FIN 3400 Chapter 05 Assignment Questions and Answers- Florida International University
You plan to invest $300 today and $500 three years from today. Two
... [Show More] years
from today, you plan to withdraw $50. Which of these is a correct statement
regarding a time line for computing the future value of your cash flows four
years from today?
Multiple choice question.
The cash flow at year 4 is a negative $500.
The cash flow at time 0 is a positive $300.
The cash flow at year 2 is a negative $50.
The cash flow at year 3 is a negative $500.
True or false: Time has a greater impact on a future value than the interest
rate.
True false question.
True
False
Stu deposited $400 in an account three years ago. Last year, he deposited
$250 and plans to deposit $300 next year. The rate is 3 percent. Which one
of these correctly states a portion of the formula needed to compute the
future value five years from today?
Multiple choice question.
$250 × 1.036
$400 × 1.037
$400 × 1.035
$300 / 1.034
How is an ordinary annuity defined?
Multiple choice question.
An ordinary annuity is a stream of unequal cash flows which occur at the
end of every time period.
An ordinary annuity is a stream of equal cash flows paid at the end of
every time period.
An ordinary annuity is a series of level and equal cash flows paid at the
beginning of every time period.
An ordinary annuity is a series of equal cash flows that occur at random
times.
You want to compute the future value of a 20-year ordinary annuity that pays
7 percent interest. Which one of these correctly represents the annuity
compounding factor that should be used in the FVAN equation?
Multiple choice question.
[(1.07)20 - 1]/0.07
(1.07)20
[(1.07) - 1]/0.07
(1.07)20/0.07
Tory invested $600 a year for three years, then $700 a year for an additional
four years. In year 9, she withdrew $1,500. She withdrew the entire
investment in year 11. Which statement correctly applies to the time line for
this problem?
Multiple choice question.
The withdrawal in year 11 is a negative cash flow.
The time line has a total of nine time periods.
The cash flow in year 4 is a negative $600.
The cash flows for the first seven years are negative.
Which one of these correctly summarizes the future value formula? Assume
the interest rate is positive.
Multiple choice question.
The lower the interest rate, the greater the future value, all else held
constant.
The higher the present value, the lower the future value, all else held
constant.
The greater the number of time periods, the higher the future value, all
else held constant.
The higher the interest rate, the lower the future value, all else held
constant.
You have decided to invest for 20 years. You start with $200 a year and plan
to increase that amount every three years by an additional $100 a year with
the first increase occurring in Year 4. You create a multiple annuity future
value time line. What cash flows will appear at Year 7 on the annuity time
line?
Multiple choice question.
Year 7 will have three cash flows in the amounts of -$200, -$100, and -
$100.
Year 7 will have one cash outflow of -$100.
Year 7 will have one cash outflow of -$400.
Year 7 will have two cash flows in the amounts of -$200 and -$100.
Two years ago, Margo deposited $500 into a savings account. One year ago,
she deposited an additional $300, and today she deposited $800. Which one
of these is these is the correct formula for computing the value of these
deposits today at a rate of 4 percent?
Multiple choice question.
PV2 = ($500/1.042) + ($300/1.04) + $800
FV2 = ($500 × 1.04) + $300 + $800/1.04
FV2 = ($500 × 1.043) + ($300 × 1.042) + ($800 × 1.04)
FV2 = ($500 × 1.042) + ($300 × 1.04) + $800
True or false: A cash outflow three years from now will appear as a positive
value at Year 3 on a present value time line. Assume today is Time 0.
True false question.
True
False
Which one of these sets of cash flows fits the description of an ordinary
annuity?
Multiple choice question.
Rent on an apartment with the first payment due on the date you move in
and subsequent payments due every month thereafter
Car payments of $240 a month for four years with the first payment due
one month after the loan is obtained
Commission earnings that are paid monthly but vary in amount
Credit card payments that are paid monthly and equal the amount spent
each month
Chris plans on saving $4,000 a year at 4 percent interest for five years.
Which one of these is the correct formula for computing the future value at
Year 5 of these savings? Assume the payments occur at the end of each year.
Multiple choice question.
FV5 = $4,000 × 1.045
FV5 = $4,000 × [(1.04 - 1)5
/0.04]
FV5 = $4,000 × [(1.045
-1)/0.04]
FV5 = $4,000 × [(1.045
-1)/.04] × (1.04)
True or false: The lower the interest rate, the lower the present value of a set
of multiple future cash flows, all else held constant.
True false question.
True
False
You plan to invest $300 today and $500 three years from today. Two years
from today, you plan to withdraw $50. Which of these is a correct statement
regarding a time line for computing the future value of your cash flows four
years from today?
Multiple choice question.
The cash flow at time 0 is a positive $300.
The cash flow at year 4 is a negative $500.
The cash flow at year 2 is a negative $50.
The cash flow at year 3 is a negative $500.
You expect to receive $800 next year, $400 three years from now, and $500
four years from now. Which one of these formulas will correctly compute the
present value as of today at 5 percent interest?
Multiple choice question.
PV = $800/1.05 + $400/1.052 + $500/1.053
PV = $800 + $400/1.052 + $500/1.053
PV = $800/1.05 + $400/1.054 + $500/1.055
PV = $800/1.05 + $400/1.053 + $500/1.054
You have decided to save $500 a year for the next five years and then
increase that amount to $700 a year for the following five years. Which one
of these correctly reflects a multiple annuity time line for the future value of
your savings?
Multiple choice question.
The time line will have a +$500 cash flow for Years 1 - 10 and an
additional +$200 cash flow for Years 6 - 10.
The time line will have a -$700 cash flow for Years 1 - 5 and a -$500 cash
flow for Years 6-10.
The time line will have a -$500 cash flow for Years 1 - 10 and an
additional -$200 cash flow for Years 6 - 10.
The time line will have a +$500 cash flow for Years 1 - 5 and a +$700
cash flow for Years 6 - 10.
An investment will pay $400 a year for 25 years. What is the correct formula
to compute the present value of these payments at a rate of 5 percent?
Multiple choice question.
$400/1.0525
$400 × {[1 - (1/1.0525)]/0.05}
$400/[(1.0525)/0.05]
$400 × [(1.0525 - 1)/0.05]
You expect to receive the following annual cash flows starting at Year 1:
$800, $500, $900, and $600. To develop a time line, what will the cash flow
for Year 3 be?
Multiple choice question.
+$600
-$900
-$600
+$900
Art's Market borrows $25,000 for three years at 8 percent. Payments are
quarterly. Which of these inputs correctly computes the payment amount?
Multiple choice question.
N = 4; I = 8/4; PV = 25,000; FV = 0; CPT PMT
N = 12; I = 8/4; PV = 25,000; FV = 0; CPT PMT
N = 12; I = 8/3; PV = 25,000; FV = 0; CPT PMT
N = 12; I = 8/4; PV = 0; FV = 25,000; CPT PMT
You borrow $10,000 for four years to buy a car. The monthly loan payment is
$237.15. If you draw a time line, what is the cash flow at Time 0?
Multiple choice question.
+$10,000
$11,383.20
-$10,000
$0
Which one of these statements is correct regarding the present value of
multiple cash flows formula? Assume a positive interest rate.
Multiple choice question.
The greater the number of future values, the lower the present value, all
else held constant.
The lower the interest rate, the lower the present value, all else held
constant.
The higher the interest rate, the lower the present value, all else held
constant.
The greater the future values, the lower the present value, all else held
constant.
Lester's rented some equipment at a cost of $800 for Years 1 through 3 and
$900 for Years 4 and 5. Which of these correctly depicts a portion of the
present value of multiple annuities time line?
Multiple choice question.
Year 4 has two cash flows in the amounts of $800 and $100.
Year 1 has one cash flow in the amount of $800.
Year 1 has two cash flows in the amounts of -$900 and $100.
Year 3 has one cash flow in the amount of -$800.
You just won a prize that will pay you $800 today and $500 a year for the
next three years. Which is the correct formula for computing the present
value as of today at 6 percent?
Multiple choice question.
PV = $800(1.06) + $500 + $500/1.06 + $500/1.062
PV = $800 + $500/1.062 + $500/1.063 + $500/1.064
PV = $800 + $500/1.06 + $500/1.062+ $500/1.063
PV = $800/1.06 + $500/1.062 + $500/1.063 + $500/1.064
Les sold some equipment and will receive annual payments of $400 for two
years and $350 for the following two years. Which is the correct present
value of multiple annuities formula given a rate of 9 percent?
Multiple choice question.
$350 × {[1 - (1/1.094)]/0.09} - $50 × {[1 - (1/1.092)]/0.09}
$400 × {[1 - (1/1.094)]/0.09} - $50 × {[1 - (1/1.092)]/0.09
$350/1.094 + $50/1.092
$350 × {[1 - (1/1.094)]/0.09} + $50 × {[1 - (1/1.092)]/0.09}
An annuity pays a rate of 8 percent and has a life of 12 years. Which of these
is the correct annuity discount factor for computing a present value of this
annuity?
Multiple choice question.
[1 - (1/1.0812)]/0.08
(1/1.0812)/0.08
1.0812/0.08
(1.0812 - 1)/0.08
What is the difference between an annuity and a perpetuity?
Multiple choice question.
A perpetuity is an annuity with payments that increase as time
progresses.
An annuity has a fixed number of cash flows while a perpetuity has
unending cash flows.
A perpetuity is an annuity with steadily decreasing cash flows.
A perpetuity is an annuity with a set number of cash flows.
Justine pays $200 a month for five years at 6 percent interest. Which of
these is the correct input for determining the amount borrowed?
Multiple choice question.
N = 12; I = 6/12; PV = 0; PMT = -200; CPT FV
N = 60; I = 6/12; PV = -200; FV = 0; CPT PMT
N = 5; I = 6; PMT = -2,400; FV = 0, CPT PV
N = 60; I = 6/12; PMT = -200; FV = 0; CPT PV
Which one of these illustrates a perpetuity?
Multiple choice question.
Payments of $100 a year for the next 100 years
Payments of $25 a year for the next 16 years
Payments that never end but vary in amount from year to year
Payments of $50 a quarter from now until forever
You sell some equipment for $8,000 and agree to accept annual payments of
$2,469.35 for four years. If you draw a time line, what is the cash flow for
Year 4?
Multiple choice question.
-$2,469.35
$8,000
+$2,469.35
$0
Which one of these best defines an annuity due?
Multiple choice question.
An annuity due is a stream of unending, equal payments that are paid at
equal intervals of time.
An annuity due is a stream of equal payments with each payment
occurring at the end of a set number of equal time intervals.
An annuity due is a stream of equal payments paid at the beginning of
each equal time interval for a set number of time periods.
An annuity due is a set of unending payments that are paid over equal
intervals of time.
You expect to receive $600 in Years 1 through 5, $700 in Years 6 through 8,
and $400 in Years 9 and 10. What cash flow(s) will appear on a present value
of multiple annuities time line for Year 10?
Multiple choice question.
Year 10 has three cash flows in the amounts of $700, -$100, and -$300.
Year 10 has one cash inflow in the amount of $400.
Year 10 has three cash flows in the amounts of $600, $100, and -$300.
Year 10 has three cash flows in the amounts of $600, $100, and $300.
How do you convert an ordinary annuity present value formula to an annuity
due present value formula?
Multiple choice question.
Divide the ordinary annuity present value by (1 + i)
Multiply the ordinary annuity present value by (1 + i)
Subtract (1 + i) from the ordinary annuity present value
Add (1 + i) to the ordinary annuity present value
You expect to receive annual gifts of $1,000 at the end of Years 1 and 2 and
$1,500 at the end of Years 3 and 4. Which of these is the correct present
value of multiple annuities formula if the rate is 6 percent?
Multiple choice question.
$1,500 × {[1 - (1/1.062)]/0.06 + $1,000 × {[1 - (1/1.062)]/0.06}
$1,000 × {[1 - (1/1.062)]/0.06} + $500 × {[1 - (1/1.064)]/0.06}
$1,500 × {[1 - (1/1.064)]/0.06} - $500 × {[1 - (1/1.062)]/0.06}
$1,000 × {[1 - (1/1.064)]/0.06} + $500 ×{[1 - (1/1.062)]/0.06}
An investment pays an annual rate of 9 percent with interest payments
occurring quarterly. How many times per year is the interest compounded?
Multiple choice question.
4 times
1 time
2 times
3 times
What is a perpetuity?
Multiple choice question.
A perpetuity is a stream of unequal payments that are received forever.
A perpetuity is an unending stream of equal payments occurring at equal
intervals of time.
A perpetuity is an annuity with a life less than 10 years.
A perpetuity is a type of annuity that has payments which occur at the
beginning of a set number of time periods.
Which one of these illustrates a perpetuity?
Multiple choice question.
Preferred stock which pays a $60 annual dividend
An investment that pays $100 the first year and increases that amount by
$5 each year for the next seven years
20-year bond that pays $50 every six months
Investment that pays $1,000 a month for five years
You can afford monthly car payments of $150 for five years at 7 percent.
How do you compute the amount you can borrow?
Multiple choice question.
N = 60; I = 7/12; PMT = -150; PV = 0; CPT FV
N = 60; I = 7; PMT = -150; FV = 0; CPT PV
N = 60; I = 7/12; PMT = -150; FV = 0; CPT PV
N = 5; I = 7/12; PMT = -150; FV = 0; CPT PV
Which one of these payment streams fits the definition of an annuity due?
Multiple choice question.
A prize pays $1,000 a year for ten years, starting today.
A preferred stock pays a $2 quarterly dividend.
A 4-year car loan requires the last monthly payment be paid at the end of
Year 4.
A 20-year bond pays semiannual interest with the first payment occurring
six months after issuance.
Bro is buying $35,000 to buy a new car; how much can are his interest
payments if the rate is 3.5% over three years?
Multiple choice question.
$2,187.42
$1,025.57
$1,000.00
$454.34
Which one of these correctly converts an ordinary future value annuity
formula into an annuity due future value formula?
Multiple choice question.
FVAN due = FVAN + (1 + i)
FVAN = FVAN due × (1 + i)
FVAN due = FVAN × (1 + i)
FVAN due = FVAN/(1 + i)
How many times per year is interest compounded on a debt that requires
monthly payments?
Multiple choice question.
1 time
2 times
12 times
4 times
A credit card charges an interest rate of one percent per month. Define the
annual percentage rate (APR) for this debt.
Multiple choice question.
The APR is equal to one percent per month multiplied by 12 months per
year.
The APR is equal to (1 + 0.01)12 - 1.
The APR is equal to one percent raised to the 12th power.
The APR is one percent.
Identify a true statement about the effective annual rate.
Multiple choice question.
An effective annual rate is higher than annual percentage rate if
compounding of interest happens more than once in a year.
An effective annual rate is the rate per period times the number of
periods per year.
An effective annual rate is always the stated rate on a loan.
An effective annual rate is the rate which excludes any interest rate
compounding.
An investment pays quarterly payments and has an APR of 8 percent. You
need to compute the future value at Year 3. What is the calculator input for
the interest rate?
Multiple choice question.
I = 8/12
I = 8/4
I = 8 × 4
I = 8/3
You borrow money for two years at 1.25 percent per month. How is the
effective annual rate (EAR) computed?
Multiple choice question.
EAR = [1 + (0.0125 × 12)12 - 1
EAR = (1 + 0.0125)24 - 1
EAR = (1 + 0.0125)12 - 1
EAR = [1 + (0.0125/12)]12 -1
Sis can afford monthly car payments of $180 for three years. How much can
she borrow if the rate is 7 percent?
Multiple choice question.
$2,346.34
$7,187.42
$6,480.00
$5,829.56
A loan charges an APR of 11 percent with payments made quarterly. How is
the EAR computed?
Multiple choice question.
EAR = (0.11/4)4
EAR = (1 + 0.11)4
-1
EAR = [1 + (0.11/4)]4
- 1
EAR = (0.11/4) × 4
How do you convert an ordinary annuity present value formula to an annuity
due present value formula?
Multiple choice question.
Add (1 + i) to the ordinary annuity present value
Subtract (1 + i) from the ordinary annuity present value
Multiply the ordinary annuity present value by (1 + i)
Divide the ordinary annuity present value by (1 + i)
What is the effective annual rate of a 6 percent APR compounded daily?
Multiple choice question.
6.09 percent
6.18 percent
6.13 percent
6.17 percent
How is the annual percentage rate (APR) defined?
Multiple choice question.
An APR is the interest rate per period times the number of periods per
year.
An APR is the interest rate charged per month on a monthly payment
loan.
An APR is the interest rate that includes any interest earned on
reinvested interest.
An APR is the interest rate that reflects annualizing with compounding
figured in.
You are comparing four loans with the following rates. Which loan offers the
best interest rate for the borrower?
Multiple choice question.
6.1 percent, compounded quarterly
6 percent, compounded monthly
6.15 percent APR, compounded annually
6.25 percent, compounded semiannually
Which one of these formulas correctly defines an effective annual rate (EAR)
for any compounding period?
Multiple choice question.
EAR = (1 + APR)Number of periods per year - 1
EAR = (1 + Rate per period)Number of periods per year - 1.
EAR = Rate per periodNumber of periods per year
EAR = Rate per period × Number of periods per year
Which statement correctly applies to this monthly loan payment calculation?
PMT360 = $145,000 × {0.005/[1 - 1/(1 + 0.005)360]} = $869.35
Multiple choice question.
The APR is 6 percent.
This is a 36-year loan.
The amount borrowed equals 360 × $869.35.
The annual interest rate is 0.5 percent.
A 3-year investment pays 5 percent annual interest with semiannual interest
payments. How is the EAR computed?
Multiple choice question.
EAR = [1 + (0.05/2)]2
- 1
EAR = [1 + (0.05/2)6
- 1
EAR = (0.05/2)2
EAR = (1 + 0.05)2
- 1
You just borrowed money for four years to buy a car. The payments are $218
a month and the APR is 7 percent. How is the EAR computed?
Multiple choice question.
EAR = [1 + (0.07/48)12 - 1]
EAR = [1 + (0.07/4)4
- 1]
EAR = [1 + (0.07/12)48 - 1]
EAR = [1 + (0.07/12)12 - 1]
You take out a $120,000 mortgage for 30 years at 4% interest. How much of
your first payment applies to the principal balance?
Multiple choice question.
$400.00
$172.90
$399.49
$173.48
Assume the answers provided are the effective annual rates with annual,
semiannual, quarterly, and monthly compounding of the identical APR. Which
rate must be the monthly EAR? (No computations are required.)
Multiple choice question.
7.529
7.576
7.325
7.459
What is an amortization schedule?
Multiple choice question.
An amortization schedule is a list limited to showing the amount of
principal that is due on a loan at any point in time.
An amortization schedule is a legal document which shows the amount
borrowed, fees incurred, and interest charges.
An amortization schedule shows the interest and principal portions of
each payment, as well as the loan balance after each payment.
An amortization consists of three columns, total payment, interest paid,
and principal paid.
You are comparing four loans with the following rates. Which loan offers the
best interest rate for the borrower?
Multiple choice question.
4.9% compounded monthly
5% compounded quarterly
5% APR, compounded annually
5% compounded semiannually
A 6 percent, $11,500 car loan requires monthly payments. What rate should
be used in the calculator input to determine the number of periods until the
loan is repaid in full?
Multiple choice question.
3 percent
1.5 percent
0.5 percent
6 percent
You borrow $18,000 for four years to buy a car. The APR is 8 percent. What
rate should be used when you compute the monthly payment?
Multiple choice question.
2.00 percent
0.67 percent
8.00 percent
0.17 percent
You pay $366.09 a month on your mortgage. The interest rate is 5 percent
and the remaining principal balance is $9,656.21. How long will it be until
your mortgage is paid off?
Multiple choice question.
28 years
28 months
26 months
26 years
Which one of these loans meets the definition of an add-on interest loan?
Multiple choice question.
Scott's loan requires annual payments equal to the annual interest with
all principal repaid at maturity.
Anna's loan computes the monthly interest based on the unpaid principal
balance.
Ruth borrowed $2,000 which equaled the initial principal balance.
Leo borrowed $1,000 at 10 percent for one year. The initial principal loan
balance was computed as $1,000 + $100 = $1,100.
You take out a $120,000 mortgage for 30 years at 4 percent interest. The
monthly payment is $572.90. How much of your second payment applies to
the principal balance?
Multiple choice question.
$172.90
$400.00
$173.48
$399.49
A 12-month add-on interest loan has monthly payments of $220 and an
interest rate of 5 percent. How do you compute the amount borrowed?
Multiple choice question.
Amount borrowed = (12 × $220) × (1 + 0.05)
Amount borrowed = (12 × $220)/0.05
Amount borrowed = 12 × $220
Amount borrowed = (12 × $220)/(1 + 0.05)
What is the table called which lists the amount of each loan payment, the
interest and principal portions of each payment, and the remaining principal
balance?
Multiple choice question.
Amortization schedule
Prospectus
Promissory note
Depreciation schedule
You borrowed $16,000 at 8 percent with semiannual payments of $707.23.
What is the correct calculator input to compute the time period?
Multiple choice question.
I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number
of semiannual periods
I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number
of years
I = 8/2; PV = 0; PMT = -707.23; FV = 16,000; CPT N, which is the number
of semiannual periods
I = 8; PV = 16,000; PMT = -707.23 × 2; FV = 0; CPT N, which is the
number of years
A $24,000 loan has an interest rate of 9.5 percent and quarterly payments of
$936.05. How many years will it take to repay this loan?
Multiple choice question.
6.4 years
12.8 years
10 years
40 years
Which type of loan computes the amount of interest at the beginning of the
loan by applying the interest rate to the amount borrowed and includes that
interest in the loan principal?
Multiple choice question.
Monthly payment loan
Interest-only loan
Add-on interest loan
Amortized loan
You borrow $500 at 10 percent for one year. The loan is an add-on interest
loan. Which one of these provides the correct calculation to determine the
monthly payment?
Multiple choice question.
[$500 + (0.10 × $500)]/12
N = 12; I = 10/12; PV = 500, FV = 0; CPT PMT
$500/12
$500 + {[($500 + $0)/2] × 0.10}/12 [Show Less]