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CFIN4
Chapter 4 – Time Value of Money
76. You have just borrowed $20,000 to buy a new car. The loan agreement calls for 60 monthly payments of $444.89 ea
to begin one month from today. If the interest is compounded monthly, then what is the effective annual rate on this
loan?
a. 12.68%
b. 14.12%
c. 12.00%
d. 13.25%
e. 15.08%
CFIN4
Chapter 4 – Time Value of Money
77. Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually. Bank B offers a 2-
year CD that is compounded semi-annually. The CDs have identical risk. What is the stated, or simple, rate that
Bank B would have to offer to make you indifferent between the two investments?
a. 9.67%
b. 9.76%
c. 9.83%
d. 9.87%
e. 9.93%
CFIN4
Chapter 4 – Time Value of Money
78. Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm,
and her boss is selling some securities which call for four payments, $50 at the end of each of the next 3 years, plus
a payment of $1,050 at the end of Year 4. Your friend says she can get you some of these securities at a cost of
$900 each. Your money is now invested in a bank that pays an 8 percent simple (quoted) interest rate, but with
quarterly compounding. You regard the securities as being just as safe, and as liquid, as your bank deposit, so your
required effective annual rate of return on the securities is the same as that on your bank deposit. You must
calculate the value of the securities to decide whether they are a good investment. What is their present value to
you?
a. $1,000
b. $866
c. $1,050
d. $901
e. $893
CFIN4
Chapter 4 – Time Value of Money
79. Your company is planning to borrow $1,000,000 on a 5-year, 15 percent, annual payment, fully amortized term loan.
What fraction of the payment made at the end of the second year will represent repayment of principal?
a. 29.83%
b. 57.18%
c. 35.02%
d. 64.45%
e. 72.36%
CFIN4
Chapter 4 – Time Value of Money
80. The Desai Company just borrowed $1,000,000 for 3 years at a quoted rate of 8 percent, quarterly compounding. The
loan is to be amortized in end-of-quarter payments over its 3-year life. How much interest (in dollars) will your
company have to pay during the second quarter?
a. $15,675.19
b. $18,508.81
c. $21,205.33
d. $24,678.89
e. $28,111.66
CFIN4
Chapter 4 – Time Value of Money
81. You have a 30-year mortgage with a simple annual interest rate of 8.5 percent. The monthly payment is $1,000.
What percentage of your total payments over the first three years goes toward the repayment of principal?
a. 1.50%
b. 3.42%
c. 5.23%
d. 6.75%
e. 8.94%
82. Your company must make payments of $100,000 each year for 10 years, with the first payment to be made 10 years
from today. To prepare for these payments, your company must make 10 equal annual deposits into an account whic
pays a simple interest rate of 7 percent, daily compounding (360-day year). Funds will remain in the account during
both the accumulation period (the first 10 years) and the distribution period (the last 10 years), and the same interest
rate will be earned throughout the entire 20 years. The first deposit will be made immediately. How large must each
deposit be?
a. $47,821.11
b. $49,661.86
c. $51,234.67
d. $52,497.33
e. $53,262.39
CFIN4
Chapter 4 – Time Value of Money
83. Your lease calls for payments of $500 at the end of each month for the next 12 months. Now your landlord offers yo
new 1-year lease which calls for zero rent for 3 months, then rental payments of $700 at the end of each month for t
next 9 months. You keep your money in a bank time deposit that pays a simple annual rate of 5 percent. By what am
would your net worth change if you accept the new lease? (Hint: Your return per month is 5%/12 = 0.4166667%.)
a. −$509.81
b. −$253.62
c. +$125.30
d. +$253.62
e. +$509.81
CFIN4
Chapter 4 – Time Value of Money
84. You plan to invest $2,500 in a money market account which will pay an annual stated (simple) interest rate of 8.75
percent, but which compounds interest on a weekly basis. If you leave this money on deposit for one year (52
weeks), what will be your ending balance when you close the account?
a. $2,583.28
b. $2,611.72
c. $2,681.00
d. $2,703.46
e. $2,728.50
CFIN4
Chapter 4 – Time Value of Money
85. You have just purchased a life insurance policy that requires you to make 40 semiannual payments of $350 each,
where the first payment is due in 6 months. The insurance company has guaranteed that these payments will be
invested to earn you an effective annual rate of 8.16 percent, although interest is to be compounded semiannually. At
the end of 20 years (40 payments), the policy will mature. The insurance company will pay out the proceeds of this
policy to you in 10 equal annual payments, with the first payment to be made one year after the policy matures. If
the effective interest rate remains at 8.16 percent, how much will you receive during each of the 10 years?
a. $6,113.20
b. $5,244.62
c. $5,792.21
d. $4,992.39
e. $4,723.81
86. Assume that you just had a child, and you are now planning for her college education. You would like to make 43
equal payments over the next 21 years (the first payment to be made immediately, all other payments to be made at
6-month intervals, with the final payment to be made at her 21st birthday) so that you will be able to cover her
expected expenses while in school. You expect to pay expenses on her 18th, 19th, 20th, and 21st birthdays. Assume
that the current (time period 0) annual cost of college is $6,000, that you expect annual inflation to be 8 percent for the
next 5 years, and then 5 percent thereafter. If you expect to be able to earn a return of 4 percent every 6 months on
your investments (a simple rate of 8 percent with semiannual compounding), what will be the amount of each of the
43 payments?
a. $705.86
b. $731.93
c. $692.15
d. $650.46
e. $785.72
