Unit 3 - Review Questions

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York University *

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3530

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Finance

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Feb 20, 2024

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ADMS 3530 – Unit 3: Review Questions 1. How much can be accumulated for retirement if $2,000 is deposited annually beginning today, and the account earns 9% interest compounded annually for 40 years? A) $87,200.00 B) $675.764.89 C) $736,583.73 D) $802,876.27 E) $890,257.35 2. An investment of 1,000,000$ is expected to generate perpetual cash flows that will start at 60,000$ at the end of year 1; and grow at a constant rate forever. What is the growth rate if you expect to earn an annual rate of return of 8%? A) 0% B) 1% C) 2% D) 6% E) 8% 3. You’ve won a contest where the stated prize money is $5million. However, you will receive your winnings as annual payments of $250,000 over 20 years with the 1st. payment beginning today. If the rate of interest is 7% how much should you be willing to accept as a lump sum payment today? A) $2,212,652 B) $2,648,504 C) $2,833,899 D) $2,950,567 E) $2,995,359 4. You are given the three following options when it comes to borrowing money I – pay 6% APR with interest compounded weekly. II – pay 6.25% APR with quarterly compounding. III – pay 6.5% APR compounded annually. All else being the same, which option would you choose? A) Option I B) Option II C) Option III 1

ADMS 3530 – D) The depositor would be indifferent between the 3 options E) The time period must be known in order to select the preferred option 5. You borrow $8,000 to buy a used car and agrees to make weekly payments of $75 for 3 years, beginning one week from today. What is the EAR of this loan? A) 21.73% B) 23.55% C) 27.43% D) 30.97% E) 34.65% 6. Alice wants to save for her retirement by starting a monthly a savings plan. She expects to make monthly deposits, starting a month from today, for 30 years. One year after making her final deposit, she will withdraw $80,000 annually for 25 years. How much should she deposit monthly to achieve her retirement objective? We assume that her account will earn 9% compounded monthly. A) $289.85 B) $349.67 C) $416.32 D) $434.98 E) $459.83 7. You purchase a condo that requires a $300,000 mortgage amortized over 25 years. You secure a rate of 4.95% compounded semi-annually and agree to make monthly mortgage payments, starting one month from today. What is your monthly payment? A) $1,736.27 B) $12,647.34 C) $1,745.04 D) $1,952.45 E) $1,857.25 8. You acquire a $450,000 cottage with a 10% down payment and finance the rest with a 30-year mortgage at 5.20% (APR compounded semi-annually). What will the remaining principal be on the mortgage after 5 years if you’re making monthly payments? A) $272,400 B) $310,450 C) $372,662 2

ADMS 3530 – D) $372,947 E) $414,068 9. You are to receive $10,000 annually starting in one year. Thereafter the payment will grow by 9% each year forever. If the discount rate is 9.762% per year compounded semi-annually, what is the present value of this cash flow? A) $9,090.90 B) $100,000 C) $1,000,000 D) $10,000,000 E) $11,111.11 10. On Jan 1 st of 2024 you borrowed $300 and will be charged a rate of 1.25% per month. Therefore the loan’s APR is ______, its EAR is _______ and you would owe a total of _______ on Dec 31 st 2024. A) 16.08%; 15.00%; $348.23 B) 15.00%; 14.55%; $345.00 C) 14.55%; 15.00%; $345.00 D) 15.00%; 16.08%; $348.23 E) 15.00%; 14.55%; $348.23 11. Today your retirement fund has a balance of $70,000. You want to retire in 30 years with $1,000,000. You can add $8,000 annually at the end of each year until retirement. What EAR do you need to earn in order to reach your goal? A) 5.84% B) 8.53% C) 10.25% D) 12.47% E) 14.68% 12. You plan to save for your retirement from age 25 to age 65 and you expect to live till the age of 100. You would like to finance a retirement income of $60,000 per year (at the beginning of the year), from age 65 to 100. You believe you can earn 3% each year on your savings. How much should you have accumulated in your retirement account at the start of the year you turn 65, if you want the retirement income to increase at a rate of 2% per year to keep up with inflation. A) $1,829,653 B) $2,000,000 3

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ADMS 3530 – C) $1,735,635 D) $1,787,704 E) $1,352,475 13. If the period rate of interest increases, which of the following statements is false (all else being the same)? A) The present value of an annuity due will decrease. B) The future value of a constant growth rate annuity will increase. C) The monthly payment of an existing car loan will increase. D) The present value of a stream of uneven cash flows will decrease. E) The present value of a growing perpetuity due will decrease. 14. Which of the following statements is true? A) All else being the same, the present value of an annuity due is greater than that of an ordinary annuity. B) The EAR of monthly compounding bank account is always greater than the EAR of semi-annual compounding account. C) It is always cheaper to borrow at a lower APR with monthly compounding than a higher APR with quarterly compounding. D) The real rate of interest can never be negative. E) Simple interest essentially means earning interest on interest. 15. If we assume that the nominal rate of interest is greater than the real rate of interest, we can generally assume that: A) there is deflation in the economy. B) an average a basket of goods will cost more in the future than it does today. C) if your nominal wages remain the same your purchasing power will increase over time. D) borrowing costs will deter investors from purchasing real-estate. E) investors will expect lower nominal rates of return to compensate them for the higher inflation. 4