TVM
TEST BANK:
TIME VALUE OF MONEY
(Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Problems
Easy:
FV of a single payment Answer: d Diff: E
[i]. You deposit $2,000 in a savings account that pays 10 percent interest, compounded annually. How much will your account be worth in 15 years?
a. $2,030.21 b. $5,000.00 c. $8,091.12 d. $8,354.50 e. $9,020.10
FV of a single payment Answer: c Diff: E
[ii]. You deposit $1,000 in a savings account that pays 9 percent interest, compounded annually. How much will your account be worth in 6 years?
a. $1,054.00 b. $1,199.00 c. $1,677.10 d. $1,689.48 e. $7,523.33
PV of a single payment
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a. $240.42 b. $263.80 c. $300.20 d. $315.38 e. $346.87
Quarterly compounding Answer: a Diff: E
[xiv]. If $100 is placed in an account that earns a nominal 4 percent, compounded quarterly, what will it be worth in 5 years?
a. $122.02 b. $105.10 c. $135.41 d. $120.90 e. $117.48
Effective annual rate Answer: c Diff: E
[xv]. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks?
a. 0.25% b. 0.50% c. 0.70% d. 1.00% e. 1.25%
Effective annual rate Answer: b Diff: E
[xvi]. You recently received a letter from Cut-to-the-Chase National Bank that offers you a new credit card that has no annual fee. It states that the annual percentage rate (APR) is 18 percent on outstanding balances. What is the effective annual interest rate? (Hint: Remember these companies bill you monthly.)
a. 18.81% b. 19.56% c. 19.25% d. 20.00% e. 18.00%
Effective annual return Answer: b Diff: E
[xvii]. Which of the
Poor Dog, Inc. borrowed $135,000 from the bank today. They must repay this money over the next six years by making monthly payments of $2,215.10. What is the interest rate on the loan? Express your answer with annual compounding.
7. Trevor's Tires is offering a set of 4 premium tires on sale for $550. The credit terms are 24 months at $20 per month. What is the interest rate on this offer?
What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?
1. Beverly Frost bought a home for $190,000 with a down payment of $19,000 at 7% for 25 years. Since then the rate has risen to 9%. How much more would her monthly payment be if she bought the house at 9%?
Therefore the annual interest rate is 8% and the effective annual rate compounded quarterly is 8.24%
6. (TCO B) Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in five equal installments at the end of each of the next five years. How much interest would you have to pay in the first year? (Points : 10)
10. An investment of $1,000 today will grow to $1,100 in one year. What is the continuously compounded rate of return?
The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
12. Today, you deposit $10,750 in a bank account that pays 3 percent simple interest. How much interest will you earn over the next 7 years?
After the calculations you end up coming out with a rate of 14.87%. The third and final part of question three asks what rate you will need if the interest is compounded semiannually. All you have to do is double the amount of terms and you will come out with a lower number of 7.177%. Since the interest is compounded semiannually that means that you will need to times that number by two and you come out with your final number of 14.35%.
7. You have $350.00 per month to spend on a car payment. If your credit union charged 7.5% interest on a used car, how much car can you purchase if you will only finance for 4 years? __________
$25,000 if invested for 18 years at a 1.72% interest rate. The stated rate of
e. If we evaluated at the same effective rate, the earlier payments would give the semiannual bond the higher value.
(Compound annuity) what is the accumulated sum of each of the following streams of payme
Account A - Present Value with Discount rate of 6% = 6500/(1+6%) = 6500/1.06 = $6,132.08