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23) Assume you have a choice between two deposit accounts. Account X has an annual
percentage rate of 12.25 percent but with interest compounded monthly. Account Y has an
annual percentage rate of 12.20 percent with interest compounded continuously. Which account
provides the highest effective annual return?
24) Carlos is the new assistant branch manager of a larger Florida-based bank and the branch
manager has asked him a question to test his knowledge. The question is which rate should the
bank advertise on monthly-compounded loans, the nominal annual percentage rate or the
effective annual percentage rate? Which rate should the bank advertise on quarterly-compounded
savings accounts? Explain. As a consumer, which would you prefer to see and why?
1) In general, with an amortized loan, the payment amount remains constant over the life of the
loan, the principal portion of each payment grows over the life of the loan, and the interest
portion of each payment declines over the life of the loan.
2) In general, with an amortized loan, the payment amount remains constant over the life of the
loan, the principal portion of each payment declines over the life of the loan, and the interest
portion of each payment grows over the life of the loan.
3) In general, with an amortized loan, the payment amount remains constant over the life of the
loan, both the principal portion of and the interest portion declines over the life of the loan.
4) In general, with an amortized loan, the payment amount grows over the life of the loan, the
principal portion of each payment grows over the life of the loan, and the interest portion
declines over the life of the loan.
5) When computing an interest or growth rate, the rate will increase with an increase in future
value, holding present value and the number of periods constant.
6) When computing an interest or growth rate, the rate will decrease with an increase in future
value, holding present value and the number of periods constant.
7) When computing an interest or growth rate, the rate will increase with a decrease in future
value, holding present value and the number of periods constant.
8) When computing the number of deposits needed to accumulate to a future sum, it will take
longer if the interest rate decreases, holding the future value and deposit size constant.
9) When computing the number of deposits needed to accumulate a future sum, it will take
longer if the interest rates are higher, holding the future value and deposit size constant.
10) The time value concept/calculation used in amortizing a loan is ________.
A) future value of a dollar
B) future value of an annuity
C) present value of a dollar
D) present value of an annuity
11) If a United States Savings bond can be purchased for $29.50 and has a maturity value of
$100 at the end of 25 years, what is the annual rate of return on the bond?
A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent
12) If a United States Savings bond can be purchased for $14.60 and has a maturity value at the
end of 25 years of $100, what is the annual rate of return on the bond?
A) 6 percent
B) 7 percent
C) 8 percent
D) 9 percent
13) Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has
priced the cruise at $15,000, and she has 5 years to accumulate this money. How much must
Janice deposit annually in an account paying 10 percent interest in order to have enough money
to send her parents on the cruise?
A) $1,862
B) $2,457
C) $3,000
D) $2,234
14) Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal
annual installments. The actual end-of-year payment is ________.
A) $942
B) $1,125
C) $1,482
D) $2,641
15) Jia borrows $50,000 at 10 percent annually compounded interest to be repaid in four equal
annual installments. The actual end-of-year loan payment is ________.
A) $10,774
B) $12,500
C) $14,340
D) $15,773
16) Nico makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest
rate of 13 percent. The original principal amount was ________.
A) $24,450
B) $15,000
C) $3,100
D) $20,175
17) Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8
percent interest rate. The original principal amount was ________.
A) $31,000
B) $30,000
C) $25,000
D) $20,000
18) Ashley owns stock in a company which has consistently paid a growing dividend over the
last five years. The first year Ashley owned the stock, she received $1.71 per share and in the
fifth year, she received $2.89 per share. What is the growth rate of the dividends over the last
five years?
A) 7 percent
B) 11 percent
C) 12 percent
D) 5 percent
19) Julian was given a gold coin originally purchased for $1 by his great-grandfather 50 years
ago. Today the coin is worth $450. The rate of return realized on the sale of this coin is
approximately equal to ________.
A) 7.5%
B) 13%
C) 9%
D) 18%
20) Alexis owns stock in a company which has consistently paid a growing dividend over the last
10 years. The first year Alexis owned the stock, she received $4.50 per share and in the 10th
year, she received $4.92 per share. What is the growth rate of the dividends over the last 10
years?
A) 15 percent
B) 14.8 percent
C) 12.2 percent
D) 9.3 percent
21) The rate of return earned on an investment of $50,000 today that guarantees an annuity of
$10,489 for six years is approximately ________.
A) 5%
B) 7%
C) 10%
D) 12%
22) What is the rate of return on an investment of $16,278 if the company expects to receive
$3,000 per year for the next 10 years?
A) 18 percent
B) 13 percent
C) 8 percent
D) 3 percent
23) What is the rate of return on an investment of $124,090 if the company expects to receive
$10,000 per year for the next 30 years?
A) 7 percent
B) 4 percent
C) 6 percent
D) 5.5 percent
24) A local brokerage firm is offering a zero-coupon certificate of deposit for $10,000. At
maturity, three years from now, the investor will receive $14,000. What is the rate of return on
this investment?
A) 14 percent
B) 13 percent
C) 12 percent
D) 11 percent
25) A local bank is offering a zero-coupon certificate of deposit for $25,000. At maturity, three
years from now, the investor will receive $32,000. What is the rate of return on this investment?
A) 3 percent
B) 6 percent
C) 9 percent
D) 12 percent
26) A ski chalet at Peak n' Peak now costs $250,000. Inflation is expected to cause this price to
increase at 5 percent per year over the next 10 years before Chris and Julie retire from successful
investment banking careers. How large an equal annual end-of-year deposit must be made into
an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon
retirement?
A) $8,333
B) $13,572
C) $25,005
D) $22,108
27) A beach house in Southern California now costs $350,000. Inflation is expected to cause this
price to increase at 5 percent per year over the next 20 years before Eric and Karinna retire from
successful careers in commercial art. How large an equal annual end-of-year deposit must be
made into an account paying an annual rate of interest of 13 percent in order to buy the beach
house upon retirement?
A) $11,472
B) $4,323
C) $79,977
D) $17,350
28) Xiao Xin is planning to accumulate $40,000 by the end of 5 years by making 5 equal annual
deposits. If she plans to make her first deposit today and can earn an annual compound rate of 9
percent on her investment, how much must each deposit be in order to accumulate the $40,000?
A) $6,132
B) $6,684
C) $23,844
D) $9,434
29) Zheng Sen wishes to accumulate $1 million by the end of 20 years by making equal annual
end-of-year deposits over the next 20 years. If Zheng Sen can earn 10 percent on his investments,
how much must he deposit at the end of each year?
A) $14,900
B) $50,000
C) $117,453
D) $17,460
30) Xiao Li wishes to accumulate $50,000 by the end of 10 years by making equal annual end-
of-year deposits over the next 10 years. If Xiao Li can earn 5 percent on her investments, how
much must she deposit at the end of each year?
A) $3,975
B) $6,475
C) $5,000
D) $4,513
31) Dorothy borrows $10,000 from the bank. For a four-year loan, the bank requires annual end-
of-year payments of $3,223.73. The annual interest rate on the loan is ________.
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent
32) Detta borrows $20,000 from the bank. For a five-year loan, the bank requires annual end-of-
year payments of $4,878.05. The annual interest rate on the loan is ________.
A) 6 percent
B) 7 percent
C) 8 percent
D) 9 percent
33) Thelma is planning for her son's college education to begin five years from today. She
estimates the yearly tuition, books, and living expenses to be $5,000 per year for a four-year
degree, assuming the expenses incur only at the end of the year. How much must Thelma deposit
today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four
years of college?
A) $20,000
B) $13,620
C) $39,520
D) $11,270
34) Otto is planning for his son's college education to begin ten years from today. He estimates
the end-of-the-year tuition, books, and living expenses to be $10,000 per year for a four-year
degree. How much must Otto deposit today, at an interest rate of 12 percent, for his son to be
able to withdraw $10,000 per year for four years of college?
A) $12,880
B) $9,780
C) $40,000
D) $18,950
