Financial Management: Principles and Applications, 11e (Titman)
Chapter 6 The Time Value of Money-Annuities and Other Topics
1) You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual
interest rate is:
A) 24%.
B) 8%.
C) 18%.
D) 12%.
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
2) If you have $20,000 in an account earning 8% annually, what constant amount could you
withdraw each year and have nothing remaining at the end of five years?
A) $3,525.62
B) $5,008.76
C) $3,408.88
D) $2,465.78
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
3) If you invest $750 every six months at 8% compounded semi-annually, how much would you
accumulate at the end of 10 years?
A) $10,065
B) $10,193
C) $22,334
D) $21,731
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
1
Copyright © 2011 Pearson Education, Inc.
24 equal monthly payments. The annual interest rate on the loan is 12% of the unpaid balance.
What is the amount of the monthly payments?
A) $282.43
B) $390.52
C) $369.82
D) $353.05
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
5) Your company has received a $50,000 loan from an industrial finance company. The annual
payments are $6,202.70. If the company is paying 9% interest per year, how many loan payments
must the company make?
A) 15
B) 13
C) 12
D) 19
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
6) ________ annuities involve depositing money at the end of the period and allowing it to grow.
A) Discount
B) Compound
C) Annuity due
D) Both B and C
Topic: 6.1 Annuities
Keywords: annuity
Principles: Principle 1: Money Has a Time Value
7) When comparing annuity due to ordinary annuities, annuity due annuities will have higher:
A) present values.
B) annuity payments.
C) future values.
D) both A and C.
E) all of the above.
Topic: 6.1 Annuities
Keywords: annuity due
Principles: Principle 1: Money Has a Time Value
2
Copyright © 2011 Pearson Education, Inc.
8) Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Gina’s plan is
to invest her money by depositing into an IRA at the end of every year. What is the amount that
she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will
earn an annual rate of 11.5%. Round off to the nearest $1.
A) $1,497
B) $5,281
C) $75
D) $3,622
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
9) Francis Peabody just won the $89,000,000 California State Lottery. The lottery offers the
winner a choice of receiving the winnings in a lump sum or in 26 equal annual installments to be
made at the beginning of each year. Assume that funds would be invested at 7.65%. Francis is
trying to decide whether to take the lump sum or the annual installments. What is the amount of
the lump sum that would be exactly equal to the present value of the annual installments? Round
off to the nearest $1.
A) $89,000,000
B) $38,163,612
C) $13,092,576
D) $41,083,128
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
10) As time increases for an amortized loan, the ________ decreases.
A) interest paid per payment
B) principal paid per payment
C) the outstanding loan balance
D) both A and C
E) all of the above
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
3
Copyright © 2011 Pearson Education, Inc.
11) What is the present value of an annuity of $27 received at the beginning of each year for the
next six years? The first payment will be received today, and the discount rate is 10% (round to
nearest $10).
A) $120
B) $130
C) $100
D) $110
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
12) What is the present value of $150 received at the beginning of each year for 16 years? The
first payment is received today. Use a discount rate of 9%, and round your answer to the nearest
$10.
A) $1,360
B) $1,480
C) $1,250
D) $1,210
Topic: 6.1 Annuities
Keywords: annuity due
Principles: Principle 1: Money Has a Time Value
13) What is the present value of $250 received at the beginning of each year for 21 years?
Assume that the first payment is received today. Use a discount rate of 12%, and round your
answer to the nearest $10.
A) $1,870
B) $2,090
C) $2,117
D) $3,243
Topic: 6.1 Annuities
Keywords: annuity due
Principles: Principle 1: Money Has a Time Value
4
Copyright © 2011 Pearson Education, Inc.
14) What is the present value of an annuity of $12 received at the end of each year for seven
years? Assume a discount rate of 11%. The first payment will be received one year from today
(round to the nearest $1).
A) $25
B) $40
C) $57
D) $118
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
15) What is the present value of an annuity of $100 received at the end of each year for seven
years? The first payment will be received one year from today (round to nearest $10). The
discount rate is 13%.
A) $440
B) $43
C) $500
D) $1,040
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
16) What is the present value of $27 received at the end of each year for five years? Assume a
discount rate of 9%. The first payment will be received one year from today (round to the nearest
$1).
A) $42
B) $114
C) $88
D) $105
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
5
Copyright © 2011 Pearson Education, Inc.
17) What is the present value of $300 received at the beginning of each year for five years?
Assume that the first payment is not received until the beginning of the third year (thus the last
payment is received at the beginning of the seventh year). Use a 10% discount rate, and round
your answer to the nearest $100.
A) $1,100
B) $1,000
C) $900
D) $1,200
Topic: 6.1 Annuities
Keywords: annuity due
Principles: Principle 1: Money Has a Time Value
18) Ingrid Birdman can earn a nominal annual rate of return of 12%, compounded semiannually.
If Ingrid made 40 consecutive semiannual deposits of $500 each, with the first deposit being
made today, how much will she accumulate at the end of Year 20? Round off to the nearest $1.
A) $52,821
B) $57,901
C) $82,024
D) $64,132
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
19) Charlie Stone wants to retire in 30 years, and he wants to have an annuity of $1,000 a year
30th year. Using an interest rate of 10%, how much must Charlie invest today in order to have
his retirement annuity (round to the nearest $10)?
A) $500
B) $490
C) $540
D) $570
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
6
Copyright © 2011 Pearson Education, Inc.
20) It is January 1st and Darwin Davis has just established an IRA (Individual Retirement
Account). Darwin will put $1,000 into the account on December 31st of this year and at the end
of each year for the following 39 years (40 years total). How much money will Darwin have in
his account at the beginning of the 41st year? Assume that the account pays 12% interest
compounded annually, and round to the nearest $1,000.
A) $93,000
B) $766,000
C) $767,000
D) $850,000
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
21) If you put $510 in a savings account at the beginning of each year for 30 years, how much
money will be in the account at the end of the 30th year? Assume that the account earns 5%, and
round to the nearest $100.
A) $33,300
B) $32,300
C) $33,900
D) None of the above
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
22) If you put $10 in a savings account at the beginning of each year for 11 years, how much
money will be in the account at the end of the 11th year? Assume that the account earns 11%,
and round to the nearest $100.
A) $220
B) $200
C) $190
D) $180
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
7
Copyright © 2011 Pearson Education, Inc.
23) If you put $310 in a savings account at the beginning of each year for 10 years, how much
money will be in the account at the end of the 10th year? Assume that the account earns 5.5%,
and round to the nearest $100.
A) $3,800
B) $3,900
C) $4,000
D) $4,200
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
24) How much money must you pay into an account at the beginning of each of 30 years in order
to have $10,000 at the end of the 30th year? Assume that the account pays 11% per annum, and
round to the nearest $1.
A) $39
B) $46
C) $50
D) None of the above
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
25) How much money must you pay into an account at the beginning of each of 20 years in order
to have $10,000 at the end of the 20th year? Assume that the account pays 12% per annum, and
round to the nearest $1.
A) $1,195
B) $111
C) $124
D) $139
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
8
Copyright © 2011 Pearson Education, Inc.
26) How much money must you pay into an account at the beginning of each of five years in
order to have $5,000 at the end of the fifth year? Assume that the account pays 12% per year, and
round to the nearest $10.
A) $700
B) $1,390
C) $1,550
D) $790
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
27) How much money must you pay into an account at the beginning of each of 11 years in order
to have $5,000 at the end of the 11th year? Assume that the account pays 8% per year, and round
to the nearest $1.
A) $700
B) $257
C) $300
D) $278
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
Use the following information in solving the following question(s).
You are going to pay $100 into an account at the beginning of each of the next 40 years. At the
beginning of the 41st year, you buy a 30-year annuity whose first payment comes at the end of
the 41st year (the account pays 12%).
28) How much money will be in the account at the end of year 40 (round to the nearest $1,000)?
A) $77,000
B) $86,000
C) $69,000
D) $93,000
Topic: 6.1 Annuities
Keywords: future value of annuity
Principles: Principle 1: Money Has a Time Value
9
Copyright © 2011 Pearson Education, Inc.
29) How much will you receive at the end of the 41st year (i.e., the first annuity payment)?
Round to the nearest $100.
A) $93,000
B) $7,800
C) $11,400
D) $10,700
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
30) A retirement plan guarantees to pay you or your estate a fixed amount for 20 years. At the
8% interest annually over the period you receive benefits. How much will your annual benefits
be, assuming the first payment occurs one year from your retirement date?
A) $682
B) $6,272
C) $2,000
D) $3,194
Topic: 6.1 Annuities
Keywords: present value of annuity
Principles: Principle 1: Money Has a Time Value
31) SellUCars, Inc. offers you a car loan at an annual interest rate of 8% compounded quarterly.
What is the annual percentage yield of the loan?
A) 8.00%
B) 8.24%
C) 8.32%
D) 8.44%
Topic: 6.1 Annuities
Keywords: effective annual rate
Principles: Principle 1: Money Has a Time Value
10