If your opportunity cost is 12%, how much will you pay for a bond that pays $100 per year forever?

If your opportunity cost is 12%, how much will you pay for a bond that pays $100 per year forever?

Answer:  PV = $100/.12 = $833.33

What is the present value of the following perpetuities?

a.    $600 discounted at 7%

b.    $450 discounted at 12%

c.     $1,000 discounted at 6%

d.    $880 discounted at 9%

Answer: 

a.     PV = $600/.07

        PV = $8,571.43

b.    PV = $450/.12

        PV = $3,750

c.     PV = $1,000/.06

        PV = $16,666.67

d.    PV = $880/.09

        PV = $9,777.78

What is the value on 1/1/14 of the following cash flows? Use a 10% discount rate, and round your answer to the nearest $1.00.

Date Cash Received         Amount of Cash

          1/1/16                                     $100

          1/1/17                                     $200

          1/1/18                                     $300

          1/1/19                                     $400

          1/1/20                                     $500

A) $1,500

B) $880

C) $968

D) $1,065

Consider the following cash flows:

Date Cash Received         Amount of Cash

          1/1/15                                     $100

          1/1/16                                     $100

          1/1/17                                     $500

          1/1/18                                     $100

What is the value on 1/1/14 of the above cash flows? Use an 8% discount rate, and round your answer to the nearest $1.00.

A) $649

B) $601

C) $740

D) $800

If you put $200 in a savings account at the beginning of each year for 10 years and then allow the account to compound for an additional 10 years, how much will be in the account at the end of the 20th year? Assume that the account earns 10%, and round to the nearest $10.

A) $8,300

B) $9,100

C) $8,900

D) $9,700

Michael Bilkman has an opportunity to buy a perpetuity that pays $24,350 annually. His required rate of return on this investment is 14.25%

Michael Bilkman has an opportunity to buy a perpetuity that pays $24,350 annually. His required rate of return on this investment is 14.25%. At what price would Michael be indifferent to buying or not buying the investment? Round off to the nearest $1.

A) $83,470

B) $170,877

C) $95,621

D) $121,709

A perpetuity will grow at the rate of 5% per year.  One year from the date of purchase, it will pay $50,0000.  If the appropriate discount rate is 10%, what is the value of the perpetuity?

A) $1,000,000

B) $500,000

C) $5,000,000

D) $1,050,000

Your rich great, great aunt just passed away at the age of 91. She liked you more than she let on and left you in her will. You will receive 100 British bonds that pay interest forever. The amount of annual interest payments that you will receive is $5,000. If you could invest your money at 4.25%, how much are these bonds worth today?

A) $64,480

B) $197,250

C) $250,000

D) $117,647

E) $55,000

A bond paying interest of $120 per year forever is an example of a perpetuity.

Answer:  TRUE

The formula for calculating the present value of a growing perpetuity is PV = Payment period 1/(i-g)

Answer:  TRUE

A perpetuity is an investment that continues forever but pays a different dollar amount each year.

Answer:  FALSE

The present value of a $100 perpetuity discounted at 5% is $1200.

Answer:  FALSE

All else constant, an individual would be indifferent between receiving $2,000 today or receiving a $200 perpetuity when the discount rate is 10% annually.

Answer:  TRUE

You have just purchased a car from Friendly Sam. The selling price of the car is $6,500. If you pay $500 down

You have just purchased a car from Friendly Sam. The selling price of the car is $6,500. If you pay $500 down, then your monthly payments are $317.22. The annual interest rate is 24%. How many payments must you make?

Answer:  i=24/2, PV=6000, PMT=317.22, FV=0, n = 24 months

a.) If Sparco, Inc. deposits $150 at the end of each year for the next eight years in an account that pays 5% interest, how much money will Sparco have at the end of eight years?

b.) Suppose Sparco decides that they need to have $5,300 at the end of the eight years. How much will they have to deposit at the end of each year?

Answer: 

a.     n=8, i=5, PV=0, PMT=-150, FV= 1432.37

b.    n=8, i=5, PV=0, FV=5300, PMT=-555.03

What is a series of equal payments for an infinite period of time called?

A) A perpetuity

B) An axiom

C) A cash cow

D) An annuity

You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?

A) .055

B) .010

C) .110

D) .220

The present value of a perpetuity decreases when the ________ decreases.

A) number of investment periods

B) annual discount rate

C) perpetuity payment

D) both B and C

You are going to pay $800 into an account at the beginning of each of 20 years. The account will then be left to compound for an additional 20 years. At the end of the 41st year you will begin receiving a perpetuity from the account. If the account pays 14%, how much will you receive each year from the perpetuity (round to nearest $1,000)?

A) $140,000

B) $150,000

C) $160,000

D) $170,000

You are considering the purchase of XYZ Company's common stock which will pay a $1.00 per share dividend one year from the date of purchase.  The dividend is expected to grow at the rate of 4% per year.  If the appropriate discount rate for this investment is 14%, what is the price of one share of this stock?

A) $7.14

B) $10.00

C) $25.00

D) Cannot be determined without maturity date

You have a credit card with a balance of $18,000. The annual interest rate on the card is 18% compounded monthly

You have a credit card with a balance of $18,000. The annual interest rate on the card is 18% compounded monthly, and the minimum payment is $400 per month. If you pay only the minimum payment each month and do not make any new charges on the card, how many years will it take for you to pay off the $18,000 balance?

Answer:  Calculator steps:

18,000                   PV

-400                       PMT

18                           I/yr or I

N = Approximately 75 months = 6.25 years

If you have an opportunity cost of 10%, how much must you invest each year to have $4,000 accumulated in 10 years?

Answer:  Using a financial calculator, N=10, i=10, PV=0, FV=4000, solve for PMT=-250.98

You have just received an endowment of $32,976. You plan to put the entire amount in an account earning 8 percent compounded annually and to withdraw $4000 at the end of each year. How many years can you continue to make the withdrawals?

Answer:   Using a financial calculator, i=8, PV=32976, FV=0, solve for PMT=-4000, solve for N=approximately 14 years

To repay a $2,000 loan from your bank, you promise to make equal payments every six months for the next five years totaling $3,116.20. What annual rate of interest will you be paying?

Answer:  Using a financial calculator, N=10, i=10, PV=0, FV=4000, solve for PMT=-250.98

        Annual interest rate = (.09)(2) = .18 = 18%

You are saving money to buy a house. You will need $7,473.50 to make the down payment. If you can deposit $500 per month in a savings account which pays 1% per month, how long will it take you to save the $7,473.50?

Answer:   $7,473.50 = $500 FVIFA[1%, n periods]

14.947 = FVIFA[1%, n periods]

        n = 14 months

You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate, compounded monthly. Create an amortization schedule for the first two months of the loan.

Answer:  Using a financial calculator N=180, i=9/12, PV=70000, FV=0, PMT=-709.99

MO         Beg                         PMT               Int.                 Princ.             End

1              $70,000                 $709.99         $525              $184.99         $69,815.01

2              $69,815.01           $709.99         $523.61         $186.38         $69,628.63

What is a series of equal payments to be received at the beginning of each period, for a finite period of time, called?

What is a series of equal payments to be received at the beginning of each period, for a finite period of time, called?

A) A perpetuity

B) An annuity due

C) A cash cow

D) A deferred annuity

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.

Answer:  TRUE

The present value of an annuity increases as the discount rate increases.

Answer:  FALSE

We can use the present value of an annuity formula to calculate constant annual loan payments.

Answer:  TRUE

A compound annuity involves depositing or investing a single sum of money and allowing it to grow for a certain number of years.

Answer:  FALSE

When repaying an amortized loan, the interest payments increase over time.

Answer:  FALSE

An amortized loan is a loan paid in unequal installments.

Answer:  FALSE

A loan amortization schedule provides a breakdown of loan payments into principal and interest payments.

Answer:  TRUE

Holding all other variables constant, payment per period for an annuity due will be higher than an ordinary annuity.

Answer:  FALSE

Edward Johnson decided to open up a Roth IRA. He will invest $1,800 per year for the next 35 years

Edward Johnson decided to open up a Roth IRA. He will invest $1,800 per year for the next 35 years. Deposits to the Roth IRA will be made via a $150 payroll deduction at the end of each month. Assume that Edward will earn 8.75% annual interest compounded monthly over the life of the IRA. How much will he have at the end of 35 years?

A) $125,250

B) $250,321

C) $363,000

D) $414,405

Suppose that you wish to save for your child's college education by opening up an educational IRA. You plan to deposit $100 per month into the IRA for the next 18 years. Assume that you will be able to earn 10%, compounded monthly, on your investment. How much will you have accumulated at the end of 18 years?

A) $21,600

B) $54,719

C) $33,548

D) $85,920

E) $60,056

What is a series of equal payments for a finite period of time called?

A) A perpetuity

B) An axiom

C) A lump sum

D) An annuity

Which of the following statements is true?

A) The future value of an annuity would be greater if funds are invested at the beginning of each period instead of at the end of each period.

B) An annuity is a series of equal payments that are made, or received, forever.

C) The effective annual rate (APR) of a loan is higher the less frequently payments are made.

D) The future value of an annuity would be greater if funds are invested at the end of each period rather than at the beginning of each period.

What is a series of equal payments to be received at the end of each period, for a finite period of time, called?

A) A perpetuity

B) An annuity due

C) A cash cow

D) A deferred annuity

Congratulations. You just won the California State Lottery. The amount awarded is paid in 20 equal annual installments

Congratulations. You just won the California State Lottery. The amount awarded is paid in 20 equal annual installments, at the beginning of each year. You can invest your money at 6.6%, compounded annually. You have calculated that the lottery is worth $20,975,400 today. How much was the amount awarded?

A) $75,310,294

B) $36,000,000

C) $81,047,770

D) $42,000,000

A friend of yours borrows $19,500 from the bank at 8% annually to be repaid in 10 equal annual end-of-year installments. The interest paid on this loan in year three is

A) $1,336.01.

B) $1,560.00.

C) $2,906.11.

D) $1,947.10.

If a loan of $10,000 is paid back in equal annual end-of-year payments of $2,570.69 during the next five years, what is the annual interest rate on the loan?

A) 2%

B) 5%

C) 9%

D) 12%

What is the present value of an investment that pays $10,000 every year at year-end for the next five years and $15,000 every year at year-end for years six through 10? The annual rate of interest for the investment is 9%.

A) $125,000.00

B) $97,250.00

C) $135,173.00

D) $76,827.50

If you have $375,000 in an account earning 9% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 20 years?

A) $7,500

B) $18,750

C) $66,912

D) $5,575

E) $41,080

You wish to borrow $12,000 to be repaid in 60 monthly installments of $257.93. The annual interest rate is

A) 10.50%.

B) 12.75%.

C) 15.25%.

D) 6.50%.

E) 8.80%.

You wish to purchase a condo at a cost of $175,000. You are able to make a down payment of $35,000 and will borrow $140,000 for 30 years at an interest rate of 7.25%. How much is your monthly payment? To solve this problems with an EXCEL spreadsheet, you would enter

A) =PMT(7.25/12,360,140000,0,1)

B) =PMT(.0725/12,360,140000,0,1)

C) =PMT(7.25,30,140000,0,1) /12

D) =PMT(.0725/12,360,175000,0,1)