978-0133423822 chapter 6 Part 3

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59) Which of the following statements is true?

A) The future value of an annuity would be greater if funds are invested at the beginning of

each period instead of at the end of each period.

B) An annuity is a series of equal payments that are made, or received, forever.

C) The efective annual rate (APR) of a loan is higher the less frequently payments are

made.

D) The future value of an annuity would be greater if funds are invested at the end of each

period rather than at the beginning of each period.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

60) What is a series of equal payments to be received at the end of each period, for a inite

period of time, called?

A) A perpetuity

B) An annuity due

C) A cash cow

D) A deferred annuity

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

61) What is a series of equal payments to be received at the beginning of each period, for a

inite period of time, called?

A) A perpetuity

B) An annuity due

C) A cash cow

D) A deferred annuity

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

62) One characteristic of an annuity is that an equal sum of money is deposited or

withdrawn each period.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

63) The present value of an annuity increases as the discount rate increases.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

64) We can use the present value of an annuity formula to calculate constant annual loan

payments.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

65) A compound annuity involves depositing or investing a single sum of money and

allowing it to grow for a certain number of years.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

66) When repaying an amortized loan, the interest payments increase over time.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

67) An amortized loan is a loan paid in unequal installments.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

68) A loan amortization schedule provides a breakdown of loan payments into principal and

interest payments.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

69) Holding all other variables constant, payment per period for an annuity due will be

higher than an ordinary annuity.

Question Status: Previous edition

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

70) If you have an opportunity cost of 10%, how much must you invest each year to have

$4,000 accumulated in 10 years?

Question Status: Revised

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

71) You have just received an endowment of $32,976. You plan to put the entire amount in

an account earning 8 percent compounded annually and to withdraw $4000 at the end of

each year. How many years can you continue to make the withdrawals?

Question Status: Revised

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

72) To repay a $2,000 loan from your bank, you promise to make equal payments every six

months for the next ive years totaling $3,116.20. What annual rate of interest will you be

paying?

Question Status: Revised

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

73) You are saving money to buy a house. You will need $7,473.50 to make the down

payment. If you can deposit $500 per month in a savings account which pays 1% per

month, how long will it take you to save the $7,473.50?

Question Status: Revised

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

74) You have a credit card with a balance of $18,000. The annual interest rate on the card

is 18% compounded monthly, and the minimum payment is $400 per month. If you pay only

the minimum payment each month and do not make any new charges on the card, how

many years will it take for you to pay of the $18,000 balance?

Question Status: Revised

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

75) You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments

over a 15-year period. The bank has ofered you a 9% interest rate, compounded monthly.

Create an amortization schedule for the irst two months of the loan.

Question Status: Revised

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

76) You have just purchased a car from Friendly Sam. The selling price of the car is $6,500.

If you pay $500 down, then your monthly payments are $317.22. The annual interest rate is

24%. How many payments must you make?

Question Status: Revised

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

77) a.) If Sparco, Inc. deposits $150 at the end of each year for the next eight years in an

account that pays 5% interest, how much money will Sparco have at the end of eight years?

b.) Suppose Sparco decides that they need to have $5,300 at the end of the eight years.

How much will they have to deposit at the end of each year?

Question Status: Revised

Objective: 6.1 Distinguish between an ordinary annuity and an annuity due and calculate the

present and future values of each.

Keywords: annuities

Principles: Principle 1: Money Has a Time Value

6.2 Perpetuities

1) What is a series of equal payments for an ininite period of time called?

A) A perpetuity

B) An axiom

C) A cash cow

D) An annuity

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

2) You have just purchased a share of preferred stock for $50.00. The preferred stock pays

an annual dividend of $5.50 per share forever. What is the rate of return on your

investment?

A) .055

B) .010

C) .110

D) .220

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

3) The present value of a perpetuity decreases when the ________ decreases.

A) number of investment periods

B) annual discount rate

C) perpetuity payment

D) both B and C

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

4) You are going to pay $800 into an account at the beginning of each of 20 years. The

account will then be left to compound for an additional 20 years. At the end of the 41st year

you will begin receiving a perpetuity from the account. If the account pays 14%, how much

will you receive each year from the perpetuity (round to nearest $1,000)?

A) $140,000

B) $150,000

C) $160,000

D) $170,000

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

5) You are considering the purchase of XYZ Company’s common stock which will pay a

$1.00 per share dividend one year from the date of purchase. The dividend is expected to

grow at the rate of 4% per year. If the appropriate discount rate for this investment is

14%, what is the price of one share of this stock?

A) $7.14

B) $10.00

C) $25.00

D) Cannot be determined without maturity date

Question Status: New question

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

6) Michael Bilkman has an opportunity to buy a perpetuity that pays $24,350 annually. His

required rate of return on this investment is 14.25%. At what price would Michael be

indiferent to buying or not buying the investment? Round of to the nearest $1.

A) $83,470

B) $170,877

C) $95,621

D) $121,709

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

7) A perpetuity will grow at the rate of 5% per year. One year from the date of purchase, it

will pay $50,0000. If the appropriate discount rate is 10%, what is the value of the

perpetuity?

A) $1,000,000

B) $500,000

C) $5,000,000

D) $1,050,000

Question Status: New question

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

8) Your rich great, great aunt just passed away at the age of 91. She liked you more than

she let on and left you in her will. You will receive 100 British bonds that pay interest

forever. The amount of annual interest payments that you will receive is $5,000. If you

could invest your money at 4.25%, how much are these bonds worth today?

A) $64,480

B) $197,250

C) $250,000

D) $117,647

E) $55,000

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

9) A bond paying interest of $120 per year forever is an example of a perpetuity.

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

10) The formula for calculating the present value of a growing perpetuity is PV = Payment

period 1/(i-g)

Question Status: New question

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

11) A perpetuity is an investment that continues forever but pays a diferent dollar amount

each year.

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

12) The present value of a $100 perpetuity discounted at 5% is $1200.

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

13) All else constant, an individual would be indiferent between receiving $2,000 today or

receiving a $200 perpetuity when the discount rate is 10% annually.

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

14) If your opportunity cost is 12%, how much will you pay for a bond that pays $100 per

year forever?

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value

15) What is the present value of the following perpetuities?

a. $600 discounted at 7%

b. $450 discounted at 12%

c. $1,000 discounted at 6%

d. $880 discounted at 9%

Question Status: Previous edition

Objective: 6.2 Calculate the present value of a level perpetuity and a growing perpetuity.

Keywords: perpetuity

Principles: Principle 1: Money Has a Time Value