Ch6 Assignment

A The present value of the annuity due exceeds the present value of the ordinary annuity, while the future value of the annuity due is less than the future value of the ordinary annuity.

B The present value of the ordinary annuity must exceed the present value of the annuity due, but the future value of an ordinary annuity may be less than the future value of the annuity due.

C If interest rates increase, the difference between the present value of the ordinary annuity and the present value of the annuity due remains the same.

D The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of the annuity due also exceeds the future value of the ordinary annuity.

Question #6

Which of the following investments has the highest effective annual interest rate (EAR)?

A 6.90 percent compounded monthly

B 6.65 percent compounded daily

C 6.90 percent compounded semiannually

D 7.10 percent compounded annually

E 6.90 percent compounded quarterly

Question #7

Calculate effective annual interest rate (EAR) for the following investments.

A bank CD that pays 6.65 percent compounded daily (on a 365-day per year basis). (Round answer to 2 decimal places, e.g. 15.25%.)

A 7.02%

B 6.88%

C 7.12%

D 7.10%

Question #8

Calculate effective annual interest rate (EAR) for the following investments.

A bank CD that pays 6.90 percent compounded semiannually. (Round answer to 2 decimal places, e.g. 15.25%.)

A 7.10%

B 7.02%

C 7.08%

D 7.12%

Question #9

Calculate effective annual interest rate (EAR) for the following investments.

A bank CD that pays 7.10 percent compounded annually. (Round answer to 2 decimal places, e.g. 15.25%.)

A 7.02%

B 6.88%

C 7.10%

D 7.08%

Question #10

Calculate effective annual interest rate (EAR) for the following investments.

A bank CD that pays 6.90 percent compounded monthly. (Round answer to 2 decimal places, e.g. 15.25%.)

A 6.88%

B 7.12%

C 7.10%

D 7.02%

Question #11

Calculate effective annual interest rate (EAR) for the following investments.

A bank CD that pays 6.90 percent compounded quarterly. (Round answer to 2 decimal places, e.g. 15.25%.)

A 7.02%

B 7.08%

C 7.10%

D 7.12%

Question #12

The effective annual rate (EAR) will equal the annual percentage rate (APR) if interest is compounded:

A annually.

B quarterly.

C daily.

D monthly.

Question #13

What is the value of this 20 year lease? The first payment, due one year from today is $2,000 and each annual payment will increase by 4%. The discount rate used to evaluate similar leases is 9%. (Round final answer to the nearest whole dollar.)

A $40,000

B $68,000

C $24,361

D $39,856

Question #14

You are invited to participate in a new company. The company is projected to payout $10,000 in the first year, and after that the payouts will grow by an annual rate of 6 percent forever. If you can invest the cash flows at 8 percent, how much will you be willing to pay for this perpetuity?

A $750,000

B $100,000

C $250,000

D $500,000

Question #15

You have received a share of preferred stock that pays an annual dividend of $10. Similar preferred stock issues are yielding 22.5%. What is the value of this share of preferred stock? (Round answer to two decimal places.)

A $41.50

B $46.67

C $44.44

D $45.67

Question #16

Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called:

A a growing perpetuity.

B a growing annuity.

C an ordinary annuity.

D an annuity due.

Question #17

In a typical loan amortization schedule:

A the amount of money paid towards reducing the loan balance decreases over time.

B the amount of interest paid each period increases over time.

C the amount of each payment does not remain constant.

D the amount of interest paid each period does not remain constant.

Question #18

To prepare a loan amortization schedule, we must first compute the:

A amount of interest that would be paid each period.

B amount of each loan payout.

C total amount of all the payments.

D the total amount of interest that would be paid over the life of the loan.

Question #19

You plan to buy a new car. The price is $30,000 and you will make a down payment of $4,000.
Your annual interest rate is 10% and you intend to pay for the car over five years. What will be your monthly payment? (Round intermediate calculation to four decimal places. Round the final answer to the nearest of two decimals.)

A $637.41

B $433.33

C $566.67

D $552.42

Question #20

The amount borrowed on a loan equals:

A future value of the loan payments.

B sum of the loan payments.

C discounted value of the loan payments.

D compounded value of the loan payments.

Question #21

Moore’s Inc. will be making lease payments of $3,895.50 for a 10-year period, starting at the end of this year. If the firm uses a 9 percent discount rate, what is the present value of this annuity? (Round to the nearest dollar.)

A $20,000

B $25,000

C $29,000

D $23,250

Question #22

Viviana Carroll needs to have $25,000 in five years. If she can earn 8 percent annually on any investment, what is the amount that she will have to invest every year at the end of each year for the next five years? (Round to the nearest dollar.)

A $5,000

B $4,261

C $4,445

D $4,640

Question #23

Cassandra Dawson wants to save for a trip to Australia. She will need $12,000 at the end of four years. She can invest a certain amount at the beginning of each of the next four years in a bank account that will pay her 6.8 percent annually. How much will she have to invest each year to reach her target? (Round to the nearest dollar.)

A $3,000

B $2,980

C $2,538

D $2,711

Question #24

John Mason decided to save $2,250 at the end of each of the next three years to pay for a vacation. If he invests it at 8 percent annually, how much will he have at the end of three years? (Round to the nearest dollar.)

A $7,010

B $6,297

C $7,304

D $7,403

Question #25

Graciela Treadwell won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 percent on any investment she makes, what is the least she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.)

A $334,600

B $750,000

C $212,400

D $235,700

Question #26

Cash flows associated with annuities are considered to be:

A a mix of constant and uneven cash flow streams.

B a constant cash flow stream.

C a cash flow stream with decreasing trend.

D an uneven cash flow stream.

Question #27

A preferred stock would be an example of:

A an ordinary annuity.

B an annuity due.

C a perpetuity.

D a growing annuity.

Question #28

If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called:

A a perpetuity.

B an ordinary annuity.

C an annuity due.

D a growing perpetuity.

Question #29

Which of the three contracts has the highest present value?

A Team’s offer

B Current Contract

C Counteroffer

Question #30

Matthew Young, a professional athlete, currently has a contract that will pay him a large amount in the first year of his contract and smaller amounts thereafter. He and his agent have asked the team to restructure the contract. The team, though reluctant, obliged. Matthew and his agent came up with a counteroffer.

Year Current Contract Team’s Offer Counteroffer
1 $7,502,000 $3,675,980 $4,876,300
2 $3,340,000 $3,507,000 $6,913,800
3 $2,755,000 $3,912,100 $3,691,700
4 $1,647,000 $3,541,050 $2,536,380

What is the present values of Counteroffer using a 14 percent discount rate? (Round answer to 2 decimal places, e.g. 15.25. Do not round factor values.)

A $13,590,933.66

B $11,985,426.04

C $10,660,208.42

Question #31

Year Current Contract Team’s Offer Counteroffer
1 $7,502,000 $3,675,980 $4,876,300
2 $3,340,000 $3,507,000 $6,913,800
3 $2,755,000 $3,912,100 $3,691,700
4 $1,647,000 $3,541,050 $2,536,380

What is the present values of Team’s Offer using a 14 percent discount rate? (Round answer to 2 decimal places, e.g. 15.25. Do not round factor values.)

A $13,590,933.66

B $10,660,208.42

C $11,985,426.04

Question #32

Year Current Contract Team’s Offer Counteroffer
1 $7,502,000 $3,675,980 $4,876,300
2 $3,340,000 $3,507,000 $6,913,800
3 $2,755,000 $3,912,100 $3,691,700
4 $1,647,000 $3,541,050 $2,536,380

What is the present values of Current Contract using a 14 percent discount rate? (Round answer to 2 decimal places, e.g. 15.25. Do not round factor values.)

Present value $

A $13,590,933.66

B $11,985,426.04

C $10,660,208.42

Question #33

Stowell earns 20% interest compounded annually on his savings. He will deposit $1,500 today, $1,650 one year from today, and $1,820 two years from today. What will be the account balance three years from today? (Round intermediate calculations to nearest four decimals.)

A $7,889

B $7,268

C $7,152

D $7,140

Question #34

Which of the following statements is true of amortization?