Which one of the following statements related to annuities and perpetuities is correct?
A perpetuity comprised of \$100 monthly payments is worth more than an annuity comprised of \$100 monthly
payments, given an interest rate of 12 percent, compounded monthly.
Most loans are a form of a perpetuity.
Perpetuities are finite but annuities are not.
An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent
interest, compounded annually.
The present value of a perpetuity cannot be computed, but the future value can.
A preferred stock pays an annual dividend of \$2.60. What is one share of this stock worth today if the rate of return is 11.75
percent?
\$18.48
\$28.80
\$30.55
\$22.13
\$20.00
Which one of the following statements correctly states a relationship?
Time and future values are inversely related, all else held constant.
Interest rates and time are positively related, all else held constant.
An increase in the discount rate increases the present value, given positive rates.
An increase in time increases the future value given a zero rate of interest.
Time and present value are inversely related, all else held constant.

You want to have \$65,000 in your savings account 9 years from now, and you're prepared to make equal annual
deposits into the account at the end of each year.
Required:
If the account pays 6.5 percent interest, what amount must you deposit each year?
\$7,222.22
\$4,224.98
\$4,225.01
\$5,540.47
\$9,851.25
Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest
and principal?
pure discount loan
modified loan
interest-only loan
balloon loan
amortized loan

An investment will pay you \$23,000 in 7 years. The appropriate discount rate is 10 percent compounded daily.
Required: What is the present value?
\$11,765.23
\$11,422.56

\$10,851.43
\$11,802.64
\$11,993.68

A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?
stated rate
effective annual rate
discounted annual rate
periodic monthly rate
consolidated monthly rate
Which of the following statements related to interest rates are correct?
I. Annual interest rates consider the effect of interest earned on reinvested interest payments.
II. When comparing loans, you should compare the effective annual rates.
III. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers.
IV. Annual and effective interest rates are equal when interest is compounded annually.
I and II only
II and III only
I, II, and III only
II and IV only
II, III, and IV only
The entire repayment of which one of the following loans is computed simply by computing a single future value?
interest-only loan
amortized loan
pure discount loan
bullet loan
balloon loan
What is the interest rate charged per period multiplied by the number of periods per year called?
annual percentage rate
periodic interest rate
daily interest rate
effective annual rate
compound interest rate
Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal
payment?
interest-only loan
amortized loan
balloon loan
modified loan
pure discount loan
Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal
amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?
interest-only loan

remainder loan
balloon loan
amortized loan
continuing loan
Which one of the following statements concerning interest rates is correct?
The effective annual rate decreases as the number of compounding periods per year increases.
Savers would prefer annual compounding over monthly compounding.
Borrowers would prefer monthly compounding over annual compounding.
The effective annual rate equals the annual percentage rate when interest is compounded annually.
For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.
You are comparing two annuities which offer quarterly payments of \$2,500 for five years and pay 0.75 percent interest per
month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one
of the following statements is correct concerning these two annuities?
These two annuities have equal present values as of today and equal future values at the end of year five.
Annuity A has a smaller future value than annuity B.
Annuity B is an annuity due.
Annuity B has a smaller present value than annuity A.
These two annuities have equal present values but unequal futures values at the end of year five.

Dinero Bank offers you a \$31,000, 7-year term loan at 8 percent annual interest.
Required:
What will your annual loan payment be? (Do not round your intermediate calculations.)
\$5,176.50
\$5,954.24
\$5,752.15
\$6,159.41
\$6,371.04

Given an interest rate of 6.0 percent per year, what is the value at date t = 10 of a perpetual stream of \$600
payments that begins at date t = 18?
\$6,650.57
\$10,000.00
\$6,274.12
\$6,517.56
\$6,783.58
An ordinary annuity is best defined by which one of the following?
equal payments paid at regular intervals over a stated time period
increasing payments paid for a definitive period of time
unequal payments that occur at set intervals for a limited period of time
increasing payments paid forever
equal payments paid at regular intervals of time on an ongoing basis

You're prepared to make monthly payments of \$320, beginning at the end of this month, into an account that pays

12 percent interest compounded monthly.
Required:

How many payments will you have made when your account balance reaches \$24,425? (Do not round your
intermediate calculations.)
51.3
62.7
5
20.46
57
Which one of the following accurately defines a perpetuity?
unending equal payments paid at either equal or unequal time intervals
a limited number of equal payments paid in even time increments
unending equal payments paid at equal time intervals
payments of equal amounts that are paid irregularly but indefinitely
varying amounts that are paid at even intervals forever

The appropriate discount rate for the following cash flows is 6 percent compounded quarterly.
Year
1

Cash Flow
\$900
800

2
3
4

0
1,400

Required:

What is the present value of the cash flows?
\$2,714.37
\$2,669.98
\$1,286.84
\$2,661.15
\$2,607.93

Suppose an investment offers to triple your money in 36 months (don't believe it).
Required:

What rate of return per quarter are you being offered?
7.15%
12.98%
8.63%
9.59%
10.55%

You want to buy a new sports car from Muscle Motors for \$52,000. The contract is in the form of a 36-month
annuity due at a 9.50 percent APR.
Required:
What will your monthly payment be?
\$1,665.71
\$1,619.58
\$1,570.00
\$1,652.63
\$1,685.68

You are planning to make monthly deposits of \$140 into a retirement account that pays 9 percent interest
compounded monthly. If your first deposit will be made one month from now, how large will your retirement
account be in 27 years?
\$172,574.87
\$201,024.55
\$191,451.95
\$181,879.35
\$2,297,423.39

Barcain Credit Corp. wants to earn an effective annual return on its consumer loans of 13 percent per year. The
bank uses daily compounding on its loans.
Required:
What interest rate is the bank required by law to report to potential borrowers?
13.45%
11.00%
12.22%
13.88%
13.00%
An amortized loan:
requires that all payments be equal in amount and include both principal and interest.
requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term.
may have equal or increasing amounts applied to the principal from each loan payment.
repays both the principal and the interest in one lump sum at the end of the loan term.
requires the principal amount to be repaid in even increments over the life of the loan.

You are looking at a one-year loan of \$10,000. The interest rate is quoted as 10 percent plus 5 points. A point on a
loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with
home mortgages. The interest rate quotation in this example requires the borrower to pay 5 points to the lender up
front and repay the loan later with 10 percent interest.
Required :
What rate would you actually be paying here?
17.37%
14.21%
4.50%

10.00%
15.79%

What is the present value of \$1,600 per year, at a discount rate of 7 percent, if the first payment is received 4 years
from now and the last payment is received 27 years from now?
\$2,993.76
\$14,680.23
\$14,979.83
\$18,350.93
\$14,722.34

What is the future value of \$500 in 23 years assuming an interest rate of 11 percent compounded semiannually?
\$709.24
\$5,575.79
\$617.92
\$5,869.26
\$5,513.13

If you put up \$24,000 today in exchange for a 8.00 percent, 17-year annuity, what will the annual cash flow be?
\$2,809.11
\$2,458.20
\$5,704.56
\$2,631.11
\$1,411.76

You need a 15-year, fixed-rate mortgage to buy a new home for \$180,000. Your mortgage bank will lend you the
money at a 9 percent APR for this 180-month loan. However, you can afford monthly payments of only \$950, so
you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.
Required:
How large will this balloon payment have to be for you to keep your monthly payments at \$950?
\$75,227.5
\$86,336.26
\$321,421.44
\$331,362.31
\$344,616.8

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