** **

**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.**

**Question options:**

** **

**4.27 years**

** **

**3.13 years**

** **

**3.59 years**

** **

**3.36 years**

** **

**Question 2**

**2.5 / 2.5 points**

** **

**An annuity is a series of:**

**Question options:**

** **

**variable cash payments at regular intervals across time.**

** **

**equal cash payments at regular intervals across time.**

** **

**variable cash payments at different intervals across time.**

** **

**equal cash payments at different intervals across time.**

** **

**Question 3**

**2.5 / 2.5 points**

** **

**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?**

**Question options:**

** **

**Amortized loan**

** **

**Interest-only loan**

** **

**Discount loan**

** **

**Compound loan**

** **

**Question 4**

**2.5 / 2.5 points**

** **

**The main variables of the TVM equation are:**

**Question options:**

** **

**present value, future value, time, interest rate, and payment.**

** **

**present value, future value, perpetuity, interest rate, and payment.**

** **

**present value, future value, time, annuity, and interest rate.**

** **

**present value, future value, perpetuity, interest rate, and principal.**

** **

**Question 5**

**2.5 / 2.5 points**

** **

**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.**

**Question options:**

** **

**$3,265,823.60**

** **

**$1,789,520.81**

** **

**$1,664,670.52**

** **

**There is not enough information to answer this question.**

** **

**Question 6**

**2.5 / 2.5 points**

** **

**You have just won the Reader’s Digest lottery of $5,000 per year for 20 years, with the first payment today followed by 19 more start-of-the-year cash flows. At an interest rate of 5%, what is the present value of your winnings?**

**Question options:**

** **

**$100,000**

** **

**$65,426.60**

** **

**$62,311.05**

** **

**$47,641.18**

** **

**Question 7**

**2.5 / 2.5 points**

** **

**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?**

**Question options:**

** **

**$90,154.83**

** **

**$93,761.02**

** **

**$28,675.97**

** **

**$32,117.08**

** **

**Question 8**

**2.5 / 2.5 points**

** **

**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?**

**Question options:**

** **

**Less than $1,000**

** **

**Exactly $1,000**

** **

**More than $1,000**

** **

**This question cannot be answered because we have an interest rate of 0%.**

** **

**Question 9**

**2.5 / 2.5 points**

** **

**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%?**

**Question options:**

** **

**The ordinary annuity is worth more with a present value of $3,790.79.**

** **

**The annuity due is worth more with a present value of $4,169.87.**

** **

**The ordinary annuity is worth more with a present value of $4,169.87.**

** **

**The annuity due is worth more with a present value of $4,586.85.**

** **

**Question 10**

**2.5 / 2.5 points**

** **

**What is the future value in Year 25 of an ordinary annuity cash flow of $2,000 per year at an interest rate of 10% per year?**

**Question options:**

** **

**$66,505.81**

** **

**$55,000.00**

** **

**$196,694.12**

** **

**$216,363.53**

** **

**Question 11**

**2.5 / 2.5 points**

** **

**Given the following cash flows, what is the future value at Year 6 when compounded at an interest rate of 8%?**

** **

**Year**

**0**

**2**

**4**

**6**

** **

**Cash Flow**

**$5,000**

**$7,000**

**$9,000**

**$11,000**

**Question options:**

** **

**$38,955.39**

** **

**$56,687.43**

** **

**$42,074.42**

** **

**$32,000**

** **

**Question 12**

**2.5 / 2.5 points**

** **

**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?**

**Question options:**

** **

**Amortized loan**

** **

**Interest-only loan**

** **

**Discount loan**

** **

**Compound loan**

** **

**Question 13**

**2.5 / 2.5 points**

** **

**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?**

**Question options:**

** **

**5.37%**

** **

**7.36%**

** **

**7.76%**

** **

**8.00%**

** **

**Question 14**

**2.5 / 2.5 points**

** **

**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?**

**Question options:**

** **

**Amortized loan**

** **

**Interest-only loan**

** **

**Discount loan**

** **

**Compound loan**

** **

**Question 15**

**0 / 2.5 points**

** **

**If you borrow $50,000 at an annual interest rate of 12% for six years, what is the annual payment (prior to maturity) on an interest-only type of loan?**

**Question options:**

** **

**$0**

** **

**$6,000**

** **

**$8,333.33**

** **

**$12,161.29**

** **

**Question 16**

**2.5 / 2.5 points**

** **

**If for the next 40 years you place $3,000 in equal year-end deposits into an account earning 8% per year, how much money will be in the account at the end of that time period?**

**Question options:**

** **

**$120,000.00**

** **

**$777,169.56**

** **

**$839,343.12**

** **

**$2,606,942.58**

** **

**Question 17**

**2.5 / 2.5 points**

** **

**If you borrow $100,000 at an annual rate of 8% for a 10-year period and repay the interest of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end of 10 years, then you have just repaid what type of loan?**

**Question options:**

** **

**Amortized loan**

** **

**Interest-only loan**

** **

**Discount loan**

** **

**Compound loan**

** **

**Question 18**

**0 / 2.5 points**

** **

**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?**

**Question options:**

** **

**$228,611.56**

** **

**$127,500**

** **

**$3,391,475.16**

** **

**There is not enough information to answer this question.**

** **

**Question 19**

**2.5 / 2.5 points**

** **

**Present value calculations do which of the following?**

**Question options:**

** **

**Compound all future cash flows into the future**

** **

**Compound all future cash flows back to the present**

** **

**Discount all future cash flows back to the present**

** **

**Discount all future cash flows into the future**

** **

**Question 20**

**2.5 / 2.5 points**

** **

**A/An __________ is a series of cash flows at regular intervals across time.**

**Question options:**

** **

**annuity**

** **

**annuity due**

** **

**perpetuity due**

** **

**None of the above**

** **

**Online Exam 5**

** **

**Question 21**

**2.5 / 2.5 points**

**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?**

**Question options:**

** **

**$20,570.00**

** **

**$20,670.97**

** **

**$20,770.90**

** **

**$20,800.00**

** **

**Question 22**

**2.5 / 2.5 points**

** **

**The phrase “price to rent money” is sometimes used to refer to:**

**Question options:**

** **

**historical prices.**

** **

**compound rates.**

** **

**discount rates.**

** **

**interest rates.**

** **

**Question 23**

**2.5 / 2.5 points**

** **

**Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5%. What is your investment worth in one year?**

**Question options:**

** **

**$1,025.00**

** **

**$1,500.95**

** **

**$1,025.27**

** **

**$1,050.95**

** **

**Question 24**

**2.5 / 2.5 points**

** **

**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:**

**Question options:**

** **

**he thinks rates will fall in the future and locking in long-term rates today may provide the highest long-run average return.**

** **

**he thinks rates will rise in the future and locking in long-term rates today may provide the lowest long-run average return.**

** **

**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.**

** **

**James has no idea what to do and should just skip this question.**

** **

**Question 25**

**2.5 / 2.5 points**

** **

**Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is true?**

**Question options:**

** **

**The bank is borrowing money from you without a promise to repay that money with interest.**

** **

**The bank is lending money to you with a promise to repay that money with interest.**

** **

**The bank is technically renting money from you with a promise to repay that money with interest.**

** **

**The bank is lending money to you, but not borrowing money from you.**

** **

**Question 26**

**2.5 / 2.5 points**

** **

**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.**

**Question options:**

** **

**$798.95**

** **

**$805.23**

** **

**$850.32**

** **

**$903.47**

** **

**Question 27**

**2.5 / 2.5 points**

** **

**The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are:**

**Question options:**

** **

**the default premium and the bankruptcy premium.**

** **

**the liquidity premium and the maturity premium.**

** **

**the default premium and the maturity premium.**

** **

**the inflation premium and the maturity premium.**

** **

**Question 28**

**2.5 / 2.5 points**

** **

**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?**

**Question options:**

** **

**$18,100.23**

** **

**$22,625.29**

** **

**$12,000.00**

** **

**$33,785.23**

** **

**Question 29**

**2.5 / 2.5 points**

** **

**Nominal interest rates are the sum of two major components. These components are:**

**Question options:**

** **

**the real interest rate and expected inflation.**

** **

**the risk-free rate and expected inflation.**

** **

**the real interest rate and default premium.**

** **

**the real interest rate and the T-bill rate.**

** **

**Question 30**

**2.5 / 2.5 points**

** **

**When interest rates are stated or given for loan repayments, it is assumed that they are __________ unless specifically stated otherwise.**

**Question options:**

** **

**daily rates**

** **

**annual percentage rates**

** **

**effective annual rates**

** **

**APYs**

** **

**Question 31**

**2.5 / 2.5 points**

** **

**The __________ compensates the investor for the additional risk that the loan will not be repaid in full.**

**Question options:**

** **

**default premium**

** **

**inflation premium**

** **

**real rate**

** **

**interest rate**

** **

**Question 32**

**2.5 / 2.5 points**

** **

**If you take out a loan from a bank, you will be charged:**

**Question options:**

** **

**for principal but not interest.**

** **

**for interest but not principal.**

** **

**for both principal and interest.**

** **

**for interest only.**

** **

**Question 33**

**2.5 / 2.5 points**

** **

**Which of the following statements is true if you increase your monthly payment above the required loan payment?**

**Question options:**

** **

**The extra portion of the payment does not go to the principal.**

** **

**You can significantly increase the number of payments needed to pay off the loan.**

** **

**The extra portion of the payment increases the principal.**

** **

**You can significantly reduce the number of payments needed to pay off the loan.**

** **

**Question 34**

**2.5 / 2.5 points**

** **

**We can write the true relationship between the nominal interest rate and the real rate and expected inflation as which of the following?**

**Question options:**

** **

**(1 + r) = (1 + r) × (1 + h*)**

** **

**r = (1 + r*) × (1 + h) – 1**

** **

**r* = (1 + r) × (1 + h) -1**

** **

**r = (1 + r*) × (1 + h) + 1**

** **

**Question 35**

**2.5 / 2.5 points**

** **

**Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year:**

**Question options:**

** **

**you will be able to consume fewer goods.**

** **

**you will be able to buy the same amount of goods or services.**

** **

**you will be able to buy fewer goods or services.**

** **

**you will be able to buy more goods or services.**

** **

**Question 36**

**2.5 / 2.5 points**

** **

**The typical payments on a consumer loan are made at:**

**Question options:**

** **

**the end of each day.**

** **

**the end of each week.**

** **

**the end of each month.**

** **

**the beginning of each month.**

** **

**Question 37**

**2.5 / 2.5 points**

** **

**What is the EAR if the APR is 10.52% and compounding is daily?**

**Question options:**

** **

**Slightly above 10.09%**

** **

**Slightly below 11.09%**

** **

**Slightly above 11.09%**

** **

**Over 11.25%**

** **

**Question 38**

**2.5 / 2.5 points**

** **

**Suppose you invest $2,000 today, compounded monthly, with an annual interest rate of 7.5%. What is your investment worth in one year?**

**Question options:**

** **

**$2,150**

** **

**$2,152.81**

** **

**$2,155.27**

** **

**$2,154.77**

** **

**Question 39**

**2.5 / 2.5 points**

** **

**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?**

**Question options:**

** **

**$800**

** **

**$600**

** **

**$400**

** **

**$200**

** **

**Question 40**

**2.5 / 2.5 points**

** **

**Which of the following statements is true?**

**Question options:**

** **

**On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the EAR rate.**

** **

**On many calculators the TVM key for interest is Y/I; this is Interest per Year, or the APR rate.**

** **

**On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the APR rate.**

** **

**On many calculators the TVM key for a period is I/Y.**