1. Assume that you purchase a 6-year,

1. Assume that you purchase a 6-year, 8 percent savings certificate for $1,000. If interest is compounded an­nually, what will be the value of the certificate when it matures?

a. $630.17 b. $1,469.33 c. $1,677.10 d. $1,586.87 e. $1,766.33

2. A savings certificate similar to the one in the previous problem is available with the exception that interest is compounded semiannually. What is the difference between the ending value of the savings certificate compounded semiannually and the one compounded annually?

a. The semiannual certificate is worth $14.16 more than the annual certificate.

b. The semiannual certificate is worth $14.16 less than the annual certificate.

c. The semiannual certificate is worth $21.54 more than the annual certificate.

d. The semiannual certificate is worth $21.54 less than the annual certificate.

e. The semiannual certificate is worth the same as the annual certificate.

3. A friend promises to pay you $600 two years from now if you loan him $500 today. What annual interest rate is your friend offering?

a. 7.55% b. 8.50% c. 9.54% d. 10.75% e. 11.25%

4. At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in just over 8 years (some calculators round to 9 years). How long, to the nearest year, would it take for the purchasing power of $1 to be cut in half if the inflation rate were only 4 percent?

a. 12 years b. 15 years c. 18 years d. 20 years e. 23 years

5. You are offered an investment opportunity with the “guar­antee” that your investment will double in 5 years. Assuming annual compounding, what annual rate of return would this investment provide?

a. 40.00% b. 100.00% c. 14.87% d. 20.00% e. 18.74%

6. You decide to begin saving toward the purchase of a new car in 5 years. If you put $1,000 at the end of each of the next 5 years in a savings account paying 6 percent compounded annually, how much will you accumulate after 5 years?

a. $6,691.13 b. $5,637.09 c. $1,338.23 d. $5,975.32 e. $5,731.94

7. Refer to Self-Test Problem 6. What would be the ending amount if the payments were made at the beginning of each year?

a. $6,691.13 b. $5,637.09 c. $1,338.23 d. $5,975.32 e. $5,731.94

8. Refer to Self-Test Problem 6. What would be the ending amount if $500 payments were made at the end of each 6-month period for 5 years and the account paid 6 percent compounded semi­annually?

a. $6,691.13 b. $5,637.09 c. $1,338.23 d. $5,975.32 e. $5,731.94

9. Calculate the present value of $1,000 to be received at the end of 8 years. Assume an interest rate of 7 percent.

a. $582.01 b. $1,718.19 c. $531.82 d. $5,971.30 e. $649.37

 

10. Jane Smith has $20,000 in a brokerage account, and she plans to contribute an additional $7,500 to the account at the end of every year. The brokerage account has an expected annual return of 8 percent. If Jane’s goal is to accumulate $375,000 in the account, how many years will it take for Jane to reach her goal?

a. 5.20 b. 10.00 c. 12.50 d. 16.33 e. 18.40

11. How much would you be willing to pay today for an invest­ment that would return $800 each year at the end of each of the next 6 years? Assume a discount rate of 5 percent.

a. $5,441.53 b. $4,800.00 c. $3,369.89 d. $4,060.55 e. $4,632.37

12. You have applied for a mortgage of $60,000 to finance the purchase of a new home. The bank will require you to make annual payments of $7,047.55 at the end of each of the next 20 years. Determine the interest rate in effect on this mortgage.

a. 8.0% b. 9.8% c. 10.0% d. 5.1% e. 11.2%

13. If you would like to accumulate $7,500 over the next 5 years, how much must you deposit each six months, starting six months from now, given a 6 percent interest rate and semiannual compounding?

a. $1,330.47 b. $879.23 c. $654.23 d. $569.00 e. $732.67

14. A company is offering bonds that pay $100 per year inde­finitely. If you require a 12 percent return on these bonds (that is, the discount rate is 12 percent), what is the value of each bond?

a. $1,000.00 b. $962.00 c. $904.67 d. $866.67 e. $833.33

15. What is the present value (t = 0) of the following cash flows if the discount rate is 12 percent?

12%

 

0 1 2 3 4 5

| | | | | |

0 2,000 2,000 2,000 3,000 -4,000

a. $4,782.43 b. $4,440.51 c. $4,221.79 d. $4,041.23 e. $3,997.98

16. What is the effective annual percentage rate (EAR) of 12 percent compounded monthly?

a. 12.00% b. 12.55% c. 12.68% d. 12.75% e. 13.00%

17. Martha Mills, manager of Plaza Gold Emporium, wants to sell on credit, giving customers 3 months in which to pay. However, Martha will have to borrow from her bank to carry the accounts receivable. The bank will charge a simple 16 percent, but with monthly compounding. Martha wants to quote a simple interest rate to her customers (all of whom are expected to pay on time at the end of 3 months) which will exactly cover her financing costs. What simple annual rate should she quote to her credit customers?

a. 15.44% b. 19.56% c. 17.23% d. 16.21% e. 18.41%

18. Self-Test Problem 12 refers to a 20-year mortgage of $60,000. This is an amortized loan. How much principal will be repaid in the second year?

a. $1,152.30 b. $1,725.70 c. $5,895.25 d. $7,047.55 e. $1,047.55

19. You have $1,000 invested in an account that pays 16 percent compounded annually. A commission agent (called a “finder”) can locate for you an equally safe deposit that will pay 16 percent, compounded quarterly, for 2 years. What is the maximum amount you should be willing to pay him now as a fee for locating the new account?

a. $10.92 b. $13.78 c. $16.14 d. $16.78 e. $21.13

20. The present value (t = 0) of the following cash flow stream is $11,958.20 when discounted at 12 percent an­nually. What is the value of the missing t = 2 cash flow?

12%

0 1 2 3 4

| | | | |

PV = 11,958.20 2,000 ? 4,000 4,000

a. $4,000.00 b. $4,500.00 c. $5,000.00 d. $5,500.00 e. $6,000.00

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