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You are comparing two annuities with equal present values.The applicable discount rate is 6.65 percent,compounded annually.One annuity pays $4,500 on the first day of each year for 25 years.How much does the second annuity pay each year for 25 years if it pays at the end of each year?


A) $4,708.03
B) $4,623.87
C) $4,608.51
D) $4,799.25
E) $4,747.50

F) A) and D)
G) All of the above

Correct Answer

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Westover Ridge has a management contract with its president that requires a lump sum payment of $15 million to be paid upon the completion of the president's first 5 years of service.The company can earn 6.5 percent on its investments and wants to set aside an equal amount of money each year over the next 5 years to fund this obligation.How much money must the firm save each year?


A) $2,895,734.60
B) $2,698,346.17
C) $2,401,033.67
D) $2,634,518.06
E) $2,848,018.22

F) B) and D)
G) C) and D)

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Annuities with payments occurring at the end of each time period are called ________,whereas annuities with payments occurring at the beginning of each time period are called ________.


A) ordinary annuities; early annuities
B) ordinary annuities; annuities due
C) annuities due; ordinary annuities
D) straight annuities; deferred annuities
E) deferred annuities; straight annuities

F) B) and C)
G) A) and B)

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Which type(s) of loan can be repaid with annuity payments?


A) Pure discount loan
B) Both pure discount and interest-only loans
C) Amortized loan
D) Both interest-only and amortized loans
E) Interest-only loan

F) A) and B)
G) A) and E)

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The present value of an ordinary annuity formula is


A) (C / r) (1 / (1 + r) T(1 + r)
B) C({1 - [1 / (1 + r) T]}/ r)
C) [C(1 + r) T/ r] / (1 + r)
D) (C / r) (1 / (1 + r) T
E) C(1 + r) T/ r(1 + r)

F) B) and E)
G) A) and B)

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Kate starts saving for retirement today and plans to make annual contributions into this retirement account.Which one of these is most apt to increase the total amount she has saved on the day she retires? Assume she earns a positive rate of return each year.


A) Retiring at age 62 rather than age 66
B) Decreasing the investment's average rate of return
C) Decreasing the amount she saves each year
D) Delaying her retirement by 1 year
E) Delaying any additions to her savings by 1 year

F) A) and C)
G) All of the above

Correct Answer

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Erickson's is considering a project with an initial cost of $623,000.The project will produce cash inflows of $33,500 monthly for 21 months.What is the annual rate of return on this project?


A) 11.57%
B) 13.59%
C) 16.59%
D) 17.47%
E) 18.44%

F) A) and B)
G) D) and E)

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Texas Foods has a loan that requires one lump sum payment at the end of 12 years in the amount of $139,000.The interest rate is 5.8 percent,compounded monthly.What amount did the firm borrow?


A) $75,209.79
B) $69,418.30
C) $82,706.63
D) $84,613.03
E) $72,461.16

F) A) and D)
G) A) and C)

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Which one of the following statements concerning the annual percentage rate (APR) is correct?


A) The APR considers interest on interest.
B) The rate of interest you actually pay on a loan is called the APR.
C) The effective annual rate is lower than the APR when an interest rate is compounded quarterly.
D) Lenders are not permitted to disclose or advertise the APR of a loan.
E) The APR equals the effective annual rate when simple interest is applied to a loan.

F) A) and B)
G) A) and C)

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You are comparing two investments,A and B,with unequal annual cash flows and varying numbers of years.Which one of these statements is correct regarding this comparison?


A) If A has the higher net present value at one discount rate,then A will have the higher net present value at all other discount rates.
B) If B has a higher net present value,then B will have the higher net future value at any point in time,given a stated discount rate.
C) If B has a higher net future value at one discount rate,then B will have the higher net present value given any discount rate.
D) The two projects cannot be compared since their time periods differ in length.
E) The project with the greater number of years will have the higher present value.

F) A) and B)
G) A) and C)

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Which one of the following would have the greatest value assuming each has a Year 0 cash flow of zero and a Year 1 annual cash flow of $100? Assume a discount rate of 8 percent,compounded annually.Also,assume any growth rate is positive.


A) Perpetuity
B) Annuity
C) Growing perpetuity
D) Growing annuity
E) Growing perpetuity or growing annuity,as they would have equal values

F) B) and E)
G) A) and C)

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Walt can afford monthly car payments of $140 for 3 years,starting 1 month from now.The interest rate is 4.6 percent,compounded monthly.How much can he afford to borrow to buy a car?


A) $4,961.36
B) $4,717.32
C) $4,533.80
D) $5,333.88
E) $4,699.31

F) A) and B)
G) A) and E)

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You have $187,620 saved today and plan to withdraw $9,000 a year.How long can you make these withdrawals if you earn an annual percentage rate of 4.8 percent?


A) 84.96 years
B) 40.48 years
C) Forever
D) 38.08 years
E) 68.24 years

F) B) and E)
G) D) and E)

Correct Answer

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An interest rate expressed as if it were compounded once per year is called the


A) periodic interest rate.
B) compound interest rate.
C) stated annual rate.
D) daily interest rate.
E) effective annual rate.

F) C) and E)
G) None of the above

Correct Answer

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Which one of the following statements concerning interest rates is correct?


A) The stated rate is the same as the effective annual rate.
B) Banks are most apt to prefer more frequent compounding on their savings accounts.
C) The annual percentage rate increases as the number of compounding periods per year increases.
D) An effective annual rate is the rate that applies if interest were charged annually.
E) For any positive rate of interest,the effective annual rate will always exceed the annual percentage rate.

F) C) and D)
G) A) and C)

Correct Answer

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Rodget's is saving $2,500 a month,starting today,and continuing for 4 years.The firm expects to earn 5.6 percent,compounded monthly.If the firm had wanted to deposit an equivalent lump sum today,how much would it have had to deposit?


A) $107,286.58
B) $108,601.95
C) $105,330.60
D) $107,787.25
E) $108,998.01

F) B) and D)
G) All of the above

Correct Answer

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You are considering a job that offers a starting bonus of $2,500,paid immediately,and an annual salary of $44,000,$47,000,and $50,000 for the next 3 years,respectively.The annual salary is paid at the end of each year.What is this offer worth today at a discount rate of 5.6 percent?


A) $158,283.49
B) $154,383.50
C) $139,283.56
D) $128,773.82
E) $142,983.33

F) D) and E)
G) A) and B)

Correct Answer

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Antonio is going to receive $25,000 today as an insurance settlement.In addition,he will receive $12,000 1 year from today and $10,000 2 years from today.If he invests these funds,how much will he have saved when he retires 32 years from now if he earns an average annual return of 6.7 percent?


A) $456,124.93
B) $461,414.14
C) $395,072.90
D) $407,008.77
E) $358,726.88

F) B) and D)
G) B) and C)

Correct Answer

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Assume a stated rate of interest of 8 percent.Which form of compounding will produce the highest effective rate of interest?


A) Daily
B) Annual
C) Continuous
D) Monthly
E) Semiannual

F) A) and B)
G) A) and C)

Correct Answer

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What is the annual percentage rate on a loan with a stated rate of 2.109 percent per quarter?


A) 8.717%
B) 9.174%
C) 8.036%
D) 8.707%
E) 8.436%

F) B) and E)
G) D) and E)

Correct Answer

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