Finance 303 ch 5 – Flashcards
Unlock all answers in this set
Unlock answersquestion
1. You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest? a. Bank 1; 6.1% with annual compounding. b. Bank 2; 6.0% with monthly compounding. c. Bank 3; 6.0% with annual compounding. d. Bank 4; 6.0% with quarterly compounding. e. Bank 5; 6.0% with daily (365-day) compounding.
answer
ANSWER: e RATIONALE: By inspection, we can see that e dominates b, c, and d because, with the same interest rate, the account with the most frequent compounding has the highest EFF%. Thus, the correct answer must be either a or e. However, we cannot tell by inspection whether a or e provides the higher EFF%. We know that with one compounding period a's EFF% is 6.1%, so we can calculate e's EFF%. It is 6.183%, so e is the correct answer. a. = (1 + 0.061/12)12 − 1 = 6.100% e. = (1 + 0.06/365)365 − 1 = 6.183%
question
2. Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding? a. $205.83 b. $216.67 c. $228.07 d. $240.08 e. $252.08
answer
ANSWER: d
question
3. Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding? a. $591.09 b. $622.20 c. $654.95 d. $689.42 e. $723.89
answer
D
question
4. Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today? a. $585.43 b. $614.70 c. $645.44 d. $677.71 e. $711.59
answer
A
question
5. Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today? a. $651.60 b. $684.18 c. $718.39 d. $754.31 e. $792.02
answer
A
question
6. How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%? a. $438.03 b. $461.08 c. $485.35 d. $510.89 e. $537.78
answer
E
question
7. Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price? a. 3.82% b. 4.25% c. 4.72% d. 5.24% e. 5.77%
answer
D
question
8. Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period? a. 15.17% b. 15.97% c. 16.77% d. 17.61% e. 18.49%
answer
B
question
9. Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period? a. 15.54% b. 16.36% c. 17.18% d. 18.04% e. 18.94%
answer
B
question
10. Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple? a. 23.99 b. 25.26 c. 26.58 d. 27.98 e. 29.46
answer
E
question
11. Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double? a. 14.39 b. 15.15 c. 15.95 d. 16.79 e. 17.67
answer
E
question
12. Last year Thomson Inc's earnings per share were $3.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Thomson's EPS to triple? a. 9.29 b. 10.33 c. 11.47 d. 12.75 e. 14.02
answer
D
question
13. You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now? a. $15,260 b. $16,063 c. $16,908 d. $17,754 e. $18,642
answer
C
question
14. You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now? a. $18,369 b. $19,287 c. $20,251 d. $21,264 e. $22,327
answer
A
question
15. You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today? a. $16,112 b. $16,918 c. $17,763 d. $18,652 e. $19,584
answer
A
question
16. You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today? a. $20,993 b. $22,098 c. $23,261 d. $24,424 e. $25,645
answer
C
question
17. What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%? a. $16,576 b. $17,449 c. $18,367 d. $19,334 e. $20,352
answer
E
question
18. What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%? a. $16,806 b. $17,690 c. $18,621 d. $19,601 e. $20,633
answer
E
question
19. You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?a. $5,493.71 b. $5,782.85 c. $6,087.21 d. $6,407.59 e. $6,744.83
answer
E
question
20. You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a. $50,753 b. $53,424 c. $56,236 d. $59,195 e. $62,311
answer
E
question
21. Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today? a. $574,924 b. $605,183 c. $635,442 d. $667,214 e. $700,575
answer
B
question
22. What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%? a. $11,262.88 b. $11,826.02 c. $12,417.32 d. $13,038.19 e. $13,690.10
answer
A
question
23. What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year? a. 8.95% b. 9.39% c. 9.86% d. 10.36% e. 10.88%
answer
A
question
24. You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a. $1,412.84 b. $1,487.20 c. $1,565.48 d. $1,643.75 e. $1,725.94
answer
C
question
25. You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a. $20,701 b. $21,791 c. $22,938 d. $24,085 e. $25,289
answer
C
question
26. Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today? a. $ 825,835 b. $ 869,300 c. $ 915,052 d. $ 963,213 e. $1,011,374
answer
D
question
27. Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today? a. $1,063,968 b. $1,119,966 c. $1,178,912 d. $1,240,960 e. $1,303,008
answer
D
question
28. You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it? a. $284,595 b. $299,574 c. $314,553 d. $330,281 e. $346,795
answer
B
question
29. Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity? a. $225,367 b. $237,229 c. $249,090 d. $261,545 e. $274,622
answer
B
question
30. What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%? a. $ 8,509 b. $ 8,957 c. $ 9,428 d. $ 9,924 e. $10,446
answer
E
question
31. Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years? a. $28,532 b. $29,959 c. $31,457 d. $33,030 e. $34,681
answer
A
question
32. Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account? a. $28,843.38 b. $30,361.46 c. $31,959.43 d. $33,641.50 e. $35,323.58
answer
D
question
34. Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes. a. 7.12% b. 7.49% c. 7.87% d. 8.26% e. 8.67%
answer
B
question
35. Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity? a. 3.44% b. 3.79% c. 4.17% d. 4.58% e. 5.04%
answer
A
question
36. Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to start a new business, and your uncle offers to give you $120,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment? a. 6.85% b. 7.21% c. 7.59% d. 7.99% e. 8.41%
answer
E
question
37. What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250? a. $77.19 b. $81.25 c. $85.31 d. $89.58 e. $94.06
answer
B
question
39. Charter Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay? a. 3.72% b. 4.13% c. 4.59% d. 5.05% e. 5.56%
answer
C
question
40. Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate? a. 15.27% b. 16.08% c. 16.88% d. 17.72% e. 18.61%
answer
B
question
41. Pace Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month? a. $120.83 b. $126.88 c. $133.22 d. $139.88 e. $146.87
answer
A
question
42. Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days? a. $5,178.09 b. $5,436.99 c. $5,708.84 d. $5,994.28 e. $6,294.00
answer
A
