You want to travel to Europe to visit relatives when you graduate from college three years from now. The trip is expected to cost a total of $10,000

You want to travel to Europe to visit relatives when you graduate from college three years from now. The trip is expected to cost a total of $10,000. Your parents have deposited $5,000 for you in a CD paying 6% interest annually, maturing three years from now. Aunt Hilda has agreed to finance the balance. If you are going to put Aunt Hilda's gift in an investment earning 10% annually over the next three years, how much must she deposit now so you can visit your relatives in three years?

A) $3,757

B) $3,039

C) $3,801

D) $3,345

What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments. Round to the nearest whole dollar.

       Year                     Cash Flow

           1                             $3,000

           2                             $4,000

           3                             $5,000

A) $10,588

B) $11,461

C) $12,688

D) $13,591

As a part of your savings plan at work, you have been depositing $250 per quarter in a savings account earning 8% interest compounded quarterly for the last 10 years. You will retire in 15 years and want to increase your contribution each year from $1,000 to $2,000 per year, by increasing your contribution every four months from $250 to $500. Additionally, you have just inherited $10,000, which you plan to invest now to earn interest at 12% compounded annually for the next 15 years. How much money will you have in savings when you retire 15 years from now?

A) $126,862

B) $73,012

C) $161,307

D) $194,415

Ronald Slump purchased a real estate investment with the following end-of-year cash flows:

       Year                EOY Cash Flow

           1                              $200

           2                              $-350

           3                              $-430

           4                              $950

What is the present value of these cash flows if the appropriate discount rate is 20%?

A) $178

B) $160

C) $133

D) $767

You have just won a magazine sweepstakes and have a choice of three alternatives. You can get $100,000 now, or $10,000 per year in perpetuity, or $50,000 now and $150,000 at the end of 10 years. If the appropriate discount rate is 12%, which option should you choose?

A) $100,000 now

B) $10,000 perpetuity

C) $50,000 now and $150,000 in 10 years

Jay Coleman just graduated. He plans to work for five years and then leave for the Australian "Outback" country

Jay Coleman just graduated. He plans to work for five years and then leave for the Australian "Outback" country. He figures that he can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, his family gave him a $2,500 graduation gift. If he puts the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will his financial "stake" be when he leaves for Australia five years from now? Round off to the nearest $1.

A) $36,082

B) $24,725

C) $30,003

D) $27,178

An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%?

A) $735

B) $865

C) $885

D) $900

You are thinking of buying a miniature golf course. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight. If the appropriate discount rate is 10%, what is the present value of these cash flows?

A) $285,288

B) $167,943

C) $235,048

D) $828,230

You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts?

       Year            End of Year Deposit

           1                              $350

           2                              $500

           3                              $725

           4                              $400

A) $1,622

B) $2,207

C) $2,384

D) $2,687

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