BUS 350 Principles of finace chapter 5 smartbook

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Excelsior University *

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350

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Finance

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Jan 9, 2024

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True or false: Time has a greater impact on a future value than the interest rate. True Reason: Time is the exponential factor and thus time has a greater impact on the future value than the interest rate. $250 × 1.036 Reason: The deposit was made one year ago and the FV is 5 years from now, thus, the exponent is 6. Stu deposited $400 in an account three years ago. Last year, he deposited $250 and plans to deposit $300 next year. The rate is 3 percent. Which one of these correctly states a portion of the formula needed to compute the future value five years from today? Multiple choice question. $400 × 1.037 $400 × 1.035 $300 / 1.034 $250 × 1.036 An ordinary annuity is a stream of equal cash flows paid at the edn of every time period. How is an ordinary annuity defined? Multiple choice question. An ordinary annuity is a series of equal cash flows that occur at random times. An ordinary annuity is a stream of equal cash flows paid at the end of every time period. An ordinary annuity is a stream of unequal cash flows which occur at the end of every time period. An ordinary annuity is a series of level and equal cash flows paid at the beginning of every time period.

[(1.07)20 - 1]/0.07 You want to compute the future value of a 20-year ordinary annuity that pays 7 percent interest. Which one of these correctly represents the annuity compounding factor that should be used in the FVAN equation? Multiple choice question. (1.07)20/0.07 (1.07)20 [(1.07)20 - 1]/0.07 [(1.07) - 1]/0.07 Year 7 will have three cash flows in the amounts of -$200, -$100, and -$100. You have decided to invest for 20 years. You start with $200 a year and plan to increase that amount every three years by an additional $100 a year with the first increase occurring in Year 4. You create a multiple annuity future value time line. What cash flows will appear at Year 7 on the annuity time line? Multiple choice question. Year 7 will have one cash outflow of -$100. Year 7 will have two cash flows in the amounts of -$200 and -$100. Year 7 will have one cash outflow of -$400. Year 7 will have three cash flows in the amounts of -$200, -$100, and -$100. The greater the number of time periods, the higher the future value, all else held constant. Which one of these correctly summarizes the future value formula? Assume the interest rate is positive. Multiple choice question. The greater the number of time periods, the higher the future value, all else held constant. The higher the interest rate, the lower the future value, all else held constant. The higher the present value, the lower the future value, all else held constant. The lower the interest rate, the greater the future value, all else held constant.

FV2 = ($500 × 1.042) + ($300 × 1.04) + $800 Two years ago, Margo deposited $500 into a savings account. One year ago, she deposited an additional $300, and today she deposited $800. Which one of these is the correct formula for computing the value of these deposits today at a rate of 4 percent? Multiple choice question. FV2 = ($500 × 1.043) + ($300 × 1.042) + ($800 × 1.04) FV2 = ($500 × 1.042) + ($300 × 1.04) + $800 PV2 = ($500/1.042) + ($300/1.04) + $800 FV2 = ($500 × 1.04) + $300 + $800/1.04 Car payments of $240 a month for four years with the first payment due one month after the loan is obtained Which one of these sets of cash flows fits the description of an ordinary annuity? Multiple choice question. Rent on an apartment with the first payment due on the date you move in and subsequent payments due every month thereafter Commission earnings that are paid monthly but vary in amount Credit card payments that are paid monthly and equal the amount spent each month Car payments of $240 a month for four years with the first payment due one month after the loan is obtained

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False Reason: An outflow will appear as a negative value. True or false: A cash outflow three years from now will appear as a positive value at Year 3 on a present value time line. Assume today is Time 0. FV5 = $4,000 × [(1.045 -1)/0.04] Chris plans on saving $4,000 a year at 4 percent interest for five years. Which one of these is the correct formula for computing the future value at Year 5 of these savings? Assume the payments occur at the end of each year. Multiple choice question. FV5 = $4,000 × [(1.045 -1)/.04] × (1.04) FV5 = $4,000 × 1.045 FV5 = $4,000 × [(1.045 -1)/0.04] FV5 = $4,000 × [(1.04 - 1)5/0.04] The time line will have a -$500 cash flow for Years 1 - 10 and an additional -$200 cash flow for Years 6 - 10. You have decided to save $500 a year for the next five years and then increase that amount to $700 a year for the following five years. Which one of these correctly reflects a multiple annuity time line for the future value of your savings?

Multiple choice question. The time line will have a +$500 cash flow for Years 1 - 10 and an additional +$200 cash flow for Years 6 - 10. The time line will have a -$700 cash flow for Years 1 - 5 and a -$500 cash flow for Years 6-10. The time line will have a -$500 cash flow for Years 1 - 10 and an additional -$200 cash flow for Years 6 - 10. The time line will have a +$500 cash flow for Years 1 - 5 and a +$700 cash flow for Years 6 - 10. The higher the interest rate, the lower the present value, all else held constant. Reason: The more interest earned, the lower the amount needed today to obtain the same future values. Which one of these statements is correct regarding the present value of multiple cash flows formula? Assume a positive interest rate. Multiple choice question. The greater the future values, the lower the present value, all else held constant. The greater the number of future values, the lower the present value, all else held constant. The higher the interest rate, the lower the present value, all else held constant. The lower the interest rate, the lower the present value, all else held constant. PV = $800/1.05 + $400/1.053 + $500/1.054 You expect to receive $800 next year, $400 three years from now, and $500 four years from now. Which one of these formulas will correctly compute the present value as of today at 5 percent interest? Multiple choice question. PV = $800/1.05 + $400/1.054 + $500/1.055

PV = $800/1.05 + $400/1.053 + $500/1.054 PV = $800 + $400/1.052 + $500/1.053 PV = $800/1.05 + $400/1.052 + $500/1.053 +$900 receive. You expect to receive the following annual cash flows starting at Year 1: $800, $500, $900, and $600. To develop a time line, what will the cash flow for Year 3 be? Multiple choice question. -$600 +$600 +$900 -$900 $400 × {[1 - (1/1.0525)]/0.05} An investment will pay $400 a year for 25 years. What is the correct formula to compute the present value of these payments at a rate of 5 percent? Multiple choice question. $400 × {[1 - (1/1.0525)]/0.05} $400/[(1.0525)/0.05] $400 × [(1.0525 - 1)/0.05] $400/1.0525

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N = 60; I = 6/12; PMT = -200; FV = 0; CPT PV Justine pays $200 a month for five years at 6 percent interest. Which of these is the correct input for determining the amount borrowed? Multiple choice question. N = 60; I = 6/12; PMT = -200; FV = 0; CPT PV N = 12; I = 6/12; PV = 0; PMT = -200; CPT FV N = 60; I = 6/12; PV = -200; FV = 0; CPT PMT N = 5; I = 6; PMT = -2,400; FV = 0, CPT PV True or false: The lower the interest rate, the lower the present value of a set of multiple future cash flows, all else held constant. False Reason: The lower the interest rate, the higher the present value. If you earn less interest, you need more money today to obtain the same future values. $5,054.84 Reason: PVA5=$1,200*{[1-(1/1.065)]=$5,054.84 You just incurred a loan with annual payments of $1,200 at 6 percent for five years. How much did you borrow? (Do not round intermediate calculations.) Multiple choice question. $4,768.71 $5,358.13

$5,054.84 $4,982.07 PV = $800 + $500/1.06 + $500/1.062+ $500/1.063 You just won a prize that will pay you $800 today and $500 a year for the next three years. Which is the correct formula for computing the present value as of today at 6 percent? Multiple choice question. PV = $800 + $500/1.062 + $500/1.063 + $500/1.064 PV = $800/1.06 + $500/1.062 + $500/1.063 + $500/1.064 PV = $800 + $500/1.06 + $500/1.062+ $500/1.063 PV = $800(1.06) + $500 + $500/1.06 + $500/1.062 [1 - (1/1.0812)]/0.08 An annuity pays a rate of 8 percent and has a life of 12 years. Which of these is the correct annuity discount factor for computing a present value of this annuity? Multiple choice question. [1 - (1/1.0812)]/0.08 (1/1.0812)/0.08 (1.0812 - 1)/0.08 1.0812/0.08

Year 1 has two cash flows in the amounts of -$900 and $100. Lester's rented some equipment at a cost of $800 for Years 1 through 3 and $900 for Years 4 and 5. Which of these correctly depicts a portion of the present value of multiple annuities time line? Multiple choice question. Year 1 has one cash flow in the amount of $800. Year 3 has one cash flow in the amount of -$800. Year 4 has two cash flows in the amounts of $800 and $100. Year 1 has two cash flows in the amounts of -$900 and $100. N = 12; I = 8/4; PV = 25,000; FV = 0; CPT PMT Reason: Since payments are quarterly and there are four quarters per year, the interest rate should be divided by four. Art's Market borrows $25,000 for three years at 8 percent. Payments are quarterly. Which of these inputs correctly computes the payment amount? Multiple choice question. N = 12; I = 8/4; PV = 0; FV = 25,000; CPT PMT N = 12; I = 8/3; PV = 25,000; FV = 0; CPT PMT N = 12; I = 8/4; PV = 25,000; FV = 0; CPT PMT N = 4; I = 8/4; PV = 25,000; FV = 0; CPT PMT $1,500 × {[1 - (1/1.064)]/0.06} - $500 × {[1 - (1/1.062)]/0.06} You expect to receive annual gifts of $1,000 at the end of Years 1 and 2 and $1,500 at the end of Years 3 and 4. Which of these is the correct present value of multiple annuities formula if the rate is 6 percent? Multiple choice question.

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$1,000 × {[1 - (1/1.062)]/0.06} + $500 × {[1 - (1/1.064)]/0.06} $1,500 × {[1 - (1/1.064)]/0.06} - $500 × {[1 - (1/1.062)]/0.06} $1,500 × {[1 - (1/1.062)]/0.06 + $1,000 × {[1 - (1/1.062)]/0.06} $1,000 × {[1 - (1/1.064)]/0.06} + $500 ×{[1 - (1/1.062)]/0.06} A perpetuity is an unending stream of equal payments occurring at equal intervals of time. What is a perpetuity? Multiple choice question. A perpetuity is an annuity with a life less than 10 years. A perpetuity is an unending stream of equal payments occurring at equal intervals of time. A perpetuity is a type of annuity that has payments which occur at the beginning of a set number of time periods. A perpetuity is a stream of unequal payments that are received forever. $207,504 Reason: PVA5=$1,2000*{[1-(1/1.065)^30]/.04=$207,504 You just bought a home with annual payments of $12,000 at 4% for 30 years. How much did you borrow? (Do not round intermediate calculations. Round your final answer to nearest dollar amount.) Multiple choice question. $360,000 $74,400 $254,128 $207,504

Preferred stock which pays a $60 annual dividend Which one of these illustrates a perpetuity? Multiple choice question. Investment that pays $1,000 a month for five years 20-year bond that pays $50 every six months An investment that pays $100 the first year and increases that amount by $5 each year for the next seven years Preferred stock which pays a $60 annual dividend An annuity due is a stream of equal payments paid at the beginning of each equal time interval for a set number of time periods. Which one of these best defines an annuity due? Multiple choice question. An annuity due is a stream of unending, equal payments that are paid at equal intervals of time. An annuity due is a stream of equal payments paid at the beginning of each equal time interval for a set number of time periods. An annuity due is a stream of equal payments with each payment occurring at the end of a set number of equal time intervals. An annuity due is a set of unending payments that are paid over equal intervals of time. Year 10 has one cash inflow in the amount of $400. You expect to receive $600 in Years 1 through 5, $700 in Years 6 through 8, and $400 in Years 9 and 10. What cash flow(s) will appear on a present value of multiple annuities time line for Year 10? Multiple choice question. Year 10 has three cash flows in the amounts of $600, $100, and -$300. Year 10 has one cash inflow in the amount of $400. Year 10 has three cash flows in the amounts of $600, $100, and $300. Year 10 has three cash flows in the amounts of $700, -$100, and -$300.

$350 × {[1 - (1/1.094)]/0.09} + $50 × {[1 - (1/1.092)]/0.09} Reason: This formula will not provide the correct answer. You should discount payments of $350 for four years and payments of $50 for two years. Les sold some equipment and will receive annual payments of $400 for two years and $350 for the following two years. Which is the correct present value of multiple annuities formula given a rate of 9 percent? Multiple choice question. $350 × {[1 - (1/1.094)]/0.09} + $50 × {[1 - (1/1.092)]/0.09} $400 × {[1 - (1/1.094)]/0.09} - $50 × {[1 - (1/1.092)]/0.09 $350/1.094 + $50/1.092 $350 × {[1 - (1/1.094)]/0.09} - $50 × {[1 - (1/1.092)]/0.09} An annuity has a fixed number of cash flows while a perpetuity has unending cash flows. What is the difference between an annuity and a perpetuity? Multiple choice question. An annuity has a fixed number of cash flows while a perpetuity has unending cash flows. A perpetuity is an annuity with a set number of cash flows. A perpetuity is an annuity with payments that increase as time progresses. A perpetuity is an annuity with steadily decreasing cash flows. Multiply the ordinary annuity present value by (1 + i) How do you convert an ordinary annuity present value formula to an annuity due present value formula?

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Multiple choice question. Subtract (1 + i) from the ordinary annuity present value Divide the ordinary annuity present value by (1 + i) Multiply the ordinary annuity present value by (1 + i) Add (1 + i) to the ordinary annuity present value Payments of $50 a quarter from now until forever Which one of these illustrates a perpetuity? Multiple choice question. Payments of $100 a year for the next 100 years Payments that never end but vary in amount from year to year Payments of $50 a quarter from now until forever Payments of $25 a year for the next 16 years A prize pays $1,000 a year for ten years, starting today. Which one of these payment streams fits the definition of an annuity due? Multiple choice question. A prize pays $1,000 a year for ten years, starting today. A preferred stock pays a $2 quarterly dividend. A 4-year car loan requires the last monthly payment be paid at the end of Year 4. A 20-year bond pays semiannual interest with the first payment occurring six months after issuance.

12 times Reason: There are 12 months in a year, so compounding occurs 12 times. How many times per year is interest compounded on a debt that requires monthly payments? Multiple choice question. 2 times 1 time 12 times 4 times FVAN due = FVAN × (1 + i) Which one of these correctly converts an ordinary future value annuity formula into an annuity due future value formula? Multiple choice question. FVAN due = FVAN × (1 + i) FVAN due = FVAN/(1 + i) FVAN due = FVAN + (1 + i) FVAN = FVAN due × (1 + i)

The APR is equal to one percent per month multiplied by 12 months per year. A credit card charges an interest rate of one percent per month. Define the annual percentage rate (APR) for this debt. Multiple choice question. The APR is one percent. The APR is equal to one percent per month multiplied by 12 months per year. The APR is equal to (1 + 0.01)12 - 1. The APR is equal to one percent raised to the 12th power. An effective annual rate is higher than annual percentage rate if compounding of interest happens more than once in a year. Identify a true statement about the effective annual rate. Multiple choice question. An effective annual rate is the rate per period times the number of periods per year. An effective annual rate is always the stated rate on a loan. An effective annual rate is the rate which excludes any interest rate compounding. An effective annual rate is higher than annual percentage rate if compounding of interest happens more than once in a year. EAR = (1 + 0.0125)12 - 1 You borrow money for two years at 1.25 percent per month. How is the effective annual rate (EAR) computed? Multiple choice question. EAR = (1 + 0.0125)12 - 1 EAR = [1 + (0.0125 × 12)12 - 1 EAR = (1 + 0.0125)24 - 1

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EAR = [1 + (0.0125/12)]12 -1 4 times An investment pays an annual rate of 9 percent with interest payments occurring quarterly. How many times per year is the interest compounded? Multiple choice question. 2 times 1 time 4 times 3 times N = 60; I = 7/12; PMT = -150; FV = 0; CPT PV You can afford monthly car payments of $150 for five years at 7 percent. How do you compute the amount you can borrow? Multiple choice question. N = 60; I = 7/12; PMT = -150; PV = 0; CPT FV N = 60; I = 7/12; PMT = -150; FV = 0; CPT PV N = 60; I = 7; PMT = -150; FV = 0; CPT PV N = 5; I = 7/12; PMT = -150; FV = 0; CPT PV $5,829.56 Reason: This is the total amount to be repaid, including interest. N = 36; I = 7/12; PMT = -180; FV = 0; CPT PV Sis can afford monthly car payments of $180 for three years. How much can she borrow if the rate is 7 percent? Multiple choice question.

$6,480.00 $5,829.56 $2,346.34 $7,187.42 An APR is the interest rate per period times the number of periods per year. How is the annual percentage rate (APR) defined? Multiple choice question. An APR is the interest rate that includes any interest earned on reinvested interest. An APR is the interest rate per period times the number of periods per year. An APR is the interest rate that reflects annualizing with compounding figured in. An APR is the interest rate charged per month on a monthly payment loan. EAR = [1 + (0.07/12)12 - 1] You just borrowed money for four years to buy a car. The payments are $218 a month and the APR is 7 percent. How is the EAR computed? Multiple choice question. EAR = [1 + (0.07/48)12 - 1] EAR = [1 + (0.07/12)12 - 1] EAR = [1 + (0.07/12)48 - 1] EAR = [1 + (0.07/4)4 - 1] EAR = (1 + Rate per period)Number of periods per year - 1. Which one of these formulas correctly defines an effective annual rate (EAR) for any compounding period?

EAR = [1 + (0.05/2)]2 - 1 A 3-year investment pays 5 percent annual interest with semiannual interest payments. How is the EAR computed? Multiple choice question. EAR = [1 + (0.05/2)6 - 1 EAR = [1 + (0.05/2)]2 - 1 EAR = (1 + 0.05)2 - 1 EAR = (0.05/2)2 I = 8/4 An investment pays quarterly payments and has an APR of 8 percent. You need to compute the future value at Year 3. What is the calculator input for the interest rate? Multiple choice question. I = 8 × 4 I = 8/12 I = 8/4 I = 8/3 6.18 percent Reason: EAR = [1 + (0.06/365)]365 - 1 = 6.18% What is the effective annual rate of a 6 percent APR compounded daily? Multiple choice question. 6.09 percent

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6.13 percent 6.17 percent 6.18 percent $1,025.57 Reason: You need to compute the payment amount, not the future value. N = 36; I = 3.5/12; PV = $35,000; FV = 0; CPT PMT Bro is borrowing $35,000 to buy a new car. How much are his car payments every month if the rate is 3.5% over three years? Multiple choice question. $2,187.42 $1,000.00 $1,025.57 $454.34 EAR = [1 + (0.11/4)]4 - 1 A loan charges an APR of 11 percent with payments made quarterly. How is the EAR computed? Multiple choice question. EAR = [1 + (0.11/4)]4 - 1 EAR = (1 + 0.11)4 -1 EAR = (0.11/4) × 4 EAR = (0.11/4)4 7.576

Assume the answers provided are the effective annual rates with annual, semiannual, quarterly, and monthly compounding of the identical APR. Which rate must be the monthly EAR? (No computations are required.) Multiple choice question. 7.325 7.529 7.459 7.576 An amortized loan is a loan in which the borrower pays interest and principal over time. Which one of these is the definition of an amortized loan? Multiple choice question. An amortized loan is a loan that matures in five years or less. An amortized loan is a loan where interest is paid monthly and the principal is repaid at loan maturity. An amortized loan is a loan in which the borrower pays interest and principal over time. An amortized loan is a loan which is repaid in a single payment at the end of the loan term. EAR = [1 + (0.07/12)12 - 1] You just borrowed money for four years to buy a car. The payments are $218 a month and the APR is 7 percent. How is the EAR computed? Multiple choice question. EAR = [1 + (0.07/12)12 - 1] EAR = [1 + (0.07/12)48 - 1] EAR = [1 + (0.07/4)4 - 1] EAR = [1 + (0.07/48)12 - 1] 0.67 percent

You borrow $18,000 for four years to buy a car. The APR is 8 percent. What rate should be used when you compute the monthly payment? Multiple choice question. 8.00 percent 0.67 percent 0.17 percent 2.00 percent $172.90 Reason: First payment: Interest = $400, Principal = $172.90; Second payment: Interest = $399.42, Principal = $173.48 You take out a $120,000 mortgage for 30 years at 4% interest. The monthly payment is $572.90. How much of your first payment applies to the principal balance? Multiple choice question. $172.90 $399.49 $173.48 $400.00 A loan requires quarterly payments of $500. The loan will be repaid in full when the last $500 payment is paid. Which one of these loans meets the definition of an amortized loan? A loan requires monthly interest payments with the principal repaid at maturity.

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The annual payment for the first four years of a 5-year loan is computed as the amount borrowed times the current market rate of interest. A loan requires quarterly payments of $500. The loan will be repaid in full when the last $500 payment is paid. A 5 percent, $5,000 loan is to be repaid in two annual payments. The first payment is $250 and the second payment is $5,250. An amortization schedule shows the interest and principal portions of each payment, as well as the loan balance after each payment. What is an amortization schedule? The APR is 6 percent. Reason: 0.005 × 12 = 0.06 = 6% Which statement correctly applies to this monthly loan payment calculation? PMT360 = $145,000 × {0.005/[1 - 1/(1 + 0.005)360]} = $869.35 Multiple choice question. This is a 36-year loan. The amount borrowed equals 360 × $869.35. The APR is 6 percent. The annual interest rate is 0.5 percent. 0.5 percent Reason:

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The annual rate is 6 percent. Since the loan payments are monthly, the rate per period is 1/12th of 6 percent, or 0.5 percent. A 6 percent, $11,500 car loan requires monthly payments. What rate should be used in the calculator input to determine the number of periods until the loan is repaid in full? 3 percent 1.5 percent 6 percent 0.5 percent $173.48 Reason: First payment: Interest = $400, Principal = $172.90; Second payment: Interest = $399.42, Principal = $173.48 You take out a $120,000 mortgage for 30 years at 4 percent interest. The monthly payment is $572.90. How much of your second payment applies to the principal balance? $173.48 $399.49 $172.90 $400.00 28 months Reason: Since the payments are monthly, the problem is solved in months. I/Y = 5/12; PV = 9,656.21; PMT = -366.09; FV = 0; CPT N; N = 28, which is the number of months.

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You pay $366.09 a month on your mortgage. The interest rate is 5 percent and the remaining principal balance is $9,656.21. How long will it be until your mortgage is paid off? (Round your answer to nearest whole number.) Multiple choice question. 28 months 25 years 26 months 26 years Amortization schedule What is the table called which lists the amount of each loan payment, the interest and principal portions of each payment, and the remaining principal balance? Leo borrowed $1,000 at 10 percent for one year. The initial principal loan balance was computed as $1,000 + $100 = $1,100. Reason: $1,000 + (0.10 × $1,000) = $1,100 Which one of these loans meets the definition of an add-on interest loan? Scott's loan requires annual payments equal to the annual interest with all principal repaid at maturity. Ruth borrowed $2,000 which equaled the initial principal balance. Anna's loan computes the monthly interest based on the unpaid principal balance. Leo borrowed $1,000 at 10 percent for one year. The initial principal loan balance was computed as $1,000 + $100 = $1,100. 0.67 to percent

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Reason: The annual rate is 8 percent. The monthly rate is computed by dividing the annual rate by 12. You borrow $18,000 for four years to buy a car. The APR is 8 percent. What rate should be used when you compute the monthly payment? [$500 + (0.10 × $500)]/12 You borrow $500 at 10 percent for one year. The loan is an add-on interest loan. Which one of these provides the correct calculation to determine the monthly payment? Multiple choice question. $500/12 N = 12; I = 10/12; PV = 500, FV = 0; CPT PMT $500 + {[($500 + $0)/2] × 0.10}/12 [$500 + (0.10 × $500)]/12 I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number of semiannual periods You borrowed $16,000 at 8 percent with semiannual payments of $707.23. What is the correct calculator input to compute the time period? Multiple choice question. I = 8; PV = 16,000; PMT = -707.23 × 2; FV = 0; CPT N, which is the number of years I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number of semiannual periods I = 8/2; PV = 0; PMT = -707.23; FV = 16,000; CPT N, which is the number of semiannual periods I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number of years 10 years Reason:

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Since the payments are quarterly, the problem is solved in quarters. I/Y = 9.5/4; PV = 24,000; PMT = -936.05; FV = 0; CPT N; N = 40 quarters = 10 years A $24,000 loan has an interest rate of 9.5 percent and quarterly payments of $936.05. How many years will it take to repay this loan? Multiple choice question. 6.4 years 12.8 years 10 years 40 years Add-on interest loan Which type of loan computes the amount of interest at the beginning of the loan by applying the interest rate to the amount borrowed and includes that interest in the loan principal? Multiple choice question. Monthly payment loan Interest-only loan Add-on interest loan Amortized loan Amount borrowed = (12 × $220)/(1 + 0.05) Reason: Total principal including interest = 12 × $220; Amount borrowed = (12 × $220)/(1 + 0.05) A 12-month add-on interest loan has monthly payments of $220 and an interest rate of 5 percent. How do you compute the amount borrowed? Multiple choice question. Amount borrowed = 12 × $220

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Amount borrowed = (12 × $220)/(1 + 0.05) Amount borrowed = (12 × $220) × (1 + 0.05) Tory invested $600 a year for three years, then $700 a year for an additional four years. In year 9, she withdrew $1,500. She withdrew the entire investment in year 11. Which statement correctly applies to the time line for this problem? The cash flows for the first seven years are negative True or false: Time has a greater impact on a future value than the interest rate. True Reason: Time is the exponential factor and thus time has a greater impact on the future value than the interest rate Which one of these sets of cash flows fits the description of an ordinary annuity? Car payments of $240 a month for four years with the first payment due one month after the loan is obtained You have decided to save $500 a year for the next five years and then increase that amount to $700 a year for the following five years. Which one of these correctly reflects a multiple annuity time line for the future value of your savings? The time line will have a -$500 cash flow for Years 1 - 10 and an additional -$200 cash flow for Years 6 - 10 You expect to receive the following annual cash flows starting at Year 1: $800, $500, $900, and $600. To develop a time line, what will the cash flow for Year 3 be? + $900

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You plan to invest $300 today and $500 three years from today. Two years from today, you plan to withdraw $50. Which of these is a correct statement regarding a time line for computing the future value of your cash flows four years from today? The cash flow at year 3 is a negative $500 Which one of these correctly summarizes the future value formula? Assume the interest rate is positive. The greater the number of time periods, the higher the future value, all else held constant How is an ordinary annuity defined? An ordinary annuity is a stream of equal cash flows paid at the end of every time period Which one of these statements is correct regarding the present value of multiple cash flows formula? Assume a positive interest rate. The higher the interest rate, the lower the present value, all else held constant You have decided to invest for 20 years. You start with $200 a year and plan to increase that amount every three years by an additional $100 a year with the first increase occurring in Year 4. You create a multiple annuity future value time line. What cash flows will appear at Year 7 on the annuity time line? Year 7 will have three cash flows in the amounts of -$200, -$100, and -$100 An investment will pay $400 a year for 25 years. What is the correct formula to compute the present value of these payments at a rate of 5 percent? $400 × {[1 - (1/1.05^25)]/0.05}

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True or false: A cash outflow three years from now will appear as a positive value at Year 3 on a present value time line. Assume today is Time 0. False Reason: An outflow will appear as a negative value Art's Market borrows $25,000 for three years at 8 percent. Payments are quarterly. Which of these inputs correctly computes the payment amount? Multiple choice question. N = 12; I = 8/4; PV = 25,000; FV = 0; CPT PMT Lester's rented some equipment at a cost of $800 for Years 1 through 3 and $900 for Years 4 and 5. Which of these correctly depicts a portion of the present value of multiple annuities time line? Multiple choice question. Year 1 has two cash flows in the amounts of -$900 and $100 Which one of these illustrates a perpetuity? Preferred stock which pays a $60 annual dividend True or false: The lower the interest rate, the lower the present value of a set of multiple future cash flows, all else held constant. False Reason:

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The lower the interest rate, the higher the present value. If you earn less interest, you need more money today to obtain the same future values Which one of these payment streams fits the definition of an annuity due? A prize pays $1,000 a year for ten years, starting today An annuity pays a rate of 8 percent and has a life of 12 years. Which of these is the correct annuity discount factor for computing a present value of this annuity? [1 - (1/1.08^12)]/0.08 Justine pays $200 a month for five years at 6 percent interest. Which of these is the correct input for determining the amount borrowed? N = 60; I = 6/12; PMT = -200; FV = 0; CPT PV How many times per year is interest compounded on a debt that requires monthly payments? 12 times You expect to receive $600 in Years 1 through 5, $700 in Years 6 through 8, and $400 in Years 9 and 10. What cash flow(s) will appear on a present value of multiple annuities time line for Year 10? Year 10 has one cash inflow in the amount of $400 You can afford monthly car payments of $150 for five years at 7 percent. How do you compute the amount you can borrow? N = 60; I = 7/12; PMT = -150; FV = 0; CPT PV

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Which one of these illustrates a perpetuity? Payments of $50 a quarter from now until forever Bro is buying $35,000 to buy a new car; how much can are his interest payments if the rate is 3.5% over three years? $1,025.57 Reason: You need to compute the present value, not the future value. N = 36; I = 3.5/12; PV = $35,000; FV = 0; CPT PMT Which one of these best defines an annuity due? An annuity due is a stream of equal payments paid at the beginning of each equal time interval for a set number of time periods An investment will pay $400 a year for 25 years. What is the correct formula to compute the present value of these payments at a rate of 5 percent? Multiple choice question. $400 × {[1 - (1/1.05^(25))]/0.05} How is the annual percentage rate (APR) defined? An APR is the interest rate per period times the number of periods per year

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An investment pays an annual rate of 9% with interest payments occurring quarterly. How many times per year is the interest compounded? 4 times Which one of these formulas correctly defines an effective annual rate (EAR) for any compounding period? EAR = (1 + Rate per period)^Number of periods per year - 1 An investment pays quarterly payments and has an APR of 8 percent. You need to compute the future value at Year 3. What is the calculator input for the interest rate? I = 8/4 A 3-year investment pays 5 percent annual interest with semiannual interest payments. How is the EAR computed? EAR = [1 + (0.05/2)]^2 - 1 Sis can afford monthly car payments of $180 for three years. How much can she borrow if the rate is 7 percent? $5,829.56 Reason: N = 36; I = 7/12; PMT = -180; FV = 0; CPT PV A loan charges an APR of 11 percent with payments made quarterly. How is the EAR computed? EAR = [1 + (0.11/4)]^(4) - 1

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Assume the answers provided are the effective annual rates with annual, semiannual, quarterly, and monthly compounding of the identical APR. Which rate must be the monthly EAR? (No computations are required.) 7.576 Reason: This is the rate given semiannual compounding. The more frequent the compounding, the higher the EAR A credit card charges an interest rate of one percent per month. Define the annual percentage rate (APR) for this debt. The APR is equal to one percent per month multiplied by 12 months per year Which statement correctly applies to this monthly loan payment calculation? PMT360 = $145,000 × {0.005/[1 - 1/(1 + 0.005)^360]} = $869.35 The APR is 6 percent. Reason: 0.005 × 12 = 0.06 = 6% Identify a true statement about the effective annual rate. An effective annual rate is higher than annual percentage rate if compounding of interest happens more than once in a year

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What is an amortization schedule? An amortization schedule shows the interest and principal portions of each payment, as well as the loan balance after each payment You borrow money for two years at 1.25 percent per month. How is the effective annual rate (EAR) computed? EAR = (1 + 0.0125)^(12) - 1 Reason: The rate given is a rate PER month, which means the 1.25 percent is a monthly, not an annual rate. EAR = (1 + 0.0125)12 - 1 You borrowed $16,000 at 8 percent with semiannual payments of $707.23. What is the correct calculator input to compute the time period? I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number of semiannual periods You just borrowed money for four years to buy a car. The payments are $218 a month and the APR is 7 percent. How is the EAR computed? EAR = [1 + (0.07/12)^12 - 1] You pay $366.09 a month on your mortgage. The interest rate is 5 percent and the remaining principal balance is $9,656.21. How long will it be until your mortgage is paid off? 28 months What is the effective annual rate of a 6 percent APR compounded daily?

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6.18% Which one of these loans meets the definition of an add-on interest loan? Leo borrowed $1,000 at 10 percent for one year. The initial principal loan balance was computed as $1,000 + $100 = $1,100. Reason: $1,000 + (0.10 × $1,000) = $1,100 You borrow $18,000 for four years to buy a car. The APR is 8 percent. What rate should be used when you compute the monthly payment? 0.67% Reason: The annual rate is 8 percent. The monthly rate is computed by dividing the annual rate by 12 What is the table called which lists the amount of each loan payment, the interest and principal portions of each payment, and the remaining principal balance? Amortization schedule A 6%, $11,500 car loan requires monthly payments. What rate should be used in the calculator input to determine the number of periods until the loan is repaid in full? 0.5% Reason:

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The annual rate is 6 percent. Since the loan payments are monthly, the rate per period is 1/12th of 6%, or 0.5% A $24,000 loan has an interest rate of 9.5% and quarterly payments of $936.05. How many years will it take to repay this loan? 10 years Reason: Since the payments are quarterly, the problem is solved in quarters. I/Y = 9.5/4; PV = 24,000; PMT = -936.05; FV = 0; CPT N; N = 40 quarters = 10 years Which type of loan computes the amount of interest at the beginning of the loan by applying the interest rate to the amount borrowed and includes that interest in the loan principal? Add-on interest loan You borrow $500 at 10% for one year. The loan is an add-on interest loan. Which one of these provides the correct calculation to determine the monthly payment? [$500 + (0.10 × $500)]/12 A 12-month add-on interest loan has monthly payments of $220 and an interest rate of 5 percent. How do you compute the amount borrowed? Amount borrowed = (12 × $220)/(1 + 0.05)Rationale:Total principal including interest = 12 × $220;Amount borrowed = (12 × $220)/(1 + 0.05) A $24,000 loan has an interest rate of 9.5 percent and quarterly payments of $936.05. How many years will it take to repay this loan? 10 years Rationale:

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Since the payments are quarterly, the problem is solved in quarters. I/Y = 9.5/4; PV = 24,000; PMT = -936.05; FV = 0; CPT N; N = 40 quarters = 10 years A 3-year investment pays 5 percent annual interest with semiannual interest payments. How is the EAR computed? EAR = [1 + (0.05/2)]^(2) - 1 Rationale: When raising fractions to a power, you must add and then subtract one. EAR = [1 + (0.05/2)]2 - 1. A 6 percent, $11,500 car loan requires monthly payments. What rate should be used in the calculator input to determine the number of periods until the loan is repaid in full? 0.5 percent Rationale: The annual rate is 6 percent. Since the loan payments are monthly, the rate per period is 1/12th of 6 percent, or 0.5 percent. A 12-month add-on interest loan has monthly payments of $220 and an interest rate of 5 percent. How do you compute the amount borrowed? Amount borrowed = (12 × $220)/(1 + 0.05) Rationale: Total principal including interest = 12 × $220; Amount borrowed = (12 × $220)/(1 + 0.05) Alex expects to incur personal costs of $3,800 in Year 1, and $4,300, $5,200 and $4,600 in costs over the following three years, respectively. What is the present value of these costs at 7 percent. $15,061.26 Rationale:

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PV = $3,800/1.07 + $4,300/1.072 + $5,200/1.073 + $4,600/1.074 = $15,061.26 An annuity due sees payments at the [BLANK 1] of each period while an annuity assumes payments at the [BLANK 2] of each period. Blank 1: beginning or start Blank 2: end An annuity pays a rate of 8 percent and has a life of 12 years. Which of these is the correct annuity discount factor for computing a present value of this annuity? [1 - (1/1.08^12)]/0.08 Art's Market borrows $25,000 for three years at 8 percent. Payments are quarterly. Which of these inputs correctly computes the payment amount? N = 12; I = 8/4; PV = 25,000; FV = 0; CPT PMT Assume the answers provided are the effective annual rates with annual, semiannual, quarterly, and monthly compounding of the identical APR. Which rate must be the monthly EAR? (No computations are required.) 7.576 Rationale: This is the rate given semiannual compounding. The more frequent the compounding, the higher the EAR. Bro is buying $35,000 to buy a new car; how much can are his interest payments if the rate is 3.5% over three years? $1,025.57

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Rationale: You need to compute the present value, not the future value. N = 36; I = 3.5/12; PV = $35,000; FV = 0; CPT PMT Chris plans on saving $4,000 a year at 4 percent interest for five years. Which one of these is the correct formula for computing the future value at Year 5 of these savings? Assume the payments occur at the end of each year. FV5 = $4,000 × [(1.04^5 -1)/0.04] Chris plans on saving $4,000 a year at 4 percent interest for five years. Which one of these is the correct formula for computing the future value at Year 5 of these savings? Assume the payments occur at the end of each year. FV5 = $4,000 × [(1.04^5 -1)/0.04] A credit card charges an interest rate of one percent per month. Define the annual percentage rate (APR) for this debt. The APR is equal to one percent per month multiplied by 12 months per year. Domenic will invest $12,000 at the end of every year for the next 50 years and earns 9.9% annually. How much will his investment account be worth 45 years from now? $6,966,411 Rationale: Using a financial calculator: N = 45; I = 9.9; PV = 0; PMT = -10,000; CPT FV; FV = $6,966,411 How do you convert an ordinary annuity present value formula to an annuity due present value formula? Multiply the ordinary annuity present value by (1 + i)

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Rationale: Multiply the ordinary annuity present value by (1 + i) to get the annuity due present value. how is an effective annual rate defined? an effective annual rate is the rate per year which includes interest rate compunding How is an ordinary annuity defined? An ordinary annuity is a stream of equal cash flows paid at the end of every time period. how is the annual percentage rate (APR) defined? an APR is the interest rate per period times the number of periods per year. How many times do you discount a cash flow received immediately? 0 How many times per year is interest compounded on a debt that requires monthly payments? 12 times Rationale: There are 12 months in a year, so compounding occurs 12 times. Identify a true statement about the effective annual rate. An effective annual rate is higher than annual percentage rate if compounding of interest happens more than once in a year.

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an investment pays an annual rate of 9 percent with interest payments occurring quarterly. how many times per year is the interest compounded? 4 times An investment pays quarterly payments and has an APR of 8 percent. You need to compute the future value at Year 3. What is the calculator input for the interest rate? I = 8/4 Rationale: Since there are four quarters per year, the annual rate should be divided by four. An investment will pay $400 a year for 25 years. What is the correct formula to compute the present value of these payments at a rate of 5 percent? $400 × {[1 - (1/1.05^(25))]/0.05} Justine pays $200 a month for five years at 6 percent interest. Which of these is the correct input for determining the amount borrowed? N = 60; I = 6/12; PMT = -200; FV = 0; CPT PV Les sold some equipment and will receive annual payments of $400 for two years and $350 for the following two years. Which is the correct present value of multiple annuities formula given a rate of 9 percent? $350 × {[1 - (1/1.09^4)]/0.09} + $50 × {[1 - (1/1.09^2)]/0.09}

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Lester's rented some equipment at a cost of $800 for Years 1 through 3 and $900 for Years 4 and 5. Which of these correctly depicts a portion of the present value of multiple annuities time line? Year 1 has two cash flows in the amounts of -$900 and $100. A loan charges an APR of 11 percent with payments made quarterly. How is the EAR computed? EAR = [1 + (0.11/4)]^(4) - 1 Reiss has invested $5,000 at the end of every year for the past 22 years and earns 8 percent annually. If he continues doing this, how much will his investment account be worth 12 years from now? $793,133 Rationale: Using a financial calculator: N = 34; I = 8; PV = 0; PMT = -5,000; CPT FV; FV = $793,133 FVA8 = $5,000 × {[(1 + 0.08)34 - 1]/0.08} = $793,133 Rusty Industries has decided to save $50,000 a year for two years and then increase that amount to $80,000 for an additional three years. Which one of these formulas will correctly compute the future value of these savings as of Year 5 at a rate of 7 percent? FVA5 = [$50,000 × (1.07^5 - 1)/0.07] + [$30,000 × (1.07^3 - 1)/0.07] Sis can afford monthly car payments of $180 for three years. How much can she borrow if the rate is 7 percent? $5,829.56 Rationale: You need to compute the present value, not the future value. N = 36; I = 7/12; PMT = -180; FV = 0; CPT PV

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Stu deposited $400 in an account three years ago. Last year, he deposited $250 and plans to deposit $300 next year. The rate is 3 percent. Which one of these correctly states a portion of the formula needed to compute the future value five years from today? $250 × 1.03^6 Rationale: The deposit was made one year ago and the FV is 5 years from now, thus, the exponent is 6. Tory invested $600 a year for three years, then $700 a year for an additional four years. In year 9, she withdrew $1,500. She withdrew the entire investment in year 11. Which statement correctly applies to the time line for this problem? The cash flows for the first seven years are negative. Rationale: Withdrawals are cash inflows (positive values) and investments are cash outflows (negative values). The cash flows are negative for the first seven years, but the amount in year 4 is $700, not $600. While there are only nine cash flows, there are 12 time periods, including time 0. Time periods 0, 8, and 10 have no cash flows. true or false: a cash outflow three years from now will appear as a positive value at year 3 on a present value time line. Assume today is Time 0. false True or false: The lower the interest rate, the lower the present value of a set of multiple future cash flows, all else held constant. False Rationale: The lower the interest rate, the higher the present value. If you earn less interest, you need more money today to obtain the same future values.

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True or false: Time has a greater impact on a future value than the interest rate. True Rationale: Time is the exponential factor and thus time has a greater impact on the future value than the interest rate. True or false: To calculate the future value of multiple annuities, simply compute the future value of each one separately and add them together. True Rationale: Each annuity is calculated separately as there is no cross compounding. Two years ago, Margo deposited $500 into a savings account. One year ago, she deposited an additional $300, and today she deposited $800. Which one of these is these is the correct formula for computing the value of these deposits today at a rate of 4 percent? FV2 = ($500 × 1.042) + ($300 × 1.04) + $800 What is an amortization schedule? An amortization schedule shows the interest and principal portions of each payment, as well as the loan balance after each payment. What is a perpetuity? A perpetuity is an unending stream of equal payments occurring at equal intervals of time. What is the difference between an annuity and a perpetuity?

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An annuity has a fixed number of cash flows while a perpetuity has unending cash flows. what is the difference between annuity and a perpetuity? an annuity has a fixed number of cash flows while perpetuity has unending cash flows. what is the effective annual rate of a 6 percent APR compounded daily? 6.18 percent What is the future value in year 7 of these cash flows: Year 0 = $200; Year 1 = -$100; Year 3 = $200; and Year 4 = $200? The interest rate is 10%. $771.61 Rationale: FV7 = ($200 × 1.067) - ($100 × 1.066) + ($200 × 1.064) + ($200 × 1.063) = $771.31 What is the future value in year 7 of these cash flows: Year 0 = $200; Year 1 = $240; Year 3 = $300; and Year 4 = $400? The interest rate is 6 percent. $1,496.32 Rationale: FV7 = ($200 × 1.067) + ($240 × 1.066) + ($300 × 1.064) + ($400 × 1.063) = $1,496.32 What is the table called which lists the amount of each loan payment, the interest and principal portions of each payment, and the remaining principal balance? Amortization schedule

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Which one of these best defines an annuity due? An annuity due is a stream of equal payments paid at the beginning of each equal time interval for a set number of time periods. Which one of these correctly converts an ordinary future value annuity formula into an annuity due future value formula? FVAN due = FVAN × (1 + i) which one of these correctly summarizes the future value formula? assume the interest rate is positive. the greater the number of time period, the higher the future value, all else held constant. Which one of these formulas correctly defines an effective annual rate (EAR) for any compounding period? EAR = (1 + Rate per period)Number of periods per year - 1. Which one of these illustrates a perpetuity? Preferred stock which pays a $60 annual dividend Rationale: A perpetuity pays equal payments that never end. This illustrates an annuity. A perpetuity has unending payments. This illustrates an annuity. A perpetuity has unending payments. which one of these illustrates a perpetuity? payments of $50 a quarter from now until forever

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Which one of these is the definition of an amortized loan? An amortized loan is a loan in which the borrower pays interest and principal over time. Which one of these loans meets the definition of an add-on interest loan? Leo borrowed $1,000 at 10 percent for one year. The initial principal loan balance was computed as $1,000 + $100 = $1,100. Rationale: $1,000 + (0.10 × $1,000) = $1,100 Which one of these loans meets the definition of an amortized loan? A loan requires quarterly payments of $500. The loan will be repaid in full when the last $500 payment is paid. Which one of these payment streams fits the definition of an annuity due? A prize pays $1,000 a year for ten years, starting today. Which one of these payment streams is an annuity due? An auto lease calls for monthly payments of $250 with the first payment due at lease signing. Which one of these sets of cash flows fits the description of an ordinary annuity? Car payments of $240 a month for four years with the first payment due one month after the loan is obtained

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Which one of these statements is correct regarding the present value of multiple cash flows formula? Assume a positive interest rate. The higher the interest rate, the lower the present value, all else held constant. Which one of these statements is correct regarding the present value of multiple cash flows formula? Assume a positive interest rate. The higher the interest rate, the lower the present value, all else held constant. Which statement correctly applies to this monthly loan payment calculation? PMT360 = $145,000 × {0.005/[1 - 1/(1 + 0.005)^(360)]} = $869.35 The APR is 6 percent. Rationale: 0.005 × 12 = 0.06 = 6% Which type of loan computes the amount of interest at the beginning of the loan by applying the interest rate to the amount borrowed and includes that interest in the loan principal? Add-on interest loan You are comparing four loans with the following rates. Which loan offers the best interest rate for the borrower? 5% APR, compounded annually Rationale: The EAR equals the APR since compounding is annual.

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You are comparing four loans with the following rates. Which loan offers the best interest rate for the borrower? 6.15 percent APR, compounded annually Rationale: The EAR equals the APR since compounding is annual. You borrow $10,000 for four years to buy a car. The monthly loan payment is $237.15. If you draw a time line, what is the cash flow at Time 0? +$10,000 Rationale: The amount borrowed is a cash inflow so it should be a positive value. You borrow $18,000 for four years to buy a car. The APR is 8 percent. What rate should be used when you compute the monthly payment? 0.67 percent Rationale: The annual rate is 8 percent. The monthly rate is computed by dividing the annual rate by 12. You borrow $500 at 10 percent for one year. The loan is an add-on interest loan. Which one of these provides the correct calculation to determine the monthly payment? [$500 + (0.10 × $500)]/12 You borrowed $16,000 at 8 percent with semiannual payments of $707.23. What is the correct calculator input to compute the time period? I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number of semiannual periods

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You borrow money for two years at 1.25 percent per month. How is the effective annual rate (EAR) computed? EAR = (1 + 0.0125)^(12) - 1 Rationale: The rate given is a rate PER month, which means the 1.25 percent is a monthly, not an annual rate. EAR = (1 + 0.0125)12 - 1. You borrow money for two years at 1.25 percent per month. How is the effective annual rate (EAR) computed? EAR = (1 + 0.0125)^(12) - 1 You can afford monthly car payments of $150 for five years at 7 percent. How do you compute the amount you can borrow? N = 60; I = 7/12; PMT = -150; FV = 0; CPT PV You endow a chair in Finance for your favorite finance professor. He will earn $150,000 every year forever and you believe you can earn 5% on your investments. How much must you invest to accomplish this goal? $3,000,000 Rationale: PV = $150,000/0.05 = $3,000,000 you expect to receive $600 in years 1 through 5, $700 in years 6 through 8, and $400 in years 9 and 10. What cash flow(s) will appear on a present value of multiple annuities time line for year 10? year 10 has one cash inflow in the amount of $400

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You expect to receive $800 next year, $400 three years from now, and $500 four years from now. Which one of these formulas will correctly compute the present value as of today at 5 percent interest? PV = $800/1.05 + $400/1.05^3 + $500/1.05^4 You expect to receive annual gifts of $1,000 at the end of Years 1 and 2 and $1,500 at the end of Years 3 and 4. Which of these is the correct present value of multiple annuities formula if the rate is 6 percent? $1,500 × {[1 - (1/1.06^4)]/0.06} - $500 × {[1 - (1/1.06^2)]/0.06} You expect to receive the following annual cash flows starting at Year 1: $800, $500, $900, and $600. To develop a time line, what will the cash flow for Year 3 be? +$900 You have decided to invest for 20 years. You start with $200 a year and plan to increase that amount every three years by an additional $100 a year with the first increase occurring in Year 4. You create a multiple annuity future value time line. What cash flows will appear at Year 7 on the annuity time line? Year 7 will have three cash flows in the amounts of -$200, -$100, and -$100. You have decided to save $500 a year for the next five years and then increase that amount to $700 a year for the following five years. Which one of these correctly reflects a multiple annuity time line for the future value of your savings? The time line will have a -$500 cash flow for Years 1 - 10 and an additional -$200 cash flow for Years 6 - 10. Rationale: Using multiple annuities, the -$500 cash flow will be for Years 1 - 10 with an additional -$200 cash flow for Years 6 - 10.

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You just borrowed money for four years to buy a car. The payments are $218 a month and the APR is 7 percent. How is the EAR computed? EAR = [1 + (0.07/12)^(12) - 1] You just bough a home with annual payments of $12,000 at 4% for 30 years. How much did you borrow? (Do not round intermediate calculations.) $207,504 Rationale: PVA5 = $1,200 × {[1 - (1/1.065)]/0.06} = $5,054.84 You just bough a home with annual payments of $12,000 at 4% for 30 years. How much did you borrow? (Do not round intermediate calculations.) $207,504 Rationale: PVA5 = $1,200 × {[1 - (1/1.065)]/0.06} = $5,054.84 You just incurred a loan with annual payments of $1,200 at 6 percent for five years. How much did you borrow? (Do not round intermediate calculations.) $5,054.84 Rationale: PVA5 = $1,200 × {[1 - (1/1.065)]/0.06} = $5,054.84 You just signed a contract and will receive $500 at the end of the next two years and $800 at the end of each of the following three years. At 4 percent, what is this contract worth today? $2,995.63 Rationale:

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PVA0 = $800 × {[1 - (1/1.045)]/0.04} - $300 × {[1 - (1/1.042)]/0.04 = $2,995.63 You just won a prize that will pay you $800 today and $500 a year for the next three years. Which is the correct formula for computing the present value as of today at 6 percent? PV = $800 + $500/1.06 + $500/1.06^2+ $500/1.06^3 You pay $366.09 a month on your mortgage. The interest rate is 5 percent and the remaining principal balance is $9,656.21. How long will it be until your mortgage is paid off? 28 months Rationale: Since the payments are monthly, the problem is solved in months. I/Y = 5/12; PV = 9,656.21; PMT = -366.09; FV = 0; CPT N; N = 28, which is the number of months. You plan to invest $300 today and $500 three years from today. Two years from today, you plan to withdraw $50. Which of these is a correct statement regarding a time line for computing the future value of your cash flows four years from today? The cash flow at year 3 is a negative $500. You sell some equipment for $8,000 and agree to accept annual payments of $2,469.35 for four years. If you draw a time line, what is the cash flow for Year 4? +$2,469.35 Rationale: Since you are the lender in this case, the payments are cash inflows. You take out a $120,000 mortgage for 30 years at 4% interest. How much of your first payment applies to the principal balance?

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$172.90 Rationale: First payment: Interest = $400, Principal = $172.90; Second payment: Interest = $399.42, Principal = $173.48 You take out a $120,000 mortgage for 30 years at 4 percent interest. The monthly payment is $572.90. How much of your second payment applies to the principal balance? $173.48 Rationale: First payment: Interest = $400, Principal = $172.90; Second payment: Interest = $399.42, Principal = $173.48 You want to compute the future value of a 20-year ordinary annuity that pays 7 percent interest. Which one of these correctly represents the annuity compounding factor that should be used in the FVAN equation? [(1.07)^(20) - 1]/0.07 You want to gift $1,000 every year forever and earn 5 percent on your investments. How much must you invest to accomplish this goal? $20,000 Rationale: PV = $1,000/0.05 = $20,000 You wish to retire with an annuity that will pay you $30,000 for the next 25 years and then $50,000 at the end of the 26th year. At 5%, what is this contract worth today? $436,880 Rationale:

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PVA0 = $50,000 × {[1 - (1/1.05^26)]/0.05} - $20,000 × {[1 - (1/1.05^25)]/0.05}

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BUS 350 Principles of finace chapter 5 smartbook

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