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You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?


A) $15,260
B) $16,063
C) $16,908
D) $17,754
E) $18,642

F) C) and D)
G) D) and E)

Correct Answer

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Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?


A) 18.58%
B) 19.56%
C) 20.54%
D) 21.57%
E) 22.65%

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

Correct Answer

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If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

A) True
B) False

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How much would $1, growing at 3.5% per year, be worth after 75 years?


A) $12.54
B) $13.20
C) $13.86
D) $14.55
E) $15.28

F) None of the above
G) B) and D)

Correct Answer

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John and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 at Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Ellen's anticipated college costs?


A) $1,965.21
B) $2,068.64
C) $2,177.51
D) $2,292.12
E) $2,412.76

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

Correct Answer

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Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

A) True
B) False

Correct Answer

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The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.

A) True
B) False

Correct Answer

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Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

A) True
B) False

Correct Answer

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Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?


A) $651.60
B) $684.18
C) $718.39
D) $754.31
E) $792.02

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

Correct Answer

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Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.

A) True
B) False

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Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to start a new business, and your uncle offers to give you $120,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment?


A) 6.85%
B) 7.21%
C) 7.59%
D) 7.99%
E) 8.41%

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

Correct Answer

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The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.

A) True
B) False

Correct Answer

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You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?


A) 4.93%
B) 5.19%
C) 5.46%
D) 5.75%
E) 6.05%

F) None of the above
G) All of the above

Correct Answer

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You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?


A) 5.14
B) 5.71
C) 6.35
D) 7.05
E) 7.84

F) A) and D)
G) None of the above

Correct Answer

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What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?


A) $77.19
B) $81.25
C) $85.31
D) $89.58
E) $94.06

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

Correct Answer

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Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?


A) The monthly payments will decline over time.
B) A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
C) The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
D) The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.
E) Exactly 10% of the first monthly payment represents interest.

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

Correct Answer

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You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?


A) Bank 1; 6.1% with annual compounding.
B) Bank 2; 6.0% with monthly compounding.
C) Bank 3; 6.0% with annual compounding.
D) Bank 4; 6.0% with quarterly compounding.
E) Bank 5; 6.0% with daily (365-day) compounding.

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

Correct Answer

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How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?


A) $438.03
B) $461.08
C) $485.35
D) $510.89
E) $537.78

F) C) and D)
G) D) and E)

Correct Answer

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What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?


A) $1,819
B) $1,915
C) $2,016
D) $2,117
E) $2,223

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

Correct Answer

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What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?


A) $969
B) $1,020
C) $1,074
D) $1,131
E) $1,187

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

Correct Answer

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