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| 1 | |
An example of an annuity is a stream of payments of $4,000 each at the end of every year for 20 years. |
| | A) | True |
| | B) | False |
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| 2 | |
The stated interest rate is the same thing as the effective annual rate. |
| | A) | True |
| | B) | False |
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| 3 | |
If interest is compounded annually, the effective annual rate and the annual percentage rate will be the same. |
| | A) | True |
| | B) | False |
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| 4 | |
As a general rule, the effective annual rate is more appropriate for financial decision making than is the annual percentage rate. |
| | A) | True |
| | B) | False |
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| 5 | |
In almost all present and future value computations, it is implicitly assumed that the cash flows occur at the beginning of each period. |
| | A) | True |
| | B) | False |
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| 6 | |
In order to compare different investment opportunities (each with the same risk) with interest rates reported in different manners you should: |
| | A) | convert each interest rate to an effective annual rate. |
| | B) | convert each interest rate to a monthly nominal rate. |
| | C) | convert each interest rate to an annual nominal rate. |
| | D) | compare the published annual rates. |
| | E) | convert each interest rate to an APR. |
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| 7 | |
You have $1,500 to invest. You have 2 choices: savings account A, which earns 8.75 percent compounded annually or savings account B, which earns 8.50 percent compounded monthly. Which account should you choose and why? |
| | A) | B; because it has a higher effective annual rate |
| | B) | A; because it has the higher stated rate |
| | C) | A; because it has a higher effective annual rate |
| | D) | B; because the quoted rate is higher |
| | E) | A; because it has the higher quoted rate |
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| 8 | |
What is the effective annual rate of 7 percent compounded quarterly? |
| | A) | 7.00 percent |
| | B) | 7.12 percent |
| | C) | 7.19 percent |
| | D) | 7.23 percent |
| | E) | 7.25 percent |
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| 9 | |
You are planning to save your annual bonuses from work and are comparing savings accounts: Account A compounds semiannually, while Account B compounds monthly. If both accounts have the same effective annual rate of interest and you place only the bonuses in the account, you should: |
| | A) | choose account A because it has a higher APR. |
| | B) | choose account B because it has a higher APR. |
| | C) | choose account B because it is compounded more often. |
| | D) | choose account A because you will pay less in taxes. |
| | E) | choose either since you would be indifferent between the two. |
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| 10 | |
You are going to withdraw $600 at the end of each year for the next four years from an account that pays interest at a rate of 6 percent compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much interest will you earn on the account over the four-year life? |
| | A) | $180.00 |
| | B) | $240.00 |
| | C) | $320.94 |
| | D) | $420.19 |
| | E) | $433.33 |
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| 11 | |
You borrowed $2,500 at 9.2 percent compounded annually. Your payments are $500 at the end of each year. How many years will you make payments on the loan? |
| | A) | 5 years |
| | B) | 6 years |
| | C) | 7 years |
| | D) | 8 years |
| | E) | 9 years |
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| 12 | |
You own a bond issued by the CP railroad that promises to pay the holder $100 annually forever. You plan to sell the bond three years from now. If similar investments yield 6 percent at that time, how much will the bond be worth? |
| | A) | $918.79 |
| | B) | $1,333.34 |
| | C) | $1,666.67 |
| | D) | $1,789.42 |
| | E) | $1,958.20 |
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| 13 | |
The preferred stock of Jay's Comics currently sells for $23.25 per share. The annual dividend of $1.50 is fixed. Assuming a constant dividend forever, what is the rate of return on this stock? |
| | A) | 3.49 percent |
| | B) | 6.45 percent |
| | C) | 8.06 percent |
| | D) | 8.50 percent |
| | E) | 10.00 percent |
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| 14 | |
You deposit $500 in an account today. You will deposit $550 at the end of each month for the next 12 months and $700 at the end of each month for the following 12 months. How much interest will you have earned in 2 years if the account pays 4.5 percent compounded monthly? |
| | A) | $669.80 |
| | B) | $727.65 |
| | C) | $749.42 |
| | D) | $862.57 |
| | E) | $879.00 |
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| 15 | |
You are borrowing $6,000 today. The loan is an amortized 6-year loan with an APR of 8 percent. The loan requires that $1,000 of the principal amount be repaid each year. Payments are to be made annually. What is the amount of the interest for the third year of the loan? |
| | A) | $80 |
| | B) | $160 |
| | C) | $240 |
| | D) | $320 |
| | E) | $400 |
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