inflation premium
C. real rate
D. interest rate
Question 32
Suppose you postpone consumption so that by investing at 8% you will have an extra $800 to spend in one year. Suppose that inflation is 4% during this time. What is the approximate real increase in your purchasing power?
A. $800
B. $600
C. $400
D. $200
Question 33
As applied to mortgage loans, which of the following statements is FALSE?
A. Advertised rates are annual percentage rates.
B. A spreadsheet uses the periodic interest rate, not the annual percentage rate.
C. By increasing the number of payments per year you increase your effective borrowing rate.
D. A mortgage problem is unlike a future value problem with an annuity.
Question 34
We can write the true relationship between the nominal interest rate and the real rate and expected inflation as which of the following?
A. (1 + r) = (1 + r) × (1 + h*)
B. r = (1 + r*) × (1 + h) - 1
C. r* = (1 + r) × (1 + h) -1
D. r = (1 + r*) × (1 + h) + 1
Question 35
You put down 20% on a home with a purchase price of $300,000. The down payment is thus $60,000, leaving a balance owed of $240,000. The bank will loan you the remaining balance at 4.28% APR. You will make annual payments with a 20-year payment schedule. What is the annual annuity payment under this schedule?
A. $18,100.23
B. $22,625.29
C. $12,000.00
D. $33,785.23
Question 36
Assume you just bought a new home and now have a mortgage on the home. The amount of the principal is $150,000, the loan is at 5% APR, and the monthly payments are spread out over 30 years. What is the loan payment? Use a calculator to determine your answer.
A. $798.95
B. $805.23
C. $850.32
D. $903.47
Question 37
What is the EAR if the APR is 5% and compounding is quarterly?
A. Slightly above 5.09%
B. Slightly below 5.09%
C. Under 5%
D. Over 5.25%
Question 38
When interest rates are stated or given for loan repayments, it is assumed that they are __________ unless specifically stated otherwise.
A. daily rates
B. annual percentage rates
C. effective annual rates
D. APYs
Question 39
The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are:
A. the default premium and the bankruptcy premium.
B. the liquidity premium and the maturity premium.
C. the default premium and the maturity premium.
D. the inflation premium and the maturity premium.
Question 40
Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is true?
A. The bank is borrowing money from you without a promise to repay that money with interest.
B. The bank is lending money to you with a promise to repay that money with interest.
C. The bank is technically renting money from you with a promise to repay that money with interest.
D. The bank is lending money to you, but not borrowing money from you.