Q&A Hero

Q: The entire repayment of a(n) ________ loan is computed simply by computing one single future value. A) interest-only B) balloon C) amortized D) pure discount E) bullet

Q: A(n) ________ loan has regular payments that include both principal and interest but these payments are insufficient to pay off the loan. A) perpetual B) continuing C) balloon D) pure discount E) interest-only

Q: Amortized loans must have which one of these characteristics over its life? A) Either equal or unequal principal payments B) One lump-sum principal payment C) Increasing payments D) Equal interest payments E) Declining periodic payments

Q: A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ________ loan. A) amortized B) modified C) balloon D) pure discount E) interest-only

Q: A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) ________ loan. A) amortized B) continuous C) balloon D) pure discount E) interest-only

Q: Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent? A) Annual B) Semi-annual C) Monthly D) Daily E) Continuous

Q: Which one of the following statements concerning interest rates is correct? A) Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. B) The effective annual rate decreases as the number of compounding periods per year increases. C) The effective annual rate equals the annual percentage rate when interest is compounded annually. D) Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. E) For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

Q: Which one of the following statements related to loan interest rates is correct? A) The annual percentage rate considers the compounding of interest. B) When comparing loans you should compare the effective annual rates. C) Lenders are most apt to quote the effective annual rate. D) Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. E) The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

Q: Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ________ rate. A) effective annual B) annual percentage C) periodic interest D) compound interest E) episodic interest

Q: The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ________ rate. A) stated B) discounted annual C) effective annual D) periodic monthly E) consolidated monthly

Q: The interest rate that is most commonly quoted by a lender is referred to as the: A) annual percentage rate. B) compound rate. C) effective annual rate. D) simple rate. E) common rate.

Q: A Canadian consol is best categorized as a(n): A) ordinary annuity. B) amortized cash flow. C) annuity due. D) discounted loan. E) perpetuity.

Q: A perpetuity is defined as: A) a limited number of equal payments paid in even time increments. B) payments of equal amounts that are paid irregularly but indefinitely. C) varying amounts that are paid at even intervals forever. D) unending equal payments paid at equal time intervals. E) unending equal payments paid at either equal or unequal time intervals.

Q: An ordinary annuity is best defined as: A) increasing payments paid for a definitive period of time. B) increasing payments paid forever. C) equal payments paid at the end of regular intervals over a stated time period. D) equal payments paid at the beginning of regular intervals for a limited time period. E) equal payments that occur at set intervals for an unlimited period of time.

Q: You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities? A) These annuities have equal present values but unequal future values. B) These two annuities have both equal present and equal future values. C) Annuity B is an annuity due. D) Annuity A has a smaller future value than annuity B. E) Annuity B has a smaller present value than annuity A.

Q: Which one of these statements related to growing annuities and perpetuities is correct? A) You can compute the present value of a growing annuity but not a growing perpetuity. B) In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. C) The future value of an annuity will decrease if the growth rate is increased. D) An increase in the rate of growth will decrease the present value of an annuity. E) The present value of a growing perpetuity will decrease if the discount rate is increased.

Q: Which one of the following statements related to annuities and perpetuities is correct? A) An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. B) A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. C) Most loans are a form of a perpetuity. D) The present value of a perpetuity cannot be computed but the future value can. E) Perpetuities are finite but annuities are not.

Q: You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.) A) Both options are of equal value since they both provide $12,000 of income. B) Option A has the higher future value at the end of Year 3. C) Option B has a higher present value at Time 0. D) Option B is a perpetuity. E) Option A is an annuity.

Q: Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed) A) The cash flows for Project B are an annuity, but those of Project A are not. B) Both sets of cash flows have equal present values as of Time 0. C) The present value at Time 0 of the final cash flow for Project A will be discounted using an exponent of three. D) Both projects have equal values at any point in time since they both pay the same total amount. E) Project B is worth less today than Project A.

Q: Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed) A) Both projects have the same future value at the end of Year 4. B) Both projects have the same value at Time 0. C) Both projects are ordinary annuities. D) Project Y has a higher present value than Project X. E) Project X has both a higher present and a higher future value than Project Y.

Q: Which one of the following statements correctly defines a time value of money relationship? A) Time and future values are inversely related, all else held constant. B) Interest rates and time are positively related, all else held constant. C) An increase in a positive discount rate increases the present value. D) An increase in time increases the future value given a zero rate of interest. E) Time and present value are inversely related, all else held constant.

Q: A 1-year loan of $15,000 is quoted at 6.7 percent plus 3 points. This loan is to be repaid in one lump sum. What is the actual cost of this loan? A) 11.86 percent B) 6.91 percent C) 12.55 percent D) 10.00 percent E) 9.70 percent

Q: Al's obtained a discount loan of $68,500 today that requires a repayment of $88,000, 3 years from today. What is the APR? A) 7.87 percent B) 8.01 percent C) 8.71 percent D) 8.57 percent E) 8.90 percent

Q: You are seeking a fixed-rate mortgage of $195,000 with a term of 30 years. Your bank quotes an APR of 6.2 percent, compounded monthly. You can only afford monthly payments of $1,000, so you offer to pay off any remaining loan balance at the end of the loan term in the form of a single balloon payment. What will be the amount of the balloon payment? A) $232,191.91 B) $173,316.67 C) $194,480.18 D) $202,828.59 E) $226,315.07

Q: This morning, you borrowed $162,000 to buy a house. The mortgage rate is 4.35 percent. The loan is to be repaid in equal monthly payments over 20 years with the first payment due one month from today. Assume each month is equal to 1/12 of a year and all taxes and insurance premiums are paid separately. How much of the second payment applies to the principal balance? A) $568.84 B) $426.11 C) $424.57 D) $587.25 E) $585.71

Q: Al obtained a mortgage of $195,000 at 5.25 percent for 15 years. How much of the second monthly payment is applied to interest? A) $850.00 B) $852.09 C) $849.16 D) $853.13 E) $848.08

Q: You just acquired a home mortgage for 30 years in the amount of $184,500 at 4.65 percent interest, compounded monthly. How much of the first payment will be interest if the loan is repaid in equal monthly payments? A) $725.20 B) $706.16 C) $714.94 D) $736.36 E) $710.46

Q: Assume you borrow $30,000 at an interest rate of 5.35 percent. The terms stipulate that the principal is due in full in 5 years and interest is to be paid annually at the end of each year. How much total interest will you pay on this loan assuming you pay as agreed? A) $4,982 B) $7,400 C) $8,025 D) $8,500 E) $1,605

Q: Kris borrowed $25,000 with an interest-only, 4-year loan at 4.75 percent. What is the amount of the loan payment in Year 4 if payments are made annually? A) $26,187.50 B) $25,296.88 C) $7,009.40 D) $1,187.50 E) $296.88

Q: John's Auto Repair just obtained an interest-only loan of $35,000 with annual payments for 10 years and an interest rate of 8 percent. What is the amount of the loan payment in Year 8? A) $5,216.03 B) $4,918.07 C) $4,280.00 D) $5,211.06 E) $2,800.00

Q: On this date last year, you borrowed $3,900. You have to repay the loan with a lump sum payment of $6,000 six years from now. What is the interest rate? A) 6.01 percent B) 6.35 percent C) 6.78 percent D) 5.47 percent E) 5.38 percent

Q: This morning, you borrowed $12,700 at an APR of 6.9 percent. If you repay the loan in one lump sum three years from today, how much will you have to repay? A) $15,514.47 B) $15,808.13 C) $15,313.00 D) $15,324.60 E) $16,441.20

Q: You borrow money today at 6.65 percent, compounded annually, and repay the principal and interest in one lump sum of $12,800 two years from today. How much are you borrowing? A) $9,900.00 B) $10,211.16 C) $11,253.52 D) $11,401.16 E) $11,250.00

Q: The Friendly Bank wants to earn an EAR of 12 percent on its consumer loans. The bank uses daily compounding. What rate is the bank most apt to quote on these loans? A) 11.76 percent B) 11.38 percent C) 11.33 percent D) 12.12 percent E) 12.00 percent

Q: Assume a 1-year loan for $6,000 has an interest rate of 4.5 percent, compounded annually. How much additional interest would be charged if the rate had compounded continuously rather than annually? A) $5.84 B) $6.17 C) $6.10 D) $5.93 E) $6.28

Q: First City Bank offers an APR of 7.65 percent on its loans. What is the maximum rate the bank can actually earn based on the quoted rate? A) 7.95 percent B) 8.14 percent C) 8.21 percent D) 7.78 percent E) 7.87 percent

Q: What is the EAR of 18.9 percent compounded continuously? A) 19.06 percent B) 20.80 percent C) 19.43 percent D) 19.89 percent E) 21.38 percent

Q: What is the EAR of 14.9 percent compounded continuously? A) 15.59 percent B) 15.62 percent C) 15.69 percent D) 15.84 percent E) 16.07 percent

Q: A new sports coupe costs $41,750 and the finance office has quoted you an APR of 7.7 compounded monthly, for 36 months. What is the EAR? A) 7.81 percent B) 8.02 percent C) 7.94 percent D) 8.13 percent E) 7.98 percent

Q: Your local pawn shop loans money at an annual rate of 24 percent and compounds interest weekly. What is the actual rate being charged on these loans? A) 25.16 percent B) 27.05 percent C) 26.49 percent D) 27.56 percent E) 28.64 percent

Q: A credit card company quotes you an APR of 18.9 percent. What is the actual rate of interest you are paying if interest is computed monthly? A) 18.90 percent B) 19.21 percent C) 20.63 percent D) 19.57 percent E) 20.72 percent

Q: Mr. Rich arranged for a mortgage loan for 65 percent of the $2.5 million purchase price of a home. The monthly payment will be $10,400 and the mortgage term is 30 years. What is the EAR on this loan? A) 6.82 percent B) 6.25 percent C) 6.46 percent D) 6.91 percent E) 6.62 percent

Q: How much would you need to invest today as a lump sum at 10.5 percent, compounded continuously, to have $200,000 in five years? A) $108,206.67 B) $118,311.07 C) $124,318.08 D) $114,407.17 E) $131,008.15

Q: What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly? A) 7.91 percent B) 8.38 percent C) 8.02 percent D) 7.87 percent E) 8.11 percent

Q: You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account? A) 15.61 percent B) 13.97 percent C) 14.98 percent D) 15.75 percent E) 16.35 percent

Q: What is the APR on a loan with a stated rate of 2.35 percent per quarter? A) 9.40 percent B) 8.69 percent C) 8.38 percent D) 8.90 percent E) 9.74 percent

Q: Your credit card company charges you 1.15 percent interest per month. What is the APR? A) 18.92 percent B) 13.80 percent C) 15.95 percent D) 17.25 percent E) 14.71 percent

Q: Western Bank offers you a $12,000, 6-year term loan at 7 percent annual interest. What is the amount of your annual loan payment? A) $2,483.33 B) $2,517.55 C) $2,066.67 D) $1,901.18 E) $1,811.07

Q: You just received an offer in the mail to transfer the $5,000 balance from your current credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a rate of 7.9 percent. You plan to make payments of $250 a month on this debt. How many fewer payments will you have to make to pay off this debt if you transfer the balance to the new card? A) 2.48 payments B) 2.63 payments C) 3.10 payments D) 2.79 payments E) 2.86 payments

Q: DLM preferred stock has a dividend yield of 5.2 percent. The stock is currently priced at $43.40 per share. What is the amount of the annual dividend? A) $2.33 B) $2.07 C) $2.40 D) $2.26 E) $1.98

Q: You grandfather invested $16,600 years ago to provide annual payments of $700 a year to his heirs forever. What is the rate of return? A) 3.65 percent B) 4.22 percent C) 4.10 percent D) 4.25 percent E) 4.33 percent

Q: Beginning three months from now, you will need $1,500 each quarter for the next four years to cover expenses. How much do you need to have saved today to meet these needs if you can earn .35 percent interest per quarter? A) $23,300.75 B) $26,847.15 C) $21,068.00 D) $22,319.54 E) $26,069.79

Q: You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annual interest until you have accumulated $50,000. How many years from today will it be when this occurs? A) 51.42 years B) 49.08 years C) 54.77 years D) 48.42 years E) 51.77 years

Q: In 1903, the winner of a competition was paid $50. In 2017, the winner's prize was $235,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate? (Do not round intermediate calculations. Round your answer to the nearest $500.) A) $1,080,000 B) $1,176,500 C) $1,250,000 D) $1,294,000 E) $1,188,500

Q: You're trying to save to buy a new $68,000 sports car. Currently, you have saved $36,840 which is invested at 4.9 percent annual interest. How many years will it be before you purchase the car, assuming the price of the car remains constant? A) 9.67 years B) 17.18 years C) 12.81 years D) 16.91 years E) 10.84 years

Q: Assume the average vehicle selling price in the United States last year was $36,420. The average price five years earlier was $31,208. What was the annual increase in the selling price over this time period? A) 1.67 percent B) 3.14 percent C) 2.56 percent D) 3.01 percent E) 2.89 percent

Q: At 5 percent interest, how long would it take to triple your money? A) 26.55 years B) 25.64 years C) 24.87 years D) 22.52 years E) 20.01 years

Q: Assume the total cost of a college education will be $245,000 when your child enters college in 15 years. You presently have $108,000 to invest for this purpose. What rate of interest must you earn to cover the cost of your child's college education? A) 5.79 percent B) 5.50 percent C) 5.61 percent D) 6.25 percent E) 6.81 percent

Q: On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? A) Age 20 B) Age 31 C) Age 30 D) Age 23 E) Age 21

Q: Some time ago, Tracie purchased two acres of land costing $67,900. Today, that land is valued at $64,800. How long has she owned this land if the price of the land has been decreasing by 1.5 percent per year? A) 3.33 years B) 2.48 years C) 3.09 years D) 2.97 years E) 2.08 years

Q: Twelve years ago, your parents set aside $8,000 to help fund your college education. Today, that fund is valued at $23,902. What rate of interest is being earned on this account? A) 8.99 percent B) 9.42 percent C) 9.67 percent D) 9.55 percent E) 9.06 percent

Q: Ten years ago, Jackson Supply set aside $125,000 in case of a financial emergency. Today, that account has increased in value to $278,592. What rate of interest is the firm earning on this money? A) 8.80 percent B) 8.34 percent C) 7.75 percent D) 8.01 percent E) 7.87 percent

Q: Towne Station is saving money to build a new loading platform. Three years ago, they set aside $23,000 for this purpose. Today, that account is worth $31,406. What rate of interest is Towne Station earning on this investment? A) 8.39 percent B) 9.47 percent C) 10.94 percent D) 8.23 percent E) 9.01 percent

Q: Four years ago, Saul invested $500. Three years ago, Trek invested $600. Today, these two investments are each worth $800. Assume each account continues to earn its respective rate of return. Which one of the following statements is correct concerning these investments? A) Three years from today, Trek's investment will be worth more than Saul's. B) One year ago, Saul's investment was worth less than Trek's investment. C) Trek earns a higher rate of return than Saul. D) Trek has earned an average annual interest rate of 9.86 percent. E) Saul has earned an average annual interest rate of 12.64 percent.

Q: Sixty years ago, your mother invested $4,500. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment? A) 6.67 percent B) 11.71 percent C) 7.90 percent D) 10.40 percent E) 12.02 percent

Q: According to the Rule of 72, you can do which one of the following? A) Approximately double your money in five years at 7.24 percent interest B) Double your money in 7.2 years at 8 percent interest C) Approximately double your money in 11 years at 6.55 percent interest D) Triple your money in 7.2 years at 7.2 percent interest E) Approximately triple your money in 7.2 years at 10 percent interest

Q: One year ago, you invested $1,750. Today it is worth $1,815.48. What rate of interest did you earn? A) 3.59 percent B) 4.33 percent C) 3.88 percent D) 3.74 percent E) 4.01 percent

Q: You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100thbirthday, 79 years from now. The appropriate discount rate is 6.4 percent. What is the present value of your winnings? A) $11,288.16 B) $9,300.82 C) $10,309.91 D) $8,333.33 E) $10,500.00

Q: Friendly Companies has an unfunded pension liability of $327 million that must be paid in 16 years. What is the present value of this liability at a discount rate of 6.24 percent? A) $129,803,162.22 B) $111,438,907.11 C) $124,147,723.50 D) $134,519,484.14 E) $121,511,366.67

Q: Theo wants to have $40,000 for a down payment on a house five years from now. He can either deposit one lump sum today or he can wait one year and deposit a lump sum. Assume an annual interest rate of 3.5 percent. How much additional money must he deposit if he waits for one year rather than making the deposit today? A) $1,001.98 B) $986.13 C) $1,178.76 D) $948.03 E) $1,020.18

Q: When you retire 45 years from now, you want to have $1.25 million saved. You think you can earn an average of 7.6 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today to fund this goal. How much more will you have to deposit if you wait for five years before making the deposit? A) $17,414.14 B) $21,319.47 C) $19,891.11 D) $20,468.85 E) $13,406.78

Q: Duane and Thad plan on retiring 27 years from today and plan to have the same amount saved at that time. In preparation for this, Duane is depositing $15,000 today at an annual interest rate of 5.2 percent. How will Thad's deposit amount vary from Duane's if Thad also makes a deposit today but earns an annual interest rate of 6.2 percent? A) $4,118.42 more B) $4,333.33 less C) $3,417.09 more D) $4,274.12 less E) $3,381.39 less

Q: Your older sister deposited $2,500 today at 6.5 percent interest for 15 years. However, you can only earn 6.25 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount saved at the end of the 15 years? A) $92.19 B) $89.70 C) $88.78 D) $90.21 E) $93.39

Q: You want to have $30,000 saved 5 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 3.5 percent rather than 2.5 percent on your savings? Today's deposit is the only deposit you will make to this savings account. A) $1,256.43 B) $891.18 C) $1,124.60 D) $945.11 E) $1,219.02

Q: You would like to give your child $100,000 to start a career 25 years from now. How much money must you set aside today for this purpose if you can earn 7.5 percent on your investments? A) $15,388.19 B) $16,397.91 C) $16,817.67 D) $15,911.13 E) $17,488.37

Q: What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent? A) $959.46 B) $1,147.07 C) $841.41 D) $1,106.18 E) $1,291.06

Q: Twenty years from now, you want to spend $175,000 for a fancy car. How much must you deposit as a lump sum today to achieve this goal at an annual interest rate of 6.6 percent? A) $54,208.16 B) $48,740.95 C) $57,911.08 D) $40,019.82 E) $51,446.60

Q: Suppose the first comic book of a classic series was sold in 1954. In 2017, the estimated price for this comic book was $310,000, which is an annual return of 22 percent. For this to be true, what was the original price of the comic book in 1954? A) $1.00 B) $.97 C) $1.33 D) $1.12 E) $1.20

Q: Your father invested a lump sum 28 years ago at 4.05 percent annual interest. Today, he gave you the proceeds of that investment, totalling $48,613.24. How much did your father originally invest? A) $14,929.47 B) $16,500.00 C) $15,994.70 D) $15,500.00 E) $16,099.45

Q: Today, you have two coins each of which is valued at $100. One coin is expected to appreciate by 5.2 percent annually while the other coin should appreciate by 5.7 percent annually. What will be the difference in the value of the two coins 50 years from now? A) $337.43 B) $318.04 C) $191.79 D) $128.32 E) $380.15