WEB CHAPTER 29—BASIC FINANCIAL TOOLS
171. A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You
could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?
a.
b.
c.
d.
e.
c
172. Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a
year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much
would it cost her to buy the annuity today?
a.
$825,835
b.
$869,300
c.
$915,052
d.
$963,213
e.
$1,011,374
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
173. A salt mine you inherited will pay you $25,000 per year for 25 years, with the first payment being made today. If you
think a fair return on the mine is 7.5%, how much should you ask for it if you decide to sell it?
a.
$284,595
b.
$299,574
c.
$314,553
d.
$330,281
e.
$346,795
174. Geraldine was injured in a car accident, and the insurance company has offered her the choice of $25,000 per year for
15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum
be to leave her as well off financially as with the annuity?
a.
$225,367
b.
$237,229
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
c.
$249,090
d.
$261,545
e.
$274,622
175. What’s the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year
4 if the interest rate is 5%?
a.
$8,509
b.
$8,957
c.
$9,428
d.
$9,924
e.
$10,446
e
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
176. Your aunt wants to retire and has $375,000. She expects to live for another 25 years and to earn 7.5% on her invested
funds. How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?
a.
$28,843.38
b.
$30,361.46
c.
$31,959.43
d.
$33,641.50
e.
$35,323.58
177. You were left $100,000 in a trust fund set up by your grandfather. The fund pays 6.5% interest. You must spend the
money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately.
How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the
account?
a.
$24,736
b.
$26,038
c.
$27,409
d.
$28,779
e.
$30,218
c
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
178. Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year
annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity?
Disregard taxes.
a.
7.12%
b.
7.49%
c.
7.87%
d.
8.26%
e.
8.67%
179. Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made
today. You need money today to open a new restaurant, and your uncle offers to give you $120,000 for the annuity. If you
sell it, what rate of return would your uncle earn on his investment?
a.
6.85%
b.
7.21%
c.
7.59%
d.
7.99%
e.
8.41%
e
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
180. What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of
$1,250?
a.
$77.19
b.
$81.25
c.
$85.31
d.
$89.58
e.
$94.06
181. What is the present value of the following cash flow stream at a rate of 6.25%?
a.
$411.57
b.
$433.23
c.
$456.03
d.
$480.03
e.
$505.30
e
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
182. You sold your motorcycle and accepted a note with the following cash flow stream as your payment. What was the
effective price you received for the car assuming an interest rate of 6.0%?
a.
$5,987
b.
$6,286
c.
$6,600
d.
$6,930
e.
$7,277
a
183. At a rate of 6.5%, what is the future value of the following cash flow stream?
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
a.
$526.01
b.
$553.69
c.
$582.83
d.
$613.51
e.
$645.80
e
184. Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5
years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on
this investment?
a.
6.77%
b.
7.13%
c.
7.50%
d.
7.88%
e.
8.27%
c
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
185. What’s the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?
a.
$1,819
b.
$1,915
c.
$2,016
d.
$2,117
e.
$2,223
c
186. What’s the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?
a.
b.
c.
d.
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
e.
187. What’s the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded
monthly?
a.
$969
b.
$1,020
c.
$1,074
d.
$1,131
e.
$1,187
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
188. American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their
monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card’s EFF%?
a.
18.58%
b.
19.56%
c.
20.54%
d.
21.57%
e.
22.65%
189. Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal
plus interest) must be repaid at the end of the year. Woodburn Bank also offers to lend you the $50,000, but it will charge
an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual
rate charged by Woodburn versus the rate charged by Southwestern?
a.
0.52%
b.
0.44%
c.
0.36%
d.
0.30%
e.
0.24%
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
190. Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make
interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is
the effective annual rate on the loan?
a.
8.24%
b.
8.45%
c.
8.66%
d.
8.88%
e.
9.10%
a
191. Billy Thornton borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The
bank uses a 360-day year. How much interest would Billy have to pay in a 30-day month?
a.
$120.83
b.
$126.88
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
c.
$133.22
d.
$139.88
e.
$146.87
a
Difficulty: Moderate
INTE.GENE.16.204 – LO: 29-1
United States – BUSPROG: Analytic
United States – TN – DISC: Time value of money
United States – OH – Default City – TBA
Simple interest
Bloom’s: Application
TYPE: Multiple Choice: Problem
192. Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.
How much would be in the account after 8 months, assuming each month has 30 days?
a.
b.
c.
d.
e.
a
Difficulty: Moderate
INTE.GENE.16.204 – LO: 29-1
United States – BUSPROG: Analytic
United States – TN – DISC: Time value of money
United States – OH – Default City – TBA
Fractional time periods
Bloom’s: Application
TYPE: Multiple Choice: Problem
193. Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the
next 4 years. How large would your payments be?
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
a.
b.
c.
d.
e.
a
194. Suppose you are buying your first home for $145,000, and you have $15,000 for your down payment. You have
arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate,
with the first payment due in one month. What will your monthly payments be?
a.
$741.57
b.
$780.60
c.
$821.69
d.
$862.77
e.
$905.91
c
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
195. Your cousin will sell you his coffee shop for $250,000, with “seller financing,” at a 6.0% nominal annual rate. The
terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years, and then make an
additional final (balloon) payment of $50,000 at the end of the last month. What would your equal monthly payments be?
a.
b.
c.
d.
e.
e
196. Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the
next 5 years. How much interest would you have to pay in the first year?
a.
b.
c.
d.
e.
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
197. You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal
end-of-year payments. How much interest would you be paying in Year 2?
a.
b.
c.
d.
e.
198. You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded
monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow
to $250,000? Round fractional months up.
a.
23
b.
27
c.
32
d.
38
e.
44
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
199. The store where you bought new home furnishings offers you two alternative payment plans. The first plan requires a
$4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the
end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?
a.
12.31%
b.
12.96%
c.
13.64%
d.
14.36%
e.
15.08%
200. One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of
$1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now
have 14 years to maturity?
a.
b.
c.
d.
e.
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
e
201. Haswell Enterprises’ bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The
going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond’s price?
a.
1,063.09
b.
1,090.35
c.
1,118.31
d.
1,146.27
e.
1,174.93
c
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
202. CMS Corporation’s balance sheet as of today is as follows:
Long-term debt (bonds, at par)
$10,000,000
Preferred stock
2,000,000
Common stock ($10 par)
10,000,000
Retained earnings
4,000,000
Total debt and equity
$26,000,000
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from
today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm’s debt?
a.
$5,276,731
b.
$5,412,032
c.
$5,547,332
d.
$7,706,000
e.
$7,898,650
Difficulty: Moderate
INTE.GENE.16.205 – LO: 29-2
United States – BUSPROG: Analytic
United States – TN – DISC: Stocks and bonds
United States – OH – Default City – TBA
Market value of semiannual bonds
Bloom’s: Application
TYPE: Multiple Choice: Problem
203. Macintosh Lumber believes the following probability distribution exists for its stock. What is the coefficient of
variation on the company’s stock?
WEB CHAPTER 29—BASIC FINANCIAL TOOLS
Probability
Stock’s
State of
of State
Expected
the Economy
Occurring
Return
Boom
0.45
25%
Normal
0.50
15%
Recession
0.05
5%
a.
0.2839
b.
0.3069
c.
0.3299
d.
0.3547
e.
0.3813
Difficulty: Moderate
INTE.GENE.16.206 – LO: 29-3
United States – BUSPROG: Analytic
United States – TN – DISC: Risk and return
United States – OH – Default City – TBA
Coefficient of variation
Bloom’s: Knowledge
TYPE: Multiple Choice: Problem
204. Martin Ortner holds a $200,000 portfolio consisting of the following stocks:
Stock
Investment
Beta
A
$ 50,000
0.95
B
50,000
0.80
C
50,000
1.00
D
50,000
1.20
Total
$200,000
What is the portfolio’s beta?
a.
0.938
b.
0.988