Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1)
An annuity is a stream of equal payments.
1)
2)
In an annuity due, payments are made at the end of each period.
2)
3)
In an annuity due, payments are made at the beginning of each period.
3)
4)
In an ordinary annuity, payments are made at the end of each period.
4)
5)
In an ordinary annuity, payments are made at the beginning of each period.
5)
6)
An annuity is a stream of unequal payments.
6)
7)
The actual rate of return on an investment is the internal rate of return.
7)
8)
Subprime loans are provided to borrowers who have excellent credit scores.
8)
9)
Subprime loans are provided to borrowers who have poor credit scores.
9)
10)
Prime mortgages are provided to borrowers with outstanding credit scores.
10)
11)
Subprime mortgages have low risk.
11)
12)
Subprime mortgages have very high risk.
12)
13)
Subprime mortgages are affected by Adjustable Rate Mortgages (ARMs).
13)
14)
Alt A loans are offered to people who are improving their credit rating.
14)
15)
Alt A loans are only offered to people with outstanding credit ratings.
15)
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
16)
Banks calculate the monthly payment on a loan as
16)
A)
as an annuity due with payment made at end of month.
B)
as an annuity due with payment made one month in advance.
C)
as an ordinary annuity with payment made at end of month.
D)
as an ordinary annuity with payment made one month is advance.
17)
Your employer gives you a stock bonus of $1,000 in your company at the beginning of each year.
You plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the
value of your stock be in 20 years?
17)
A)
$86,4421.00
B)
$102,443.60
C)
$117,810.10
D)
$72,035.10
E)
Cannot determine with the information provided.
18)
Your employer gives you a stock bonus of $1,000 in your company at the beginning of each year.
You plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the
value of your stock be in 20 years? This problem would be solved by using the formula for the
18)
A)
future value of a lump sum.
B)
future value of an annuity due.
C)
future value of an ordinary annuity.
D)
present value of a lump sum.
E)
present value of an ordinary annuity.
19)
Your employer gives you a stock bonus of $1,000 in your company at the beginning of each year.
You plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the
value of your gain on the stock be for the 20 years?
19)
A)
$82,443.60
B)
$52,035.00
C)
$97,810.10
D)
none of the above
20)
Your employer gives you a stock bonus of $1,000 in your company at the beginning of each year.
You plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. How much
would your employer give you in stock bonuses during the 20 years?
20)
A)
$20,000
B)
$15,000
C)
$1,000
D)
none of the above
21)
Your employer gives you a stock bonus of $1,000 in your company at the end of each year. You
plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the value
of your gain on the stock be for the 20 years?
21)
A)
$52,035.00
B)
$97,810.10
C)
$82,443.60
D)
none of the above
22)
Your employer gives you a stock bonus of $1,000 in your company at the end of each year. You
plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the value
of your stock be in 20 years? This problem would be solved by using the formula for the
22)
A)
future value of an annuity due.
B)
future value of a lump sum.
C)
present value of an ordinary annuity.
D)
present value of a lump sum.
E)
future value of an ordinary annuity.
23)
Your employer gives you a stock bonus of $1,000 in your company at the end of each year. You
plan to retire in 20 years. The stock has a growth rate of 15 percent per annum. What will the value
of your stock be in 20 years?
23)
A)
$86,421.00
B)
$117,810.10
C)
$72,035.10
D)
$102,443.60
E)
Cannot determine with the information provided.
24)
You have an absolutely brilliant child who is six years old and will be attending a private college in
twelve years. You know that in twelve years a four–year college will cost at least $70,000 per year
(total $280,000), including tuition, books, and room and board. If you can earn 12 percent on a
mutual fund investment during the next twelve years, how much will you have to invest at the
beginning of each year to have enough to send your child to college for four years?
24)
A)
$4,484.33
B)
$10,359.20
C)
$5,022.45
D)
$11,602.30
25)
You have an absolutely brilliant child who is six years old and will be attending a private college in
twelve years. You know that in twelve years a four–year college will cost at least $70,000 per year
(total $280,000), including tuition, books, and room and board. You determine that you can earn 12
percent on a mutual fund investment during the next twelve years, and invest at the beginning of
each year. How much will your total investment be for the twelve–year period?
25)
A)
$139,227
B)
$53,811
C)
$124,310
D)
$60,269
26)
You have an absolutely brilliant child who is six years old and will be attending a private college in
twelve years. You know that in twelve years a four–year college will cost at least $70,000 per year
(total $280,000), including tuition, books, and room and board. If you can earn 12 percent on a
mutual fund investment during the next twelve years, how much will you have to invest at the end
of each year to have enough to send your child to college for four years?
26)
A)
$14,755
B)
$5,022
C)
$11,602
D)
$34,503
27)
You have an absolutely brilliant child who is six years old and will be attending a private college in
twelve years. You know that in twelve years a four–year college will cost at least $70,000 per year
(total $280,000), including tuition, books, and room and board. You determine that you can earn 12
percent on a mutual fund investment during the next twelve years, and invest at the end of each
year. How much will your total investment be for the twelve–year period?
27)
A)
$177,060
B)
$139,227
C)
$414,036
D)
$60,264
28)
Calculate the monthly payment on a $200,000 mortgage if payment is made at the beginning of
each month, and the annual interest rate is 5.5 percent for 30 years.
28)
A)
$11,000.00
B)
$1,135.58
C)
$1,300.25
D)
$1,100.00
29)
Calculate the total payments on a $200,000 mortgage if payment is made at the beginning of each
month, and the annual interest rate is 5.5 percent for 30 years.
29)
A)
$300,160
B)
$548,987
C)
$3,960,000
D)
$408,808
30)
To determine the mortgage payment on a home loan with payments made at the beginning of each
month, you would
30)
A)
determine the present value factor of an ordinary annuity and multiply the factor by the loan
amount to determine the payment.
B)
determine the present value factor of an annuity due and divide the factor into the loan to
determine the payment.
C)
determine the present value factor of an ordinary annuity and divide the factor into the loan
to determine the payment.
D)
determine the present value factor of an annuity due and multiply the factor by the loan
amount to determine the payment.
31)
Calculate the monthly payment on a $200,000 mortgage if payment is made at the beginning of
each month, and the annual interest rate is 4.25 percent for 15 years.
31)
A)
$1,111
B)
$13,714.22
C)
$1,400.25
D)
$1,504.56
32)
Calculate the total payments on a $200,000 mortgage if payment is made at the end of each month,
and the annual interest rate is 4.25 percent for 15 years.
32)
A)
$287,456.36
B)
$270,820.80
C)
$2,469,985.20
D)
$199,980
33)
You have a company that needs a new computer system that will cost $25,000. You put down
$5,000 and finance the remainder at 12 percent, compounded monthly for 2 years. The bank will
automatically deduct the payment from your account at the beginning of each month. What is your
monthly equipment payment?
33)
A)
$2,230
B)
$1,176.83
C)
$941.47
D)
$2,677
34)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. He
believes that he will live to be 87. He will draw the money at the end of each year. How much
money will he need when he retires in order to support his $60,000 annual life style if he will
average 12 percent per year on his retirement account?
34)
A)
$470,588
B)
$439,800
C)
$505,302
D)
$527,059
35)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. He
believes that he will live to be 87. He will draw the money at the beginning of each year. How
much money will he need when he retires in order to support his $60,000 annual life style if he will
average 12 percent per year on his retirement account?
35)
A)
$505,302
B)
$439,800
C)
$527,059
D)
$470,586
36)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. He
believes that he will live to be 87. He will draw the money at the end of each year. How much
interest will he earn during his retirement years if he will average 12 percent per year on his
retirement account?
36)
A)
$994,699
B)
$1,029,414
C)
$1,060,200
D)
$972,941
37)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. He
believes that he will live to be 87. He will draw the money at the beginning of each year. How
much interest will he earn during his retirement years if he will average 12 percent per year on his
retirement account?
37)
A)
$972,941
B)
$1,029,414
C)
$1,060,200
D)
$994,699
38)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. John is
currently 45 years of age. How much does he have to place at the end of each year into a retirement
account earning 15 percent per year in order to have an adequate retirement nest egg at age 62? He
believes that he will live to be 87 and plans to earn 12 percent during retirement. He will draw the
money at the end of each year.
38)
A)
$7,764
B)
$11,077
C)
$9,890
D)
$6,758
39)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. John is
currently 45 years of age. How much does he have to place at the end of each year into a retirement
account earning 15 percent per year in order to have an adequate retirement nest egg at age 62? He
believes that he will live to be 87 and plans to earn 12 percent during retirement. He will draw the
money at the beginning of each year.
39)
A)
$11,077
B)
$9,890
C)
$7,764
D)
$6,758
40)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. John is
currently 45 years of age. How much does he have to place at the beginning of each year into a
retirement account earning 15 percent per year in order to have an adequate retirement nest egg at
age 62? He believes that he will live to be 87 and plans to earn 12 percent during retirement. He
will draw the money at the end of each year.
40)
A)
$9,632
B)
$11,077
C)
$8,600
D)
$6,468
41)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. John is
currently 45 years of age. How much does he have to place at the beginning of each year into a
retirement account earning 15 percent per year in order to have an adequate retirement nest egg at
age 62? He believes that he will live to be 87 and plans to earn 12 percent during retirement. He
will draw the money at the beginning of each year.
41)
A)
$9,632
B)
$9,890
C)
$8,600
D)
$11,077
42)
John Adams plans to retire at the age of 62. He wants an annual income of $60,000 per year. John is
currently 45 years of age. How much does he have to place at the beginning of each year into a
retirement account earning 15 percent per year in order to have an adequate retirement nest egg at
age 62? He believes that he will live to be 87 and plans to earn 12 percent during retirement. He
will draw the money at the end of each year. The solution to this problem requires us to use the
________, and the ________ factors.
42)
A)
present value of an ordinary annuity; future value of an annuity due
B)
future value of an ordinary annuity; future value of an annuity due
C)
future value of an annuity due; present value of an ordinary annuity
D)
present value of a future annuity; future value of an ordinary annuity
43)
An entrepreneur would like to buy a piece of equipment for his business. The equipment cost
$50,000 and will increase cash flow by $20,000 each year for 5 years. What is his IRR?
43)
A)
28.65%
B)
2.50%
C)
25.55%
D)
40.00%
44)
You want to send your grandchild to a prestigious university. You heard that a college education
will cost $500,000 in 18 years. If you invest $10,000 at the end of each year, what IRR will you need
in order to reach your goal of $500,000?
44)
A)
9.07%
B)
12.25%
C)
10.92%
D)
13.35%
45)
An entrepreneur would like to buy a piece of equipment for his business. The equipment cost
$75,000 and will increase cash flow by $12,000 each year for 15 years. What is his IRR?
45)
A)
10.92%
B)
13.65%
C)
12.25%
D)
8.00%
46)
You want to send your grandchild to a very prestigious university. You heard that a college
education will cost $800,000 in 18 years. If you invest $10,000 at the end of each year, what IRR will
you need in order to reach your goal of $800,000?
46)
A)
12.46%
B)
13.65%
C)
18.00%
D)
15.52%
47)
Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the
form of an annuity due. What is the present value of this stream of payments if money can earn 10
percent annual interest?
47)
A)
$246,468
B)
$500,000
C)
$468,246
D)
$864,642
48)
Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the
form of an annuity due. What is the present value of this stream of payments if money can earn 8
percent annual interest?
48)
A)
$579,139
B)
$500,000
C)
$530,180
D)
$479,035
49)
Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the
form of an annuity due. What is the present value of this stream of payments if money can earn 7
percent annual interest?
49)
A)
$566,780
B)
$977,665
C)
$500,000
D)
$779,664
50)
Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the
form of an annuity due. What is the present value of this stream of payments if money can earn 6
percent annual interest?
50)
A)
$500,000
B)
$607,905
C)
$607,004
D)
$900,706
51)
Ira Roth opens up a Roth IRA and places $5,000 in his retirement account at the beginning of each
year for 25 years. He believes the account will earn 9 percent interest per year, compounded
monthly. How much will he have in his retirement account in 25 years?
51)
A)
$355,900.96
B)
$490,000.58
C)
$390,000.58
D)
$490,165.32
52)
Ira Roth opens up a Roth IRA and places $4,500 in his retirement account at the beginning of each
year for 20 years. He believes the account will earn 8 percent interest per year, compounded
quarterly. How much will he have in his retirement account in 20 years?
52)
A)
$187,231.63
B)
$219,228.48
C)
$228,912.40
D)
$266,255.40
53)
Ira Roth opens up a Roth IRA and places $4,000 in his retirement account at the beginning of each
year for 15 years. He believes the account will earn 6 percent interest per year, compounded
monthly. How much will he have in his retirement account in 15 years?
53)
A)
$108,081
B)
$58,145
C)
$100,115.22
D)
$158,029
54)
The city of Metropolis borrows $88,000,000 so that it can build a football stadium. It plans to set up
a sinking fund that will repay the loan 10 years later. Assume a 6 percent interest rate per year.
What will Metropolis have to place in the fund at the beginning of each year in order to pay back
the $88,000,000?
54)
A)
$6,676,380
B)
$536,980
C)
$534,309
D)
$6,298,472
55)
Calculate the monthly mortgage payment made at the beginning of each month on a $100,000
mortgage. It is a 15–year mortgage, and the interest rate is 6.375.
55)
A)
$859.68
B)
$867.14
C)
$864.25
D)
$10,806.73
56)
Calculate the total payments on a $100,000 mortgage. It is a 15–year mortgage, and the interest rate
is 6.375.
56)
A)
$162,101
B)
$154,742
C)
$155,565
D)
$156,085
57)
Calculate the total amount of interest paid on a $100,000 mortgage. It is a 15–year mortgage, and
the interest rate is 6.375.
57)
A)
$56,085
B)
$54,742
C)
$55,565
D)
$62,101
58)
How much will you have in a Roth IRA if you invest $5,000 a year for 35 years, if money earns 6
percent, and you make the investment at the beginning of each year?
58)
A)
$474,181.61
B)
$557,173.89
C)
$451,601.54
D)
$590,604.33
59)
How much will you have in a Roth IRA if you invest $5,000 a year for 35 years, if money earns 5
percent, and you make the investment at the beginning of each year?
59)
A)
$451,601.54
B)
$557,173.89
C)
$590,604.33
D)
$474,181.61
60)
How much will you have in a Roth IRA if you invest $5,000 a year for 35 years, if money earns 6
percent, and you make the investment at the end of each year?
60)
A)
$590,604.33
B)
$557,173.89
C)
$474,181.61
D)
$451,601.54
61)
How much will you have in a Roth IRA if you invest $5,000 a year for 35 years, if money earns 5
percent, and you make the investment at the end of each year?
61)
A)
$451,601.54
B)
$557,173.89
C)
$590,604.33
D)
$474,181.61
62)
A $1,500,000 building generates monthly rents of $20,000 for 10 years. The owners are paying 7
percent interest on the mortgage. What is the present value of the rental payments?
62)
A)
$150,304.64
B)
$305,623.24
C)
$1,732,575
D)
$1,722,527
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
63)
John graduates from college at the age of 25. He places $5,000 in a 401k at the beginning of year one, $8,000 at
the beginning of year two, $11,000 at the beginning of year three, $14,000 at the beginning of year four, and then
$15,000 per year until he retires at the age of 60. If money earns 8 percent per year, how much will John have in
his retirement account at age 60?