Finance Multiple Choice Question Answer

23. If you put $310 in a savings account at the beginning of each year for 10 years, how much money will be in the account at the end of the 10th year? Assume that the account earns 5.5%, and round to the nearest $100.

1. $3,800
2. $3,900
3. $4,000
4. $4,20

Answer: D) $4,200

24. How much money must you pay into an account at the beginning of each of 30 years in order to have $10,000 at the end of the 30th year? Assume that the account pays 11% per annum, and round to the nearest $1.

1. $39
2. $46
3. $50
4. None of the above

Answer: D) None of the above

25. How much money must you pay into an account at the beginning of each of 20 years in order to have $10,000 at the end of the 20th year? Assume that the account pays 12% per annum, and round to the nearest $1.

1. $1,195
2. $111
3. $124
4. $139

Answer: C) $124

26. How much money must you pay into an account at the beginning of each of five years in order to have $5,000 at the end of the fifth year? Assume that the account pays 12% per year, and round to the nearest $10.

1. $700
2. $1,390
3. $1,550
4. $790

Answer: A) $700

27. How much money must you pay into an account at the beginning of each of 11 years in order to have $5,000 at the end of the 11th year? Assume that the account pays 8% per year, and round to the nearest $1.

1. $700
2. $257
3. $300
4. $278

Answer: D) $278

28. A retirement plan guarantees to pay you or your estate a fixed amount for 20 years. At the time of retirement, you will have $31,360 to your credit in the plan. The plan anticipates earning 8% interest annually over the period you receive benefits. How much will your annual benefits be, assuming the first payment occurs one year from your retirement date?

1. $682
2. $6,272
3. $2,000
4. $3,194

Answer: D) $3,194

29. SellUCars, Inc. offers you a car loan at an annual interest rate of 8% compounded quarterly. What is the annual percentage yield of the loan?

1. 8.00%
2. 8.24%
3. 8.32%
4. 8.44%

Answer: B) 8.24%

30. George and Barbara will be retiring in four years and would like to buy a lake house. They estimate that they will need $150,000 at the end of four years to buy this house. They want to make four equal annual payments into an account at the end of each year. If they can earn 16% on their money, compounded annually, over the next four years, how much must they invest at the end of each year for the next four years to have accumulated $150,000 by retirement?

1. $25,523
2. $29,606
3. $46,212
4. $43,500
5. $37,500

Answer: B) $29,606

31. You have been accepted to study gourmet cooking at Le Cordon Bleu Culinary Institute in Paris, France. You will need $15,000 every six months (beginning six months from now) for the next three years to cover tuition and living expenses. Mom and Dad have agreed to pay for your education. They want to make one deposit now in a bank account earning 6% interest, compounded semiannually, so that you can withdraw $15,000 every six months for the next three years. How much must they deposit now?

1. $97,026
2. $73,760
3. $90,000
4. $81,258

Answer: D) $81,258

32. Horace and Myrtle want to buy a house. Their banker offered them a fully amortizing $95,000 loan at a 12% annual rate for 20 years. What will their monthly payment be if they make equal monthly installments over the next 20 years?

1. $1,046
2. $749
3. $1,722
4. $1,346

Answer: A) $1,046

33. Harold Hawkins bought a home for $320,000. He made a down payment of $45,000; the balance will be paid off over 30 years at a 6.775% rate of interest. How much will Harold's monthly payments be? Round off to the nearest $1.

1. $1,450
2. $1,788
3. $3,200
4. $1,682

Answer: B) $1,788

34. You buy a race horse, which has a winning streak for four years, bringing in $500,000 per year, and then it dies of a heart attack. If you paid $1,518,675 for the horse four years ago, what was your annual return over this four-year period?

1. 8%
2. 33%
3. 18%
4. 12%

Answer: D) 12%

35. You are considering a home loan with monthly payments at an annual percentage yield of 5.116%. What is the quoted rate of interest on the loan?

1. 4.5%
2. 4.75%
3. 5%
4. 6%

Answer: C) 5%

36. You deposited $2,000 in a bank account paying 6% on January 1, 2004, and then you made $2,000 deposits on January 1 in 2005 and 2006. Which of the following expressions will calculate your bank balance just after the last payment was deposited?

1. FV = $2,000[1.06]-1 + $2,000[1.06]-2 + $2,000[1.06]-3
2. FV = $2,000[1.06]1 + $2,000[1.06]2 + $2,000[1.06]3
3. FV = $2,000[1.06]0 + $2,000[1.06]1 + $2,000[1.06]2
4. FV = $2,000[1.06]-0 + $2,000[1.06]-1 + $2,000[1.06]-2 + $1,000[1.06]-3

Answer: B) FV = $2,000[1.06]1 + $2,000[1.06]2 + $2,000[1.06]3

37. Harry just bought a new four-wheel-drive Jeep Cherokee for his lumber business. The price of the vehicle was $35,000, of which he made a $5,000 down payment and took out an amortized loan for the rest. His local bank made the loan at 12% interest for five years. He is to pay back the principal and interest in five equal annual installments beginning one year from now. Determine the amount of Harry's annual payment.

1. $8,322
2. $9,600
3. $9,709
4. $6,720

Answer: A) $8,322

38. Your investment goal is to have $3,000,000 in 40 years for retirement. You decide to invest in a mutual fund today that pays 12% per year compounded monthly. How much must you invest at the end of each month to meet your investment goal? Round to the nearest $1.

1. $245
2. $255
3. $285
4. $305
5. $315

Answer: B) $255

39. You have borrowed $70,000 to buy a sports car. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate compounded monthly. Calculate the total amount of interest dollars you will pay the bank over the life of the loan. Round to the nearest dollar and assume end-of-month payments.

1. $47,451
2. $51,644
3. $54,776
4. $57,798

Answer: D) $57,798

40. You have borrowed $70,000 to buy rental property. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate compounded monthly. Calculate the principal paid to the bank in month two of the loan. Assume end-of-period payments.

1. $184.01
2. $186.38
3. $188.46
4. $190.64
5. $192.73

Answer: B) $186.38

41. A friend of yours plans to begin saving for retirement by depositing $2,000 at the end of each year for the next 25 years. If she can earn 10% annually on her investment, how much will she have accumulated at the end of 25 years?

1. $50,000
2. $196,692
3. $100,000
4. $216,361

Answer: B) $196,692

42. How much must you deposit at the end of each of the next 10 years in a savings account paying 5% annually in order to have $10,000 saved by the end of the 10th year?

1. $1,000
2. $1,638
3. $1,500
4. $795

Answer: D) $795

43. What is the value today of an investment that pays $500 every year at year-end during the next 15 years if the annual interest rate is 9%?

1. $4,030.50
2. $7,500.00
3. $3,500.00
4. $7,000.00

Answer: A) $4,030.50

44. How much would an investor be willing to pay today for an investment that returns $1,000 every year at year-end for five years if he wants to earn a 10% annual return on the investment?

1. $1,000
2. $3,791
3. $5,000
4. $7,700

Answer: B) $3,791

45. A friend of yours would like you to lend him $5,000 today to be paid back in 5 annual payments. What would be the equal annual end-of-year payment on this loan if you charge your friend 7% interest?

1. $869.45
2. $1,000.00
3. $1,219.51
4. $1,350.00

Answer: C) $1,219.51

46. Recently you borrowed money for a new car. The loan amount is $15,000 to be paid back in equal annual payments which begin today, and will continue to be payable at the beginning of each year for a total of five years. Interest on the loan is 8%. What is the amount of the loan payment?

1. $3,756.85
2. $4,200.00
3. $3,478.31
4. $3,000.00

Answer: C) $3,478.31

47. A friend of yours borrows $19,500 from the bank at 8% annually to be repaid in 10 equal annual end-of-year installments. The interest paid on this loan in year three is:

1. $1,336.01.
2. $1,560.00.
3. $2,906.11.
4. $1,947.10.

Answer: A) $1,336.01.

48. If a loan of $10,000 is paid back in equal annual end-of-year payments of $2,570.69 during the next five years, what is the annual interest rate on the loan?

1. 2%
2. 5%
3. 9%
4. 12%

Answer: C) 9%

49. What is the present value of an investment that pays $10,000 every year at year-end for the next five years and $15,000 every year at year-end for years six through 10?

The annual rate of interest for the investment is 9%.

1. $125,000.00
2. $97,250.00
3. $135,173.00
4. $76,827.50

Answer: D) $76,827.50

50. Congratulations. You just won the California State Lottery. The amount awarded is paid in 20 equal annual installments, at the beginning of each year. You can invest your money at 6.6%, compounded annually. You have calculated that the lottery is worth $20,975,400 today. How much was the amount awarded?

1. $75,310,294
2. $36,000,000
3. $81,047,770
4. $42,000,000

Answer: B) $36,000,000

51. If you have $375,000 in an account earning 9% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 20 years?

1. $7,500
2. $18,750
3. $66,912
4. $5,575

Answer: E) $41,080

52. You wish to borrow $12,000 to be repaid in 60 monthly installments of $257.93. The annual interest rate is:

1. 10.50%.
2. 12.75%.
3. 15.25%.
4. 6.50%.
5. 8.80%.

Answer: A) 10.50%.

53. You wish to purchase a condo at a cost of $175,000. You are able to make a down payment of $35,000 and will borrow $140,000 for 30 years at an interest rate of 7.25%.

How much is your monthly payment?

1. $650
2. $955
3. $1,092
4. $1,023
5. $875

Answer: B) $955

54. Suppose that you wish to save for your child's college education by opening up an educational IRA. You plan to deposit $100 per month into the IRA for the next 18 years. Assume that you will be able to earn 10%, compounded monthly, on your investment. How much will you have accumulated at the end of 18 years?

1. $21,600
2. $54,719
3. $33,548
4. $85,920
5. $60,056

Answer: E) $60,056

55. Edward Johnson decided to open up a Roth IRA. He will invest $1,800 per year for the next 35 years. Deposits to the Roth IRA will be made via a $150 payroll deduction at the end of each month. Assume that Edward will earn 8.75% annual interest compounded monthly over the life of the IRA. How much will he have at the end of 35 years?

1. $125,250
2. $250,321
3. $363,000
4. $414,405

Answer: D) $414,405

56. What is a series of equal payments for a finite period of time called?

1. A perpetuity
2. An axiom
3. A lump sum
4. An annuity

Answer: D) An annuity

57. Which of the following statements is true?

1. The future value of an annuity would be greater if funds are invested at the beginning of each period instead of at the end of each period.
2. An annuity is a series of equal payments that are made, or received, forever.
3. The effective annual rate (APR) of a loan is higher the less frequently payments are made.
4. The future value of an annuity would be greater if funds are invested at the end of each period rather than at the beginning of each period.

Answer: A) The future value of an annuity would be greater if funds are invested at the beginning of each period instead of at the end of each period.

58. What is a series of equal payments to be received at the end of each period, for a finite period of time, called?

1. A perpetuity
2. An annuity due
3. A cash cow
4. A deferred annuity

Answer: D) A deferred annuity

59. What is a series of equal payments to be received at the beginning of each period, for a finite period of time, called?

1. A perpetuity
2. An annuity due
3. A cash cow
4. A deferred annuity

Answer: B) An annuity due

60. One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.

TRUE/FALSE

Answer: TRUE

61. The present value of an annuity increases as the discount rate increases

TRUE/FALSE

Answer: FALSE

62. We can use the present value of an annuity formula to calculate constant annual loan payments.

TRUE/FALSE

Answer: TRUE

63. A compound annuity involves depositing or investing a single sum of money and allowing it to grow for a certain number of years

TRUE/FALSE

Answer: FALSE

64. When repaying an amortized loan, the interest payments increase over time

TRUE/FALSE

Answer: FALSE

65. An amortized loan is a loan paid in unequal installments

TRUE/FALSE

Answer: FLASE

66. A loan amortization schedule provides a breakdown of loan payments into principal and interest payments

TRUE/FALSE

Answer: TRUE

67. Holding all other variables constant, payment per period for an annuity due will be higher than an ordinary annuity

TRUE/FALSE

Answer: FALSE

68. What is a series of equal payments for an infinite period of time called?

1. A perpetuity
2. An axiom
3. A cash cow
4. An annuity

Answer: A) A perpetuity

69. You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?

1. .055
2. .010
3. .110
4. .220

Answer: C) .110

70. The present value of a perpetuity decreases when the ________ decreases.

1. number of investment periods
2. annual discount rate
3. perpetuity payment
4. both B and C

Answer: C) perpetuity payment

71. You are going to pay $800 into an account at the beginning of each of 20 years. The account will then be left to compound for an additional 20 years. At the end of the 41st year you will begin receiving a perpetuity from the account. If the account pays 14%, how much will you receive each year from the perpetuity (round to nearest $1,000)?

1. $140,000
2. $150,000
3. $160,000
4. $170,000

Answer: C) $160,000

72. You are considering the purchase of XYZ Company's perpetual preferred stock which pays a perpetual annual dividend of $8 per share. If the appropriate discount rate for this investment is 14%, what is the price of one share of this stock?

1. $7.02
2. $57.14
3. $36.43
4. Cannot be determined without maturity date

Answer: B) $57.14

73. Michael Bilkman has an opportunity to buy a perpetuity that pays $24,350 annually. His required rate of return on this investment is 14.25%. At what price would Michael be indifferent to buying or not buying the investment? Round off to the nearest $1.

1. $83,470
2. $170,877
3. $95,621
4. $121,709

Answer: B) $170,877

74. What is the present value of a $200 perpetuity when the discount rate is 10%?

1. $2,000
2. $20,000
3. $4,000
4. $40,000

Answer: A) $2,000

75. Your rich great, great aunt just passed away at the age of 91. She liked you more than she let on and left you in her will. You will receive 100 British bonds that pay interest forever. The amount of annual interest payments that you will receive is $5,000. If you could invest your money at 4.25%, how much are these bonds worth today?

1. $64,480
2. $197,250
3. $250,000
4. $117,647
5. $55,000

Answer: D) $117,647

76. A bond paying interest of $120 per year forever is an example of a perpetuity.

TRUE/FALSE

Answer: TRUE

77. The formula for calculating the present value of a perpetuity is P = A/(1 + i)

TRUE/FALSE

Answer: FALSE

78. A perpetuity is an investment that continues forever but pays a different dollar amount each year.

TRUE/FALSE

Answer: FALSE

79. The present value of a $100 perpetuity discounted at 5% is $1200

TRUE/FALSE

Answer: FALSE

80. All else constant, an individual would be indifferent between receiving $2,000 today or receiving a $200 perpetuity when the discount rate is 10% annually

TRUE/FALSE

Answer: TRUE

81. What is the value on 1/1/05 of the following cash flows? Use a 10% discount rate, and round your answer to the nearest $10.

1. $490
2. $460
3. $970
4. $450

Answer: C) $970

82. Consider the following cash flows:

What is the value on 1/1/05 of the above cash flows? Use an 8% discount rate, and round your answer to the nearest $10.

1. $600
2. $620
3. $630
4. $650

Answer: A) $600

83. If you put $200 in a savings account at the beginning of each year for 10 years and then allow the account to compound for an additional 10 years, how much will be in the account at the end of the 20th year? Assume that the account earns 10%, and round to the nearest $10.

1. $8,300
2. $9,100
3. $8,900
4. $9,700

Answer: B) $9,100

84. An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%?

1. $735
2. $865
3. $885
4. $900

Answer: B) $865

85. Jay Coleman just graduated. He plans to work for five years and then leave for the Australian "Outback" country. He figures that he can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, his family gave him a $2,500 graduation gift. If he puts the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will his financial "stake" be when he leaves for Australia five years from now?

Round off to the nearest $1.

1. $36,082
2. $24,725
3. $30,003
4. $27,178

Answer: D) $27,178

86. You are thinking of buying a miniature golf course. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight. If the appropriate discount rate is 10%, what is the present value of these cash flows?

1. $285,288
2. $167,943
3. $235,048
4. $828,230

Answer: C) $235,048

87. You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts?

1. $1,622
2. $2,207
3. $2,384
4. $2,687

Answer: B) $2,207

88. You want to travel to Europe to visit relatives when you graduate from college three years from now. The trip is expected to cost a total of $10,000. Your parents have deposited $5,000 for you in a CD paying 6% interest annually, maturing three years from now. Aunt Hilda has agreed to finance the balance. If you are going to put Aunt Hilda's gift in an investment earning 10% annually over the next three years, how much must she deposit now so you can visit your relatives in three years?

1. $3,757
2. $3,039
3. $3,801
4. $3,345

Answer: B) $3,039

89. What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments. Round to the nearest whole dollar.

1. $10,588
2. $11,461
3. $12,688
4. $13,591

Answer: A) $10,588

90. As a part of your savings plan at work, you have been depositing $250 per quarter in a savings account earning 8% interest compounded quarterly for the last 10 years. You will retire in 15 years and want to increase your contribution each year from $1,000 to $2,000 per year, by increasing your contribution every four months from $250 to $500. Additionally, you have just inherited $10,000, which you plan to invest now to earn interest at 12% compounded annually for the next 15 years. How much money will you have in savings when you retire 15 years from now?

1. $126,862
2. $73,012
3. $161,307
4. $194,415

Answer: C) $161,307

91. Ronald Slump purchased a real estate investment with the following end-of-year cash flows:

92. What is the present value of these cash flows if the appropriate discount rate is 20%?

1. $178
2. $160
3. $133
4. $767

Answer: C) $133

93. You have just won a magazine sweepstakes and have a choice of three alternatives. You can get $100,000 now, or $10,000 per year in perpetuity, or $50,000 now and $150,000 at the end of 10 years. If the appropriate discount rate is 12%, which option should you choose?

1. $100,000 now
2. $10,000 perpetuity
3. $50,000 now and $150,000 in 10 years

Answer: A) $100,000 now

94. Your parents are planning to retire in Phoenix, AZ in 20 years. Currently, the typical house that pleases your parents costs $200,000, but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years. In order to buy a house upon retirement, what must they save each year in equal annual end-of-year deposits if they can earn 10% annually?

1. $21,910.00
2. $7,650.94
3. $10,000.00
4. $14,715.52

Answer: B) $7,650.94

95. You intend to purchase your dream PC upon graduation in two years. It will have a cost of $2,975, including all attachments and sales tax. You just received a $3,000 pre-graduation gift from your rich uncle that you intend to deposit in a money market account that pays 6% interest, compounded monthly. How much of your pre-graduation gift will you need to deposit in order to have $2,975 available for the purchase of the PC upon graduation?

1. $1,275
2. $2,588
3. $2,975
4. $1,567
5. $2,639

Answer: E) $2,639

96. Assume that two investments have a three-year life and generate the cash flows shown below. Which of the two would you prefer?

1. Investment A, since it has the most even cash flows
2. Investment B, since it gives you the largest cash flows in earlier years
3. Neither, since they both have equal lives
4. Both investments are equally attractive
5. None of the above

Answer: B) Investment B, since it gives you the largest cash flows in earlier years

97. You have just purchased an investment that generates the cash flows that are shown below. You are able to invest your money at 5.75%, compounded annually. How much is this investment worth today?

1. $7,758
2. $4,521
3. $10,260
4. $8,467
5. $6,583

Answer: D) $8,467

98. To evaluate and compare investment proposals, we must adjust all cash flows to a common date.

TRUE/FALSE

Answer: TRUE