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73) You borrow $25,000 to buy a car, and agree to make 48 monthly payments of $607.39 to repay the
loan. What annual rate of interest, which is being compounded monthly, are you being charged?
Keywords: Annual Rate of Interest, Annuity, Loan Amortization
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
74) You wish to accumulate $10,000 by depositing $481.46 per month into a savings account that earns
4.75% compounded monthly. How many monthly deposits must you make?
Keywords: Annuity, Future Value, Number of Periods, Monthly Compounding
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
75) Today is your 30th birthday and you must choose between two retirement options. The first option
will provide you with 10 equal annual payments of $100,000 beginning on your 65th birthday. The
second option will provide you with one payment of $1,000,000 on your 70th birthday. If the interest rate
is 6 percent per year and you are assured of living to at least 80 years of age, which option is better?
Keywords: Annuity, Present Value
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
76) A bond will pay $5,000 at maturity in 9 years. It also makes semiannual interest payments of $400
until maturity. If the discount rate is 7% compounded semiannually, what should be the market price of
the bond?
Keywords: Present Value, Annuity, semiannual Compounding, Bond
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
32
77) Frank Zanca is considering three different investments that his broker has offered to him. The
different cash flows are as follows:
End of Year
A
B
C
1
300
400
2
300
3
300
4
300
300
600
5
300
6
300
7
300
8
300
600
Because Frank only has enough savings for one investment, his broker has proposed the third alternative
to be, according to his expertise, “the best in town.” However, Frank questions his broker and wants to
calculate the present value of each investment. Assuming a 15% discount rate, what is Frank’s best
alternative?
Keywords: Present Value, Annuity, Deferred Annuity, Uneven Cash Flow
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
78) Leigh Delight Candy, Inc. is choosing between two bonds in which to invest their cash. One is being
offered from Hershey‘s and will mature in 10 years and pay $30 each quarter. The other alternative is a
Mars’ bond that will mature in 20 years and pay $30 each quarter. What would be the present value of
each bond if the discount rate is 10% compounded quarterly, and each bond pays $1,000 at maturity?
Keywords: Annuity, Quarterly Compounding, Present Value, Bond
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
33
79) In order to send your first child to Law School when the time comes, you want to accumulate $40,000
at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how
much would you have to deposit if:
a. you want to deposit an equal amount at the end of each year?
b. you want to deposit one large lump sum today?
Keywords: Annuity, Present Value, Single Sum
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
80) Cindy wants $2.5 million for her retirement at age 65. Cindy is 25 years old today and plans to deposit
equal amounts each year starting on her 26th birthday and ending on her 65th birthday. If her
investments earn 6% per year, how much must each deposit be?
Keywords: Time Value of Money, Payment, Future Value of an Annuity
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
81) A retirement home in Florida costs $200,000 today. Housing prices in Florida are increasing at a rate
of 4% per year. Joe wants to buy the home in 8 years when he retires. Joe has $25,000 right now in a
savings account paying 8% interest per year. Joe wants to make eight equal annual deposits into the
savings account starting today. How much must each deposit be so Joe will have enough money in his
savings account to buy the retirement home when he retires?
Keywords: Time Value of Money, Annuity, Annuity Due, Payment
Learning Obj.: L.O. 5.2
AACSB: Analytical Thinking
Learning Objective 5.3
1) A return of 12% compounded annually is the same as a return of 1% per month.
Keywords: Time Value of Money, Compounding Periods
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
34
2) The price of a computer today is $400 and inflation is 5% per year. Therefore, in two years the price of
the computer is expected to be $440.
Keywords: Time Value of Money, Compounding, Inflation
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
3) If we invest money for 10 years at 8 percent interest, compounded semiannually, we are really
investing money for 20 six-month periods, and receiving 4 percent interest each period.
Keywords: Compounding Periods, Time Value of Money
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
4) For a given stated interest rate, an investor would receive a greater future value with daily
compounding as opposed to monthly compounding.
Keywords: Future Value, Compounding Periods
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
5) A certificate of deposit that pays 9.8% compounded monthly is better than a similar certificate of
deposit that pays 10% compounded only once per year.
Keywords: APY, Effective Annual Rate
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
6) It is never appropriate to compare nominal rates unless they include the same number of
compounding periods per year.
Keywords: Nominal Interest Rates, Compounding, Effective Annual Rate
Learning Obj.: L.O. 5.3
AACSB: Reflective Thinking
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7) Which of the following investments has the highest effective annual return (EAR)? (Assume that all
CDs are of equal risk.)
A) a bank CD that pays 7.00 percent interest compounded daily
B) a bank CD that pays 7.10 percent compounded monthly
C) a bank CD that pays 7.30 percent annually
D) a bank CD that pays 7.25 percent compounded semiannually
Keywords: Effective Annual Rate, Interest Rate
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
8) One bank offers you 4% interest compounded semiannually. What would the equivalent rate be if
interest were compounded quarterly?
A) 3.98%
B) 3.96%
C) 3.92%
D) 1.00%
Keywords: Semiannual Compounding, Quarterly Compounding, Effective Annual Rate
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
9) A financial analyst tells you that investing in stocks will allow you to double your money in 7 years.
What annual rate of return is the analyst assuming you can earn?
A) 8.76%
B) 9.87%
C) 10.01%
D) 10.41%
Keywords: Rate of Return, Compound Interest
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
10) You believe in the power of compounding and decide to save $1 per day by avoiding the purchase of
a soda. You deposit the $1 at the end of each day in a bank account that pays 8% interest compounded
daily. You are going to take a trip in 20 years with the money you have accumulated. How much money
will you have in 20 years, assuming 365 days per year?
A) $7,500
B) $12,438
C) $18,032
D) $22,456
Keywords: Annuity, Future Value, Compounding Periods
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
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11) Today is your 20th birthday and your bank account balance is $25,000. Your account is earning 6.5%
interest compounded semiannually. How much will be in the account on your 50th birthday?
A) $159,795
B) $162,183
C) $163,823
D) $170,351
Keywords: Future Value, Semiannual Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
12) Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5%
interest compounded quarterly. How much will be in the account on your 50th birthday?
A) $159,795
B) $162,183
C) $163,832
D) $164,631
Keywords: Future Value, Monthly Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
13) Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5%
interest compounded monthly. How much will be in the account on your 50th birthday?
A) $159,795
B) $162,183
C) $163,823
D) $164,631
Keywords: Future Value, Monthly Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
14) Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5%
interest compounded daily. How much will be in the account on your 50th birthday?
A) $159,795
B) $162,183
C) $163,823
D) $164,631
Keywords: Future Value, Monthly Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
37
15) At 6 percent compounded monthly, how long will it take to triple your money?
A) 221 months
B) 175 months
C) 102 months
D) 48 months
Keywords: Future Value, Monthly Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
16) If you invest $750 every six months at 8 percent compounded semiannually, how much would you
accumulate at the end of 10 years?
A) $10,065
B) $10,193
C) $22,334
D) $21,731
Keywords: Annuity, Semiannual Compounding, Future Value
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
17) You are currently earning 12% compounded semiannually. Your investment company is switching all
accounts to daily compounding. What rate will give you the same effective annual rate of return as you
are receiving now?
A) 10.83%
B) 10.97%
C) 11.66%
D) 11.89%
Keywords: Compounding Periods, Effective Annual Rate
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
18) What is the future value of $500 invested at 8.94% compounded quarterly for 12.5 years (rounded to
nearest $1)?
A) $670
B) $1,510
C) $1,617
D) $46,739
Keywords: Future Value, Quarterly Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
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19) If you put $2,000 in a savings account that yields 8% compounded semiannually, how much money
will you have in the account in 20 years (rounded to nearest $10)?
A) $6,789
B) $8,342
C) $9,602
D) $9,972
Keywords: Future Value, Semiannual Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
20) If you put $10,000 in an investment that returns 11 percent compounded monthly what would you
have after 10 years (rounded to nearest $1)?
A) $29,892
B) $27,559
C) $25,486
D) $22,489
Keywords: Future Value, Monthly Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
21) If you want to have $5,000 in 10 years, how much money must you put in a savings account today?
(Assume that the savings account pays 4% and it is compounded daily; round to the nearest $1).
A) $3,352
B) $3,370
C) $4,102
D) $4,207
Keywords: Present Value, Daily Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking
22) You want $20,000 in 5 years to take your spouse on a second honeymoon. Your investment account
earns 7% compounded semiannually. How much money must you put in the investment account today?
(Round to the nearest $1.)
A) $14,178
B) $12,367
C) $15,985
D) $13,349
Keywords: Present Value, Semiannual Compounding
Learning Obj.: L.O. 5.3
AACSB: Analytical Thinking