1. A dollar paid (or received) in the future is A. not worth as much as a dollar paid (or received) today.
2. A loan is offered with monthly payments and a 10 percent APR. What is the loan’s effective annual rate (EAR)? A. 10.47 percent
3. A loan is offered with monthly payments and a 6.5 percent APR. What is the loan’s effective annual rate (EAR)? A. 6.697 percent
4. A perpetuity, a special form of annuity, pays cash flows A. periodically forever.
5. An average home in Chicago costs $295,000. If house prices are expected to grow at an average rate of 3 percent per year, what will a house cost in five years? A. $341,985.85
6. Approximately how many years does it take to double a $300 investment when interest rates are 8 percent per year? A. 9 years
7. Approximately how many years does it take to double a $475 investment when interest rates are 8 percent per year? A. 9 years
8. Approximately how many years does it take to double a $500 investment when interest rates are 4 percent per year? A. 18 years
9. Approximately how many years does it take to double a $600 investment when interest rates are 6 percent per year? A. 12 years
10. Approximately what interest rate is needed to double an investment over six years? A. 12 percent
11. Approximately what interest rate is needed to double an investment over eight years? A. 9 percent
12. Approximately what interest rate is needed to double an investment over four years? A. 18 percent
13. Approximately what rate is needed to double an investment over five years? A. 14.4 percent
14. Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value A. grows.
15. Compute the present value of $3,000 paid in four years using the following discount rates: 3 percent in year 1, 4 percent in year 2, 5 percent in year 3, and 6 percent in year 4. A. $2,516.26
16. Compute the present value of $4,000 paid in five years using the following discount rates: 10 percent in year 1, 2 percent in year 2, 12 percent in year 3, and 9 percent in years 4 and 5. A. $2,679.15
17. Compute the present value of $4,000 paid in five years using the following discount rates: 10 percent in year 1, 2 percent in year 2, 12 percent in year 3, and 9 percent in years 4 and 5. A. $2,679.15
18. Compute the present value of $9,000 paid in four years using the following discount rates: 4 percent in year 1, 5 percent in year 2, 4 percent in year 3, and 3 percent in year 4. A. $7,693.95
19. Determine the interest rate earned on a $1,500 deposit when $1,680 is paid back in one year. A. 12.00 percent
20. Determine the interest rate earned on a $200 deposit when $208 is paid back in one year. A. 4 percent
21. Determine the interest rate earned on a $450 deposit when $475 is paid back in one year. A. 5.56 percent
22. Determine the interest rate earned on an $800 deposit when $808 is paid back in one year A. 1 percent
23. How are present values affected by changes in interest rates? A. The lower the interest rate, the larger the present value will be.
24. How much would be in your savings account in 10 years after depositing $50 today if the bank pays 7 percent interest per year? A. $98.36
25. How much would be in your savings account in 12 years if you deposited $1,500 today? Assume the bank pays 5 percent per year. A. $2,693.78
26. How much would be in your savings account in 7 years after depositing $100 today if the bank pays 5 percent interest per year? A. $140.71
27. If an average home in your town currently costs $300,000, and house prices are expected to grow at an average rate of 5 percent per year, what will an average house cost in 10 years? A. $488,688.39
28. If an average home in your town currently costs $350,000, and house prices are expected to grow at an average rate of 3 percent per year, what will an average house cost in “5” years? A. $405,745.93
29. If the future value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what is the future value of the same annuity due? A. $1,060.00
30. If the future value of an ordinary, 5-year annuity is $100,000 and interest rates are 5 percent, what is the future value of the same annuity due? A. $105,000.00
31. If the future value of an ordinary, 7-year annuity is $10,000 and interest rates are 4 percent, what is the future value of the same annuity due? A. $10,400.00
32. If the present value of an ordinary, 10-year annuity is $25,000 and interest rates are 7 percent, what is the present value of the same annuity due? A. $26,750.00
33. If the present value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what is the present value of the same annuity due? A. $1,060.00
34. In order to discount multiple cash flows to the present, one would use A. the appropriate discount rate.
35. Level sets of frequent, consistent cash flows are called A. annuities.
36. Loan amortization schedules show. A. both the principal balance and interest paid per period.
37. Many people who want to start investing for their future want to start today, which implies an annuity stream that is paid at the beginning of the period. Beginning-of-period cash flows are referred to as A. annuities due.
38. People borrow money because they expect A. their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on the loan.
39. The interest rate, i, which we use to calculate present value, is often referred to as the A. discount rate.
40. The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect? A. interest rate for compounding
41. The longer money can earn interest, A. the greater the compounding effect.
42. The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a A. more accurate measure of the interest rate paid for monthly compounding.
43. We call the process of earning interest on both the original deposit and on the earlier interest payments A. compounding
44. What is the future value of $2,000 deposited for one year earning 6 percent interest rate annually? A. $2,120
45. What is the future value of $2,500 deposited for one year earning a 14 percent interest rate annually? A. $2,850
46. What is the future value of $600 deposited for four years earning an 11 percent interest rate annually? A. $910.84
47. What is the future value of $700 deposited for one year earning 4 percent interest rate annually? A. $728
48. What is the future value of a $1,000 annuity payment over 4 years if the interest rates are 8 percent? A. $4,506.11
49. What is the future value of a $500 annuity payment over eight years if interest rates are 14 percent? A. $6,616.38
50. What is the future value of an $800 annuity payment over 15 years if the interest rates are 6 percent? A. $18,620.78
51. What is the present value of a $1,100 payment made every year forever when interest rates are 4.5 percent? A. $24,444.44
52. What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent? A. $1,197.81
53. What is the present value of a $500 payment made in four years when the discount rate is 8 percent? A. $367.51
54. What is the present value of a $750 payment made in three years when the discount rate is 5 percent? A. $647.88
55. What is the present value of a $775 annuity payment over six years if interest rates are 11 percent? A. $3,278.67
56. What is the present value, when interest rates are 10 percent, of a $75 payment made every year forever? A. $750.00
57. When calculating the number of years needed to grow an investment to a specific amount of money A. the higher the interest rate, the shorter the time period needed to achieve the growth.
58. When moving from the left to the right of a time line, we are using A. compound interest to calculate future values.
59. When saving for future expenditures, we can add the ________ of contributions over time to see what the total will be worth at some point in time. A. future value
69. When you get your credit card bill, if you make a payment larger than the minimum payment A. you will reduce the payoff time
70. When you get your credit card bill, it will offer a minimum payment, which A. usually only pays the accrued interest and a small amount of principal.
71.When your investment compounds, your money will grow in a(n) __________ fashion. A. exponential
72. Which of the following is NOT true when developing a time line? A. Cash outflows are designated with a positive number.
73. Which of the following is the equivalent of $300 received today? A. Seven hundred ninety-five dollars ninety-nine cents to be received 20 years in the future assuming a 5 percent annual interest rate.
75. Which of the following statements is correct? A. $100 to be received in the future is worth less than that today since it could be invested and earn interest.
76. Which of the following statements is incorrect with respect to time lines? A. Interest rates are not included on our time lines.
77. Which of the following will increase the future value of an annuity? A. All of these choices are correct.
78. Which of the following will increase the present value of an annuity? A. The interest rate decreases.
79. You are offered a choice between $770 today and $815 one year from today. Assume that interest rates are 4 percent. Which do you prefer? A. $815 one year from today
80. You double your money in five years. The reason your return is not 20 percent per year is because: A. it does not reflect the effect of compounding.
81. Your credit rating and current economic conditions will determine A. the interest rate that a lender will offer.
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