FIN 362 Week 2 Quiz

FIN 362 Week 2 Quiz |  Assignment Help | Mercer University 

FIN 362 TEST 2 2020SU

Question 1

Which one of these statements related to growing annuities and perpetuities is correct?

o   You can compute the present value of a growing annuity but not a growing perpetuity.

o   The present value of a growing perpetuity will decrease if the discount rate is increased.

o   In computing the present value of a growing annuity, you discount the cash flows using the growth     rate as the discount rate.

o   The future value of an annuity will decrease if the growth rate is increased.

o   An increase in the rate of growth will decrease the present value of an annuity.

Question 2

Which one of the following statements correctly defines a time value of money relationship?

o   Interest rates and time are positively related, all else held constant.

o   Time and future values are inversely related, all else held constant.

o   Time and present value are inversely related, all else held constant.

o   An increase in time increases the future value given a zero rate of interest.

o   An increase in a positive discount rate increases the present value.

Question 3

The entire repayment of which one of the following loans is computed simply by computing one          single future value?

o   Balloon loan.

o   Pure discount loan.

o   Interest-only loan.

o   Amortized loan.

o   Bullet loan.

Question 4

How is the principal amount of an interest-only loan repaid?

o   The principal is repaid in increasing increments through regular monthly payments.

o   The principal is repaid in one lump sum at the end of the loan period.

o   The principal is repaid in equal annual payments.

o   The principal is repaid in decreasing increments and included in each loan payment.

o   The principal is forgiven over the loan period; thus it does not have to be repaid.

Question 5

Which one of the following terms is defined a loan wherein the regular payments, including both         interest and principal amounts, are insufficient to retire the entire loan amount, which then must be          repaid in one lump sum?

o   Interest-only loan.

o   Balloon loan.

o   Pure discount loan.

o   Continuing loan.

o   Amortized loan.

Question 6

Which one of the following statements related to annuities and perpetuities is correct?

o   A perpetuity composed of $100 monthly payments is worth less than an annuity of $100 monthly        payments given equal discount rates.

o   An ordinary annuity is worth less than an annuity due given equal annual cash flows for 10 years at     7 percent interest, compounded annually.

o   Perpetuities are infinite, but annuities are not.

o   The present value and future value of a perpetuity can be computed.

o   Most loans are not a form of a perpetuity

Question 7

Which one of the following statements related to loan interest rates is correct?

o   Regardless of the compounding period, the effective annual rate will always be higher than the            annual percentage rate.

o   The annual percentage rate considers the compounding of interest.

o   Lenders are most apt to quote the effective annual rate.

o   When comparing loans you should compare the effective annual rates.

o   The more frequent the compounding period, the lower the effective annual rate given a fixed annual                 percentage rate.

Question 8

You want to buy a new sports car for $55,000 and you make $5000 down payment. The contract is in                 the form of a 60-month annuity at an APR of 6 percent, compounded monthly. What will be your                monthly payment?

o   $1,047.90

o   $$966.64

o   $1,088.01

o   $992.18

o   $1,063.30

Question 9

What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is            received 6 years from now and you receive a total of 25 annual payments?

o   $9,149.74

o   $8,420.12

o   $9,417.69

o   $8,471.98

o   $8,891.72

Question 10

Al’s obtained a discount loan of $71,000 today that requires a repayment of $90,000, 3.5 years from today compounded quarterly. What is the APR on this loan?

o   7.87 percent

o   8.23 percent

o   1.71 percent

o   6.01 percent

o   6.83 percent

Question 11

You have just purchased a new warehouse. To finance the purchase, you arranged for a 30-year          mortgage loan for 63 percent of the $2.5 million purchase price. The monthly payment on this loan                 will be $10,400. What is the effective annual rate on this loan?

o   6.93 percent

o   6.52 percent

o   7.15 percent

o   7.27 percent

o   6.82 percent

Question 12

As the beneficiary of a life insurance policy, you have two options for receiving the insurance               proceeds. You can receive a lump sum of $225,000 one year from today or receive payments of       $1,500 a month for 20 years. If you can earn 6 percent on your money, which option should you take            and why?

o   You should accept the payments because they are worth $247,800 to you today.

o   You should accept the $200,000 because the payments are worth $195,413 to you today.

o   You should accept the payments because they are worth $209,371 to you today.

o   You should accept the payments because they are worth $336,000 to you today.

o   You should accept the $225,000 because the payments are worth $212,264 to you today.

Question 13

You want to borrow $34,800 and can afford monthly payments of $950 for 48 months, but no more. Assume monthly compounding. What is the highest APR rate you can afford?

o   12.24 percent

o   13.94 percent

o   14.52 percent

o   13.38 percent

o   14.82 percent

Question 14

You want to be a millionaire when you retire in 40 years and can earn an annual return of 10.8             percent. How much more will you have to save each month if you wait 15 years to start saving versus           if you start saving at the end of this month?

o   $447.24

o   $454.13

o   $441.15

o   $408.53

o   $414.34

Question 15

You want to buy a new sports coupe for $41,750 and the finance office at the dealership has quoted you an APR of 7.665, compounded monthly for 48 months. What is the effective interest rate on this             loan?

o   8.23 percent

o   7.87 percent

o   7.94 percent

o   8.28 percent

o   8.41 percent

Question 16

You want to make a one-time deposit today that will increase in value to $100 at the end of this year.                 Which rate of interest will allow you to deposit the least amount today to reach this goal?

o   3.4%

o   3.6%

o   2.9%

o   3.8%

o   2.6%

Question 17

On June 1, you borrowed $195,000 to buy a house. The mortgage rate is 5.28 percent. The loan is to be repaid in equal monthly payments over 15 years. How much of the first payment applies to the              principal balance?

o   $658.56

o   $717.51

o   $712.64

o   $722.50

o   $756.70

Question 18

John's Auto Repair just took out a $52,000, 15-year, 8 percent, interest-only loan from the bank.          Payments are made annually. What is the amount of the loan payment in year 10?

o   $41,600

o   $5,200

o   $56,160

o   $4,160

o   $52,000

Question 19

A preferred stock pays an annual dividend of $4.10. What is one share of this stock worth today if the                rate of return is 9.86 percent?

o   $40.43

o   $41.58

o   $43.38

o   $42.36

o   $42.90

Question 20

The government has imposed a fine on JJ’s Place. The fine calls for annual, end-of-year payments of   $60,000, $70,000, $75,000, and $50,000, respectively, over the next four years. The   government will earn 5.5 percent on the funds held. How much will the community shelter receive              six years from      today?

o   $283,250

o   $292,753

o   $263,758

o   $308,855

o   $277,491

Question 21

Troy will receive $7,500 at the end of year 3. At the end of the following two years, he will receive      $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of year 5 if        the interest rate is 8 percent?

o   $28,738

o   $35,255

o   $33,445

o   $30,968

o   $35,622

Question 22

You just signed a consulting contract that will pay you $38,000, $62,000, and $85,000 annually at the end of the next three years, respectively. What is the present value of these cash flows given a discount rate of 10.5?

o   $157,131

o   $148,165

o   $172,910

o   $139,975

o   $147,387

Question 23

Kate starts saving for retirement today and plans to make annual contributions into this retirement    account. Which one of these is most apt to increase the total amount she has saved on the day she      retires? Assume she earns a positive rate of return each year.

o   Delaying her retirement by 1 year

o   Retiring at age 62 rather than age 66

o   Decreasing the investment's average rate of return

o   Delaying any additions to her savings by 1 year

o   Decreasing the amount, she saves each year

Question 24

Annuities with payments occurring at the beginning of each period are called ________, whereas        annuities with payments occurring at the end of each period are called ________.

o   deferred annuities; straight annuities.

o   ordinary annuities; annuities due

o   annuities due; ordinary annuities

o   straight annuities; deferred annuities

o   ordinary annuities; early annuities

Question 25

The effective annual rate (EAR) of a loan will increase if

o   the frequency of the interest rate compounding is decreased. You Answered

o   the annual percentage rate (APR) is decreased.

o   the interest is changed from compound to simple interest at the same annual percentage rate (APR).

o   the compounding of interest is changed from continuous compounding to daily compounding.

o   either the annual percentage rate (APR) or the compounding frequency is increased.

Question 26

An annuity stream where the payments occur forever is called a(n)

o   perpetuity

o   annuity due.

o   amortized cash flow stream.

o   indemnity.

o   ordinary annuity.

Question 27

Scott has been offered a 12-year job at a starting salary of $65,000 and guaranteed annual raises                of 5 percent. What is the current value of this offer at a discount rate of 7 percent?

o   $658,509.52

o   $558,845.85

o   $325,000.00

o   $602,409.91

o   $630,500.00

Question 28

Given a firm with positive annual cash flows, which one of the following will increase the current         value of that firm?

o   Increasing the annual growth rate of the cash flows

o   Decreasing the life of the firm

o   Increasing either the growth rate of the cash flows or the discount rate

o   Increasing the discount rate

o   Decreasing the amount of each cash flow

Question 29

The interest rate charged per period multiplied by the number of periods per year is called the

o   compound interest rate.

o   Simple interest rate.

o   effective annual rate.

o   periodic interest rate.

o   Nominal rate

Question 30

You want to purchase a new house in future, and you are willing to pay $200,000. Currently you have                 $100,000 which you can invest at 9.6% APR compounded monthly. How many years will it be before you have enough money to pay cash for the house?

o   7.25 year

o   7.56 years

o   2 years

o   10.41 years

o   87 years

Question 31

A growing annuity is a set of

o   level cash flows occurring each period for a fixed number of periods.

o   steadily increasing cash flows occurring each period for a fixed number of periods.

o   level cash flows occurring each period forever.

o   arbitrary cash flows occurring each period for no more than 10 years.

o   increasing cash flows occurring each period forever.

Question 32

The growing perpetuity present value formula assumes that

o   growth rate, g, equal discounting rate, r, and the time periods are limited in number.

o   growth rate, g, is less than discounting rate, r, and the time periods are finite

o   the first cash flow occurs at Time 0.

o   the growth rate increases as time progresses.

o   growth rate, g, is less than discounting rate, r, and the time periods are regular and discrete.

Question 33

Suppose you have a 20-year $300,000 business loan payable in 10 years. The interest rate            is 6.6% compounded monthly. What is the amount of balloon payment?

o   $197,656

o   $158,325

o   $45,088

o   $83,556

o   $98,828

Question 34

Martha receives $2000 on the first of each month. Stewart receives $2000 on the last day of each       month. Both Martha and Stewart will receive payments for 30 years. The discount rate is 9 percent,            compounded monthly. What is the difference in the present value of these two sets of payments?

o   $1,926.61

o   $1,942.29

o   $1,849.26

o   $1,911.29

o   $1,864.23

Question 35

You borrow $230,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 25          years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how                much total interest will you pay?

o   $153,524

o   $164,319

o   $160,408

o   $147,027

o   $141,406

Question 36

An annuity costs $185,000 today and provides monthly payments of $933 for 40 years. The first           payment occurs 1 month from today. What annual rate of return does this annuity offer?

o   5.33%

o   4.79%

o   5.47%

o   4.56%

o   5.16%

Question 37

One year ago, the Jenkins Center opened an investment account and deposited $5,000. Today, it is     depositing an additional $6,000 and will make a final deposit of $7,500 1 year from now. How much              will the firm have saved 4 years from now if it earns an average annual return of 6.5 percent?

o   $23,628.86

o   $19,159.67

o   $20,832.60

o   $22,186.72

o   $22,430.84

Question 38

You are considering a job that offers a starting bonus of $2500, paid immediately, and an annual         salary of $48,000, $51,000, and $55,000 for the next 3 years, respectively. The annual salary is paid      at the end of each year. What is this offer worth today at a discount rate of 5.6 percent?

o   $139,283.56

o   $158,283.49

o   $138,066.75

o   $154,383.50

o   $140,394.69

Question 39

Cast Out Co. invested $39,700 in a project. At the end of three years, the company sold the project     for $62,500. What annual rate of return did the firm earn on this project?

o   18.14%

o   17.47%

o   16.33%

o   19.20%

o   18.67%

Question 40

A trust has been established to fund scholarships in perpetuity. The annual distribution of            $1,200 has just been made and future payments will increase by 3 percent per year. What is the       value of this trust at a discount rate of 7.4 percent?

o   $29,960.00

o   $27,272.73

o   $17,189.19

o   $28,090.91

o   $24,609.11