FIN 362 Week 3 Quiz

FIN 362 Week 3 Quiz |  Assignment Help | Mercer University 

FIN 362 HWK 3 TVM5-6

 

Question 1

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

 

o   Accumulation.

o   Simplifying.

o   Discounting

o   Aggregation.

o   Compounding.

 

 

Question 2

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

 

o   Bonus income.

o   Free interest.

o   Simple interest.

o   Present value interest.

o   Interest on interest.

 

 

Question 3

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

o   Interest on interest.

o   Compound interest.

o   Free interest.

o   Dual interest.

o   Simple interest.

 

 

Question 4

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

 

o   Reducing.

o   Accumulating.

o   Compounding.

o   Growth analysis.

o   Discounting.

 

 

Question 5

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

 

o   Simple rate. .

o   Compound rate.

o   Effective rate.

o   Current yield.

o   Discount rate.

 

 

Question 6

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

 

o   Andy will earn compound interest.

o   Andy will earn more interest in year three than Barb will.

o   Barb will earn more interest the second year than Andy.

o   After five years, Andy and Barb will both have earned the same amount of interest.

o   Barb will earn more interest the first year than Andy will.

 

 

 

Question 7

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming neither Sue nor Neal withdraw any money from their accounts prior to retiring?

 

o   Sue will have less money when she retires than Neal.

o   Neal will earn more compound interest than Sue.

o   If both Sue and Neal wait to age 70 to retire, they will have equal amounts of savings.

o   Sue will have more money than Neal at age 60.

o   Neal will earn more interest on interest than Sue.

 

 

 

Question 8

Samantha opened a savings account this morning. Her money will earn 3.5 percent interest, compounded annually. After four years, her savings account will be worth $5,000. Assume she will not make any withdrawals. Given this, which one of the following statements is true?

 

o   Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest.

o   Samantha deposited more than $5,000 this morning.

o   Samantha is earning simple interest on her savings.

o   The present value of Samantha’s account is $5,000.

o   Samantha could earn more interest on this account if she withdrew her interest earnings each year.

 

 

 

Question 9

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?

 

o   The interest amount you earn will double in value every year.

o   The interest you earn 6 years from now will equal the interest you earn t10 years from now.

o   The present value of this investment is equal to $1,000.

o   (1 + 40).06.The future value of this amount is equal to $1,000 

o   40..06 The total amount of interest you will earn will equal $1,000

 

 

Question 10

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

 

o   Soo Lee's money is worth more than Luis's money given the 7 percent discount rate.

o   In today's dollars, Luis's money is worth more than Soo Lee's.

o   The present values of Luis and Soo Lee's money are equal.

o   In future dollars, Soo Lee's money is worth more than Luis's money.

o   Twenty years from now, the value of Luis's money will be equal to the value of Soo Lee's money.

 

 

Question 11

You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You will earn 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire?

 

I. Invest in a different account paying a higher rate of interest.

II. Invest in a different account paying a lower rate of interest.

III. Retire later.

IV. Retire sooner.

   II only.

 

o   I and III only.

o   I and IV only.

o   II and III only.

o   I only.

 

 

 

Question 12

Phillippe invested $1,000 10 years ago and expected to have $1,800 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, he only has $1,680 in his account today. Which one of the following must be true?

 

o   He earned a lower interest rate than he expected.

o   He earned simple interest rather than compound interest.

o   He ignored the Rule of 72 which caused his account to decrease in value.

o   He did not earn any interest on interest as he expected.

o   The future value interest factor turned out to be higher than he expected.

 

 

Question 13

Which of these will increase the present value of an amount to be received sometime in the future?

 

 

o   Decrease in the interest rate.

o   Increase in the discount rate.

o   Decrease in the future value.

o   Decrease in both the future value and the number of time periods.

o   Increase in the time until the amount is received.

 

 

 

Question 14

Al invested $7,200 in an account that pays 4 percent simple interest. How much money will he have at the end of five years?

 

o   $8,678

o   $8,710

o   $8,056

o   $8,299

o   $8,640

 

 

 

Question 15

Travis invested $8,250 in an account that pays 4 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?

 

o   $302.16

o   $258.09

o   $296.44

o   $266.67

o   $341.41

 

Question 16

What is the future value of $11,600 invested for 17 years at 7.25 percent compounded annually?

 

o   $41,009.13

o   $32,483.60

o   $38,991.07

o   $38,125.20

o   $27,890.87

 

Question 17

Today, you earn a salary of $28,000. What will be your annual salary 12 years from now if you earn annual raises of 2.6 percent?

 

o   $36,736.00

o   $38,100.12

o   $37,414.06

o   $37,122.08

o   $38,235.24

 

 

 

Question 18

You collect old coins. Today, you have two coins each of which is valued at $100. One coin is expected to increase in value by 5.2 percent annually while the other coin is expected to increase in value by 5 percent annually. What will be the difference in the value of the two coins 25 years from now?

 

o   $54.24

o   $16.50

o   $41.79

o   $18.04

o   $30.15

 

 

 

Question 19

Your father invested a lump sum 33 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?

 

o   $11,999.45

o   $15,500.00

o   $13,035.72

o   $6,500.00

o   $5,929.47

 

 

 

Question 20

What is the present value of $42,000 to be received 22 years from today if the discount rate is 14 percent?

 

o   $2,351.49

o   $3,147.07

o   $2,291.06

o   $2,841.41

o   $1,806.18

 

 

Question 21

When you retire 35 years from now, you want to have $1.2 million. You think you can earn an average of 9 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 5 years from today. How much more will you have to deposit as a lump sum if you wait for 5 years before making the deposit?

 

o   $31,662.08

o   $29,891.11

o   $26,319.47

o   $33,406.78

o   $27,414.14

 

 

Question 22

Theo needs $40,000 as a down payment for a house six years from now. He earns 2.5 percent on his savings. Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum. How much additional money must he deposit if he waits for one year rather than making the deposit today?

 

o   $811.13

o   $948.03

o   $778.98

o   $1,020.18

o   $862.30

 

 

 

Question 23

One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?

 

o   6.59 percent

o   7.01 percent

o   6.92 percent

o   6.67 percent

o   6.88 percent

 

 

 

Question 24

Some time ago, Tracie purchased 11 acres of land costing $77,900. Today, that land is valued at $54,800. How long has she owned this land if the price of the land has been decreasing by 3.5 percent per year?

 

o   12.08 years

o   10.29 years

o   11.33 years

o   9.08 years

o   9.87 years

 

 

 

 

 

Question 25

On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?

 

o   Age 21

o   Age 31

o   Age 29

o   Age 30

o   Age 32

 

Question 26

Your grandmother is gifting you $150 a month for four years while you attend college to earn your bachelor's degree. At a 4.8 percent discount rate, what are these payments worth to you on the day you enter college?

 

o   $6,539.14

o   $6,201.16

o   $6,608.87

o   $6,870.23

o   $5,589.19

 

Question 27

Your employer contributes $60 a week to your retirement plan. Assume you work for your employer for another 20 years and the applicable discount rate is 9 percent. Given these assumptions, what is this employee benefit worth to you today?

 

o   $28,927.38

o   $25,306.16

o   $27,618.46

o   $29,211.11

o   $25,987.74

 

 

Question 28

You just purchased an annuity that will pay you $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent?

 

o   $241,309

o   $266,498

o   $245,621

o   $258,319

o   $251,409

 

 

Question 29

You are scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

 

o   $2,021.18

o   $2,304.96

o   $2,170.39

o   $2,027.94

o   $2,511.07

 

 

Question 30

What is the future value of $1,400 a year for 35 years at 6 percent interest? Assume annual compounding.

 

o   $164,200

o   $138,714

o   $147,267

o   $156,009

o   $142,908

 

 

Question 31

You are borrowing $21,800 to buy a car. The terms of the loan call for monthly payments for five years at 8.25 percent interest. What is the amount of each payment?

 

o   $387.71

o   $444.64

o   $439.76

o   $391.40

o   $401.12

 

 

Question 32

Travis International has a one-time expense of $2.86 million that must be paid three years from now. Since the firm cannot raise that amount in one day, it wants to save an equal amount each month over the next three years to fund this expense. If the firm can earn 2.1 percent on its savings, how much must it save each month?

 

o   $73,901.15

o   $78,416.20

o   $87,411.08

o   $91,300.05

o   $77,037.69

 

 

Question 33

You are considering an annuity that costs $160,000 today. The annuity pays $17,500 a year at an annual interest rate of 7.5 percent. What is the length of the annuity time period?

 

o   13 years

o   15 years

o   17 years

o   14 years

o   16 years

 

 

Question 34

Today, you are retiring. You have a total of $289,416 in your retirement savings. You want to withdraw $2,500 at the beginning of every month, starting today and expect to earn 4.6 percent, compounded monthly. How long will it be until you run out of money?

 

o   12.71 years

o   29.97 years

o   8.56 years

o   18.99 years

o   22.03 years

 

 

Question 35

Your insurance agent is trying to sell you an annuity that costs $50,000 today. By buying this annuity, your agent promises that you will receive payments of $250 a month for the next 20 years. What is the rate of return on this investment?

 

o   2.47 percent

o   3.67 percent

o   2.45 percent

o   3.75 percent

o   1.88 percent

 

 

Question 36

You have been investing $250 a month for the last 13 years. Today, your investment account is worth $73,262. What is your average rate of return on your investments?

 

o   9.41 percent

o   8.94 percent

o   9.23 percent

o   9.36 percent

o   9.78 percent

 

 

Question 37

You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $21,500 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?

 

o   $398,148

o   $291,006

o   $350,000

o   $346,900

o   $348,409

 

 

Question 38

A wealthy benefactor just contributed to your college’s scholarship program. This gift will provide $20,000 in scholarships next year with that amount increasing by 2 percent annually thereafter.. If the discount rate is 6.5 percent, what is the current value of this perpetual gift?

 

o   $550,750

o   $350,000

o   $444,444

o   $307,700

o   $525,000

 

 

 

 

 

 

 

 

Question 39

You want to start your own consulting business and believe it could produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $450,000. At a 14 percent discount rate, what is this business idea worth today?

 

o   $514,545

o   $478,901

o   $311,406

o   $430,109

o   $345,738

 

 

Question 40

You are considering a project that will provide annual cash inflows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 12.5 percent?

 

o   $54,877

o   $47,615

o   $53,567

o   $46,388

o   $55,429