Q&A Hero

Q: A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20? A) The bond is currently selling at a premium. B) The current yield exceeds the coupon rate. C) The bond is selling at par value. D) The current yield exceeds the yield to maturity. E) The coupon rate has increased to 7 percent.

Q: The current yield is defined as the annual interest on a bond divided by the: A) coupon rate. B) face value. C) market price. D) call price. E) par value.

Q: The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: A) coupon rate. B) face rate. C) call rate. D) yield to maturity. E) current yield.

Q: A bond's principal is repaid on the ________ date. A) coupon B) yield C) maturity D) dirty E) clean

Q: A discount bond's coupon rate is equal to the annual interest divided by the: A) call price. B) current price. C) face value. D) clean price. E) dirty price.

Q: Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? A) Coupon B) Face value C) Discount D) Yield E) Dirty price

Q: Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? A) Coupon B) Face value C) Discount D) Call premium E) Yield

Q: You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy? A) 3.650 percent B) 3.100 percent C) 2.875 percent D) 3.125 percent E) 4.255 percent

Q: You would like to provide $125,000 a year forever for your heirs. How much money must you deposit today to fund this goal if you can earn a guaranteed 4.5 percent rate of return? A) $2,777,778 B) $2,521,212 C) $2,666,667 D) $2,858,122 E) $2,850,000

Q: A preferred stock pays an annual dividend of $5.20. What is one share of this stock worth today if the rate of return is 10.44 percent? A) $51.48 B) $41.18 C) $49.81 D) $39.87 E) $42.90

Q: Sara wants to establish a trust fund to provide $75,000 in scholarships each year and earn a fixed 6.15 percent rate of return. How much money must she contribute to the fund assuming that only the interest income is distributed? A) $987,450 B) $1,478,023 C) $1,333,333 D) $1,219,512 E) $1,500,000

Q: What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 25 annual payments? A) $9,417.69 B) $9,238.87 C) $9,333.33 D) $9,420.12 E) $9,881.72

Q: Jones Stoneware has a liability of $75,000 due four years from today. The company is planning to make an initial deposit today into a savings account and then deposit an additional $10,000 at the end of each of the next four years. The account pays interest of 4.5 percent. How much does the firm need to deposit today for its savings to be sufficient to pay this debt? A) $28,299.95 B) $19,469.64 C) $21,400.33 D) $27,016.84 E) $22,218.09

Q: For the next 20 years, you plan to invest $600 a month in a stock account earning 7 percent and $400 a month in a bond account earning 4 percent. When you retire in 20 years, you will combine your money into an account with a return of 5 percent. How much can you withdraw each month during retirement assuming a 30-year withdrawal period? A) $2,636.19 B) $2,904.11 C) $3,008.21 D) $2,465.44 E) $3,206.97

Q: A one-time gift to your college will provide $25,000 in scholarship funds next year with that amount increasing by 2 percent annually thereafter. If the discount rate is 5.5 percent, what is the current value of this perpetual gift? A) $777,777.78 B) $748,602.49 C) $726,849.29 D) $714,285.71 E) $725,000.00

Q: You want to buy a new sports car for $55,000. The contract is in the form of a 60-month annuity due at an APR of 5.6 percent, compounded monthly. What will be your monthly payment? A) $1,047.90 B) $1,053.87 C) $1,048.21 D) $1,063.30 E) $1,072.11

Q: You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $50,000 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent? A) $1,350,000.00 B) $1,348,409.50 C) $925,925.93 D) $891,006.67 E) $846,918.22

Q: Your grandfather left you an inheritance that will provide an annual income for the next 20 years. You will receive the first payment one year from now in the amount of $2,500. Every year after that, the payment amount will increase by 5 percent. What is your inheritance worth to you today if you can earn 7.5 percent on your investments? A) $37,537.88 B) $28,667.40 C) $23,211.00 D) $35,612.20 E) $30,974.92

Q: You just settled an insurance claim that calls for increasing payments over a 10-year period. The first payment will be paid one year from now in the amount of $5,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments? A) $42,023.05 B) $36,408.28 C) $34,141.14 D) $41,422.89 E) $38,008.16

Q: Today, you turn 21. Your birthday wish is that you will be a millionaire by your 40th birthday. In an attempt to reach this goal, you decide to save $75 a day, every day, until you turn 40. You open an investment account and deposit your first $75 today. What rate of return must you earn to achieve your goal? Note: Ignore Leap Years. A) 7.67 percent B) 6.27 percent C) 9.20 percent D) 7.06 percent E) 8.54 percent

Q: Your father helped you start saving $25 a month beginning on your fifth birthday. He always made you deposit the money into your savings account on the first day of each month just to "start the month out right." Today completes your 15th year of saving and you now have $6,528.91 in this account. What is the rate of return on your savings? A) 4.67 percent B) 5.30 percent C) 5.87 percent D) 4.98 percent E) 6.12 percent

Q: You have been purchasing $12,000 worth of stock annually for the past eight years and now have a portfolio valued at $87,881. What is your annual rate of return? A) 4.32 percent B) 2.54 percent C) 3.29 percent D) − 4.32 percent E) − 2.54 percent

Q: You have been investing $300 a month for the last 8 years. Today, your investment account is worth $43,262. What is your average rate of return on your investments? A) 9.69 percent B) 7.23 percent C) 9.36 percent D) 8.41 percent E) 7.78 percent

Q: Your insurance agent is trying to sell you an annuity that costs $50,000 today. By buying this annuity, your agent promises that you will receive payments of $250 a month for the next 20 years. What is the rate of return on this investment? A) 3.75 percent B) 2.47 percent C) 1.88 percent D) 2.45 percent E) 3.67 percent

Q: Jogging Gear is considering a project with an initial cash requirement of $238,400. The project will yield cash flows of $4,930 monthly for 65 months. What is the rate of return on this project? A) 9.97 percent B) 11.38 percent C) 14.28 percent D) 13.41 percent E) 10.56 percent

Q: The Art Gallery is notoriously known as a slow-payer. The firm currently needs to borrow $25,000 and only one company will loan to them. The terms of the loan call for weekly payments of $500 at a weekly interest rate of .45%. What is the loan term? A) 42.5 weeks B) 45.00 weeks C) 56.77 weeks D) 50.11 weeks E) 43.33 weeks

Q: Today, you are retiring. You have a total of $289,416 in your retirement savings. You want to withdraw $2,500 at the beginning of every month, starting today and expect to earn 4.6 percent, compounded monthly. How long will it be until you run out of money? A) 29.97 years B) 8.56 years C) 22.03 years D) 12.71 years E) 18.99 years

Q: The Rodriquez family is determined to purchase a $250,000 home without incurring any debt. The family plans to save $2,500 a quarter for this purpose and expects to earn 6.65 percent, compounded quarterly. How long will it be until the family can purchase a home? A) 23.09 years B) 14.85 years C) 35.46 years D) 48.82 years E) 59.39 years

Q: Today, you borrowed $3,200 on a credit card that charges an interest rate of 12.9 percent, compounded monthly. How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $60? A) 6.87 years B) 6.28 years C) 6.64 years D) 7.23 years E) 7.31 years

Q: You want to borrow $27,500 and can afford monthly payments of $650 for 48 months, but no more. Assume monthly compounding. What is the highest APR rate you can afford? A) 6.33 percent B) 6.67 percent C) 5.82 percent D) 7.01 percent E) 7.18 percent

Q: You are preparing to make monthly payments of $100, beginning at the end of this month, into an account that pays 5 percent interest, compounded monthly. How many payments will you have made when your account balance reaches $10,000? A) 97.30 B) 83.77 C) 89.46 D) 100.00 E) 91.12

Q: You are the recipient of a gift that will pay you $25,000 one year from now and every year thereafter for the following 24 years. The payments will increase in value by 2.5 percent each year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift? A) $416,667 B) $316,172 C) $409,613 D) $311,406 E) $386,101

Q: You want to be a millionaire when you retire in 30 years and expect to earn 8.5 percent, compounded monthly. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month? A) $947.22 B) $1,046.80 C) $808.47 D) $841.15 E) $989.10

Q: An annuity that pays $12,500 a year at an annual interest rate of 5.45 percent costs $150,000 today. What is the length of the annuity time period? A) 25 years B) 18 years C) 15 years D) 20 years E) 22 years

Q: Stephanie is going to contribute $160 on the first of each month, starting today, to her retirement account. Her employer will provide a match of 50 percent. In other words, her employer will add $80 to the amount Stephanie saves. If both Stephanie and her employer continue to do this and she can earn a monthly interest rate of .45 percent, how much will she have in her retirement account 35 years from now? A) $336,264.14 B) $204,286.67 C) $199,312.04 D) $268,418.78 E) $299,547.97

Q: Racing Motors wants to save $825,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. How much does the company need to save each quarter to achieve its goal if it can earn 4.45 percent on its savings? A) $63,932.91 B) $62,969.70 C) $63,192.05 D) $62,925.00 E) $64,644.17

Q: Chris has three options for settling an insurance claim. Option A will provide $1,500 a month for 6 years. Option B will pay $1,025 a month for 10 years. Option C offers $85,000 as a lump sum payment today. The applicable discount rate is 6.8 percent, compounded monthly. Which option should Chris select, and why, if he is only concerned with the financial aspects of the offers? A) Option A: It provides the largest monthly payment. B) Option B: It pays the largest total amount. C) Option C: It is all paid today. D) Option B: It pays the greatest number of payments. E) Option B: It has the largest value today.

Q: Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 4.75 percent? A) $24,890.88 B) $31,311.16 C) $33,338.44 D) $28,909.29 E) $29,333.33

Q: Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease? A) $10,331.03 B) $6,232.80 C) $9,197.74 D) $7,203.14 E) $11,008.31

Q: An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent, compounded quarterly, what is the most you are willing to pay as a lump sum today to obtain this annuity? A) $32,008.24 B) $34,208.16 C) $44,591.11 D) $43,008.80 E) $38,927.59

Q: Phil purchased a car today at a price of $8,500. He paid $300 down in cash and financed the balance for 36 months at 5.75 percent, compounded monthly. What is the amount of each monthly loan payment? A) $248.53 B) $270.23 C) $318.47 D) $305.37 E) $257.62

Q: You estimate that you will owe $40,200 in student loans by the time you graduate. If you want to have this debt paid in full within 10 years, how much must you pay each month if the interest rate is 4.35 percent, compounded monthly? A) $411.09 B) $413.73 C) $414.28 D) $436.05 E) $442.50

Q: Island News purchased a piece of property for $1.79 million. The firm paid a down payment of 20 percent in cash and financed the balance. The loan terms require monthly payments for 20 years at an APR of 4.75 percent, compounded monthly. What is the amount of each mortgage payment? A) $9,253.92 B) $10,419.97 C) $8,607.11 D) $11,567.40 E) $12,301.16

Q: Nadine is retiring today and has $96,000 in her retirement savings. She expects to earn 5.5 percent, compounded monthly. How much can she withdraw from her retirement savings each month if she plans to spend her last penny 18 years from now? A) $809.92 B) $847.78 C) $919.46 D) $616.08 E) $701.10

Q: Travis International has a one-time expense of $1.13 million that must be paid two years from today. The firm can earn 4.3 percent, compounded monthly, on its savings. How much must the firm save each month to fund this expense if the firm starts investing equal amounts each month starting at the end of this month? A) $38,416.20 B) $45,172.02 C) $51,300.05 D) $47,411.08 E) $53,901.15

Q: You borrowed $185,000 for 30 years to buy a house. The interest rate is 4.35 percent, compounded monthly. If you pay all of your monthly payments as agreed, how much total interest will you pay on this mortgage? (Round the monthly payment to the nearest whole cent.) A) $150,408 B) $147,027 C) $146,542 D) $154,319 E) $141,406

Q: You just obtained a loan of $16,700 with monthly payments for four years at 6.35 percent interest, compounded monthly. What is the amount of each payment? A) $387.71 B) $391.40 C) $401.12 D) $419.76 E) $394.89

Q: Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years? A) $12,093.38 B) $12,113.33 C) $12,127.04 D) $12,211.12 E) $12,219.46

Q: Rosina plans on saving $2,000 a year and expects to earn an annual rate of 6.9 percent. How much will she have in her account at the end of 37 years? A) $406,429.10 B) $338,369.09 C) $297,407.17 D) $313,274.38 E) $308,316.67

Q: What is the future value of $8,500 a year for 40 years at 10.8 percent interest, compounded annually? A) $3,278,406.16 B) $4,681,062.12 C) $2,711,414.14 D) $3,989,476.67 E) $4,021,223.33

Q: What is the future value of $1,575 a year for 25 years at 6.3 percent interest, compounded annually? A) $76,919.04 B) $72,545.78 C) $90,152.04 D) $92,006.08 E) $91,315.09

Q: Trish receives $450 on the first of each month. Josh receives $450 on the last day of each month. Both Trish and Josh will receive payments for next four years. At a discount rate of 9.5 percent, what is the difference in the present value of these two sets of payments? A) $141.80 B) $151.06 C) $154.30 D) $159.08 E) $162.50

Q: Two annuities have equal present values and an applicable discount rate of 7.25 percent. One annuity pays $2,500 on the first day of each year for 15 years. How much does the second annuity pay each year for 15 years if it pays at the end of each year? A) $2,331.00 B) $2,266.67 C) $2,500.00 D) $2,390.50 E) $2,681.25

Q: Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year? A) $2,170.39 B) $2,511.07 C) $2,021.18 D) $2,027.94 E) $2,304.96

Q: Sue just purchased an annuity that will pay $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent? A) $241,309 B) $245,621 C) $251,409 D) $258,319 E) $266,498

Q: You need some money today and the only friend you have that has any is a miser. He agrees to loan you the money you need, if you make payments of $30 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2 percent interest per month. How much total interest is he charging? A) $4.50 B) $3.60 C) $9.50 D) $4.68 E) $8.60

Q: The Distribution Point plans to save $2,000 a month for the next 3 years for future emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit that would yield the same amount of savings as the monthly deposits after 3 years? A) $70,459.07 B) $67,485.97 C) $69,068.18 D) $69,333.33 E) $67,233.84

Q: Assume you work for an employer who will contribute $60 a week for the next 20 years into a retirement plan for your benefit. At a discount rate of 9 percent, what is this employee benefit worth to you today? A) $28,927.38 B) $27,618.46 C) $29,211.11 D) $25,306.16 E) $25,987.74

Q: As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why? A) You should accept the payments because they are worth $202,414 to you today. B) You should accept the payments because they are worth $201,846 to you today. C) You should accept the payments because they are worth $201,210 to you today. D) You should accept the $200,000 because the payments are only worth $189,311 to you today. E) You should accept the $200,000 because the payments are only worth $195,413 to you today.

Q: Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, how much can he afford to borrow to purchase a car? A) $11,750.00 B) $12,348.03 C) $11,697.88 D) $10,266.67 E) $10,400.00

Q: You just won the grand prize in a national writing contest! As your prize, you will receive $500 a month for 50 months. If you can earn 7 percent on your money, what is this prize worth to you today? A) $21,629.93 B) $18,411.06 C) $21,338.40 D) $20,333.33 E) $19,450.25

Q: Your grandmother will be gifting you $150 at the end of each month for four years while you attend college. At a discount rate of 3.7 percent, what are these payments worth to you on the day you enter college? A) $6,201.16 B) $6,682.99 C) $6,539.14 D) $6,608.87 E) $6,870.23

Q: Your broker is offering 1.2 percent compounded daily on its money market account. If you deposit $7,500 today, how much will you have in your account 15 years from now? A) $8,979.10 B) $9,714.06 C) $8,204.50 D) $9,336.81 E) $9,414.14

Q: A charity plans to invest annual payments of $60,000, $70,000, $75,000, and $50,000, respectively, over the next four years. The first payment will be invested one year from today. Assuming the investment earns 5.5 percent annually, how much will the charity have available four years from now? A) $263,025 B) $236,875 C) $277,491 D) $328,572 E) $285,737

Q: Waldo expects to save the following amounts: Year 1 = $50,000; Year 2 = $28,000; Year 3 = $12,000. If he can earn an average annual return of 10.5 percent, how much will he have saved in this account exactly 25 years from the time of the first deposit? A) $1,172,373 B) $935,334 C) $806,311 D) $947,509 E) $1,033,545

Q: A proposed project has cash flows of $2,000, $?, $1,750, and $1,250 at the end of Years 1 to 4. The discount rate is 7.2 percent and the present value of the four cash flows is $6,669.25. What is the value of the Year 2 cash flow? A) $2,450 B) $2,750 C) $2,500 D) $2,250 E) $2,800

Q: Sue plans to save $4,500, $0, and $5,500 at the end of Years 1 to 3, respectively. What will her investment account be worth at the end of the Year 3 if she earns an annual rate of 4.15 percent? A) $10,583.82 B) $10,381.25 C) $10,609.50 D) $11,526.50 E) $10,812.07

Q: Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent? A) $38,418.80 B) $32,907.67 C) $36,121.08 D) $39,010.77 E) $33,445.44

Q: One year ago, JK Mfg. deposited $12,000 in an investment account for the purpose of buying new equipment four years from today. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today. How much cash will be available when the company is ready to buy the equipment assuming an interest rate of 5.5 percent? A) $43,609.77 B) $45,208.61 C) $44,007.50 D) $46,008.30 E) $47,138.09

Q: Your anticipated wedding is three years from today. You don't know who your spouse will be but you do know that you are saving $10,000 today and $17,000 one year from today for this purpose. You also plan to pay the final $12,000 of anticipated costs on your wedding day. At a discount rate of 5.5 percent, what is the current cost of your upcoming wedding? A) $36,333.11 B) $41,065.25 C) $36,895.17 D) $38,411.08 E) $35,248.16

Q: You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why? A) You should accept the $89,500 today because it has the higher net present value. B) You should accept the $89,500 today because it has the lower future value. C) You should accept the first offer as it is a lump sum payment. D) You should accept the second offer because it has the larger net present value. E) It does not matter which offer you accept as they are equally valuable.

Q: You just signed a consulting contract that will pay you $38,000, $42,000, and $45,000 annually at the end of the next three years, respectively. What is the present value of this contract given a discount rate of 10.5? A) $102,138.76 B) $108,307.67 C) $112,860.33 D) $92,433.27 E) $96,422.15

Q: You are considering a project with cash flows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 7.9 percent? A) $54,877.02 B) $51,695.15 C) $55,429.08 D) $46,388.78 E) $53,566.67

Q: You want to start a business that you believe can produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $250,000. At a discount rate of 16 percent, what is this business worth today? A) $258,803.02 B) $314,011.33 C) $280,894.67 D) $325,837.81 E) $297,077.17

Q: Your parents have made you two offers. The first offer includes annual gifts of $5,000, $6,000, and $8,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 6.2 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer? A) $16,707.06 B) $16,407.78 C) $16,360.42 D) $17,709.48 E) $17,856.42

Q: You are considering two savings options. Both options offer a rate of return of 7.6 percent. The first option is to save $2,500, $2,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today? A) $7,414.59 B) $6,289.74 C) $6,660.00 D) $6,890.89 E) $6,784.20

Q: Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations? A) $519,799.59 B) $538,615.08 C) $545,920.61 D) $595,170.53 E) $538,407.71

Q: You need $25,000 today and have decided to take out a loan at 7 percent interest for five years. Which one of the following loans would be the least expensive for you? Assume all loans require monthly payments and that interest is compounded on a monthly basis. A) Interest-only loan B) Amortized loan with equal principal payments C) Amortized loan with equal loan payments D) Discount loan E) Balloon loan where 50 percent of the principal is repaid as a balloon payment

Q: An amortized loan: A) requires the principal amount to be repaid in even increments over the life of the loan. B) may have equal or increasing amounts applied to the principal from each loan payment. C) requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. D) requires that all payments be equal in amount and include both principal and interest. E) repays both the principal and the interest in one lump sum at the end of the loan term.

Q: With an interest-only loan the principal is: A) forgiven over the loan period; thus it does not have to be repaid. B) repaid in decreasing increments and included in each loan payment. C) repaid in one lump sum at the end of the loan period. D) repaid in equal annual payments. E) repaid in increasing increments through regular monthly payments.