2) The present value of a $100 three-year annuity due (first cash flow occurs today) discounted at
a rate of 10% is equal to ________.
A) $248.69
B) $273.55
C) $135.17
D) $300.00
3) Plimpton has an annuity due that pays $800 per year for 11 years. What is the present value of
the cash flows if they are discounted at an annual rate of 7.50%?
A) $5,296.27
B) $5,693.49
C) $6,291.26
D) $8,800.00
4) A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an
________.
A) annuity
B) annuity due
C) perpetuity
D) amortization
5) You dream of endowing a chair in finance at the local university that will provide a salary of
$250,000 per year forever, with the first cash flow to be one year from today. If the university
promises to invest the money at a rate of 4% per year, how much money must you give the
university today to make your dream a reality?
A) $3,000,000
B) $6,250,000
C) $8,857,143
D) This question cannot be answered.
6) Your neighbor owns a perpetuity of $100 per year that has a discount rate of 6% per year. He
offers to sell to you all but the next 20 cash flows (the first to be received one year from today)
for $500. In other words, he keeps the first 20 cash flows of his perpetuity and you get all of the
rest. Is this a good price for you if the appropriate discount rate is 6%?
A) No, because the entire perpetuity is worth only $1,666.67 and your neighbor is taking the best
cash flows worth more than $1,200 in present value terms
B) Yes, because the present value of the remaining cash flows is $519.68 and you are buying
them for only $500.
C) No, because the cash flows you receive are only worth $482.16 and that is less than the $500
your neighbor is asking for the cash flows.
D) This question cannot be answered.
7) Which of the following is NOT a form of perpetuity?
A) A British consol bond
B) Preferred stock that pays the same dividend forever
C) A philanthropic endowment fund that pays the same charitable amount every year forever
D) All are examples of perpetuities.
8) You have just won the Publisher’s Clearinghouse lottery of $50,000 per year for twenty years,
with the first payment today followed by nineteen more start-of-the-year cash flows. At an
interest rate of 4%, what is the present value of your winnings?
A) $1,000,000.00
B) $706,696.97
C) $650,426.60
D) $470,641.18
9) You have just turned 27 and may now spend a portion of the trust fund your parents
established for you. The terms of the trust fund allow you to withdraw 50 beginning-of-the-year
cash flows of $40,000 each. An investment firm has offered to pay you cash for all of the fund
today. If the rate they use to discount the cash flows is 14% per year, what is their offer price
today for your pension fund?
A) $2,605,750,853
B) $2000,000.00
C) $624,915.20
D) $325,249.13
10) You have accumulated $1,200,000 for your retirement. How much money can you withdraw
in equal annual beginning-of-the-year cash flows if you invest the money at a rate of 5% for
thirty years?
A) $74,344.50
B) $60,251.52
C) $58,469.12
D) $39,061.96
11) What is the present value of a lottery paid as an annuity due for twenty years if the cash
flows are $150,000 per year and the appropriate discount rate is 7.50%?
A) $5,000,000.00
B) $3,186,045.39
C) $2,739,769.55
D) $1,643,861.73
12) A wealthy man just died and left his pet dogs the following estate: $20,000 per year for the
next 11 years with the first cash flow today. At a discount rate of 4.2%, what is the doggy estate
worth in today’s dollars?
A) $98,352.84
B) $180,614.80
C) $220,000.00
D) $607,180.14
13) The future value three years from today of a $200 three-year annuity due compounded at a
rate of 10% is equal to ________.
A) $600.00
B) $662.00
C) $728.20
D) $266.20
14) Severson has an annuity due that pays $400 per year for 20 years. What is the value of the
cash flows 20 years from today if they are placed in an account that earns 7.50%? Note: You are
asked to find the FV one year after the last cash flow is realized.
A) $9,000.00
B) $9,675.00
C) $16,846.35
D) $18,621.01
15) Johnson has an annuity due that pays $600 per year for 15 years. (Note: There are 15 annual
cash flows with the first cash flow occurring today.) What is the value of the cash flows 14 years
from today (immediately after the last deposit is made) if they are placed in an account that earns
7.50%?
A) $9,000.00
B) $9,675.00
C) $15,671.02
D) $16,846.35
16) Which is greater, the present value of a $1,000 five-year ordinary annuity discounted at 10%,
or the present value of a $1,000 five-year annuity due discounted at 10%?
A) The ordinary annuity is worth more with a present value of $3,790.79.
B) The annuity due is worth more with a present value of $4,169.87.
C) The ordinary annuity is worth more with a present value of $4,169.87.
D) The annuity due is worth more with a present value of $4,586.85.
17) Ordinary annuity payments occur at the beginning of the period, whereas annuity due
payments occur at the end of the period.
18) Given a positive interest rate and a positive cash flow, an ordinary annuity always has a
greater present value than an annuity due of the same size and number of cash flows.
19) Given a positive interest rate and a positive cash flow, an ordinary annuity always has a
greater future value than an annuity due of the same size and number of cash flows.
20) Given a positive interest rate and a positive cash flow, an annuity due always has a greater
present value than an ordinary annuity of the same size and number of cash flows.
21) A British consol bond can be considered a type of perpetuity.
22) You have decided to endow the insert your name here Chair in Finance at the State
University. How much money must you deposit into the endowment account today if the Chair
pays $125,000 per year forever (first payment one year from today) and is invested at a rate that
pays out 4.50% per year forever?
23) Assume that you are 23 years old and that you place $3,000 year-end deposits each year into
a stock index fund that earns an average of 9.5% per year for the next 17 years. How much
money will be in the account at the end of 17 years? How much money will you have in the
account 15 years later at age 55 if the account continues to earn 9.5% per year but you
discontinue making new contributions? How much money would you have at the end of 17 years
if you had made the same number of deposits but at the beginning of the year instead of at the
end of the year? How much money will you have in the account 15 years later at age 55 if the
account continues to earn 9.5% per year but you discontinued making new contributions?
1) When you pay off the principal and all of the interest at one time at the maturity date of the
loan, we call this type of loan a/an ________.
A) amortized loan
B) interest-only loan
C) discount loan
D) compound loan
2) What type of loan makes interest payments throughout the life of the loan and then pays the
principal and final interest payment at the maturity date?
A) Amortized loan
B) Interest-only loan
C) Discount loan
D) Compound loan
3) What type of loan requires both principal and interest payments as you go by making equal
payments each period?
A) Amortized loan
B) Interest-only loan
C) Discount loan
D) Compound loan
4) If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the total
amount of principal and interest due of $215,892.50 at the end of 10 years, what type of loan did
you have?
A) Amortized loan
B) Interest-only loan
C) Discount loan
D) Compound loan
5) If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the interest
of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end
of 10 years, then you have just repaid what type of loan?
A) Amortized loan
B) Interest-only loan
C) Discount loan
D) Compound loan
6) If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay with 10
equal annual end-of-the-year payments of $14,902.95, then you have just repaid what type of
loan?
A) Amortized loan
B) Interest-only loan
C) Discount loan
D) Compound loan
7) If you borrow $40,000 at an annual interest rate of 11% for seven years, what is the annual
payment (prior to maturity) on an interest-only type of loan?
A) $4,400.00
B) $6,000.00
C) $8,333.33
D) $12,161.29
8) If you borrow $40,000 at an annual interest rate of 11% for seven years, what is the annual
payment (prior to maturity) on a discount loan?
A) $0.00
B) $6,000.00
C) $8,333.33
D) $12,161.29
9) If you borrow $40,000 at an annual interest rate of 11% for seven years, what is the annual
payment (prior to maturity) on a fully amortized loan?
A) $0.00
B) $3,000.00
C) $8,333.33
D) $8,488.61
10) You sign a contract to pay back all of the interest and principal of a loan at the maturity date.
This is an example of an interest-only loan.
11) You sign a contract to pay back all of the interest and principal of a loan at the maturity date.
This is an example of a discount loan.
12) Home mortgage loans are commonly paid off by making equal monthly payments consisting
of both interest and principal. This is an example of an amortized loan.
13) If you borrow $5,000 at an annual interest rate of 9.0% for six years, what will your
repayment(s) be if this is a discount loan?
14) If you borrow $5,000 at an annual interest rate of 9.0% for six years, what will your
repayment(s) be if this is an interest-only loan?
1) Which of the following is NOT true with regard to an amortization table?
A) The interest payment for a period is equal to the periodic interest rate multiplied by the
beginning-of-the-period principal balance.
B) The remaining principal balance at the end of a payment period is equal to the beginning-of–
the-period principal less the total payment.
C) The total payment is calculated by using the present value of an annuity formula.
D) All of the above are true.
2) Assume a five-year equal payment amortization schedule with an annual interest rate of 7%
and annual payments. If the beginning principal is $8,000, then the first interest payment will be
how large?
A) $560.00
B) $960.00
C) $1,219.28
D) There is not enough information to answer this question.
3) Which of the following is NOT true regarding the total payment in an equal payment
amortization table?
A) The total payment for any period is equal to the principal plus interest payments for that same
period.
B) The total payment is calculated using the present value of an annuity formula rearranged to
solve for the payment.
C) The final total payment will be greater than the beginning principal for the final period,
assuming a positive interest rate.
D) All of the above are true.
4) Amortization tables are common and can be used for all but which of the following?
A) Car loans
B) Mortgage loans
C) Consumer product loans
D) Amortization tables may be used for all of the above.