b

28.You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to
draw out of your savings at the rate of $10,000 per year. How much would you have to pay in equal
annual deposits until retirement to meet your objectives? Assume interest remains at 9%. [$1254]

29.You can deposit $4000 per year into an account that pays 12% interest. If you deposit such
amounts for 15 years and start drawing money out of the account in equal annual installments,
how much could you draw out each year for 20 years? [$19964.12]

30.What is the value of a $100 perpetuity if interest is 7%? [$1428.57]

31.You deposit $13,000 at the beginning of every year for 10 years. If interest is being paid at 8%, how
much will you have in 10 years? [$203391.33]

32.You are getting payments of $8000 at the beginning of every year and they are to last another five
years. At 6%, what is the value of this annuity? [35720.84]

33.How much would you have to deposit today to have $10,000 in five years at 6% interest
compounded semiannually? [$7440.94]

34.Construct an amortization schedule for a 3-year loan of $20,000 if interest is 9%.

35.If you get payments of $15,000 per year for the next ten years and interest is 4%, how much would
that stream of income be worth in present value terms? [$121663.50]

36.Your company must deposit equal annual beginning of year payments into a sinking fund for an
obligation of $800,000 which matures in 15 years. Assuming you can earn 4% interest on the sinking
fund, how much must the payments be? [$38415]

37.If you deposit $45,000 into an account earning 4% interest compounded quarterly, how much would
you have in 5 years? [$54908.55]

38.How much would you pay for an investment which will be worth $16,000 in three years? Assume
interest is 5%. [$13821]

39.You have $100,000 to invest at 4% interest. If you wish to withdraw equal annual payments for 4
years, how much could you withdraw each year and leave $0 in the investment account? [$27548]

40.You are considering the purchase of two different insurance annuities. Annuity A will pay you
$16,000 at the beginning of each year for 8 years. Annuity B will pay you $12,000 at the end of each
year for 12 years. Assuming your money is worth 7%, and each costs you $75,000 today, which would
you prefer? [$102228 and $95312]
 41.If your company borrows $300,000 at 8% interest and agrees to repay the loan in 10 equal
semiannual payments to include principal plus interest, how much would those payments be? [$36897]

42.You deposit $17,000 each year for 10 years at 7%. Then you earn 9% after that. If you leave the
money invested for another 5 years how much will you have in the 15th year? [$361374]

43. c

44. c

45.. c

46. a

47.. b

48 b

49 d

50. a

51.. c

52. d

53.. b

54. a

55. d

56. a

57.. d

58. a

59. a

60 c

61. b

62.. b

63 c

64. a

65. b
66. a

67. c

68.. c

69 d

70. d

71.. b

72.. a

73. c

74 d

75.Justin Banks just won the lottery and is trying to decide between the annual cash flow payment option
or the lump sum option. He can earn 8% at the bank and the annual cash flow option is $100,000/year,
beginning today for 15 years. What is the annual cash flow option worth to Banks today?
A) $924,423.70.
B) $855,947.87.
C) $1,080,000.00.

A- $924,423.70.

First put your calculator in the BGN.

N = 15; I/Y = 8; PMT = 100,000; CPT → PV = 924,423.70.

Alternatively, do not set your calculator to BGN, simply multiply the ordinary annuity (end of the period
payments) answer by 1 + I/Y. You get the annuity due answer and you don’t run the risk of forgetting
to reset your calculator back to the end of the period setting.

OR N = 14; I/Y = 8; PMT = 100,000; CPT → PV = 824,423.70 + 100,000 = 924,423.70.

76.A recent ad for a Roth IRA includes the statement that if a person invests $500 at the beginning of
each month for 35 years, they could have $1,000,000 for retirement. Assuming monthly compounding,
what annual interest rate is implied in this statement?

A) 7.625%.
B) 7.411%.
C) 6.988%.

B- 7.411%.

Solve for an annuity due with a future value of $1,000,000, a number of periods equal to (35 × 12) = 420,
payments = -500, and present value = 0. Solve for i. i = 0.61761 × 12 = 7.411% stated annually. Don’t
forget to set your calculator for payments at the beginning of the periods. If you don’t, you’ll get
7.437%.

77.If 10 equal annual deposits of $1,000 are made into an investment account earning 9% starting today,
how much will you have in 20 years?

A) $39,204.
B) $35,967.
C) $42,165.

A- $39,204.

Switch to BGN mode. PMT = –1,000; N = 10, I/Y = 9, PV = 0; CPT → FV = 16,560.29. Remember the
answer will be one year after the last payment in annuity due FV problems. Now PV10 = 16,560.29; N =
10; I/Y = 9; PMT = 0; CPT → FV = 39,204.23. Switch back to END mode.

78.In 10 years, what is the value of $100 invested today at an interest rate of 8% per year, compounded
monthly?

A) $222.
B) $216.
C) $180.

A-

N = 10 × 12 = 120; I/Y = 8/12 = 0.666667; PV = –100; PMT = 0; CPT → FV = 221.96.

79.Compute the present value of a perpetuity with $100 payments beginning four years from now.
Assume the appropriate annual interest rate is 10%.

A) $751.
B) $683.
C) $1000.

A- $751.

Compute the present value of the perpetuity at (t = 3). Recall, the present value of a perpetuity or annuity
is valued one period before the first payment. So, the present value at t = 3 is 100 / 0.10 = 1,000. Now it
3
is necessary to discount this lump sum to t = 0. Therefore, present value at t = 0 is 1,000 / (1.10) = 751.

80.What will $10,000 become in 5 years if the annual interest rate is 8%, compounded monthly?

A) $14,693.28.
B) $14,802.44.
C) $14,898.46.
C- $14,898.46.

60
FV(t=5) = $10,000 × (1 + 0.08 / 12) = $14,898.46

N = 60 (12 × 5); PV = -$10,000; I/Y = 0.66667 (8% / 12months); CPT → FV = $14,898.46

81.An investor will receive an annuity of $5,000 a year for seven years. The first payment is to be
received 5 years from today. If the annual interest rate is 11.5%, what is the present value of the annuity?

A) $15,000.
B) $13,453.
C) $23,185.
4
A-With PMT = 5,000; N = 7; I/Y = 11.5; value (at t = 4) = 23,185.175. Therefore, PV (at t = 0) = 23,185.175 / (1.115) =
$15,000.68.

82.Sarah Parker is buying a new $25,000 car. Her trade-in is worth $5,000 so she needs to borrow
$20,000. The loan will be paid in 48 monthly installments and the annual interest rate on the loan is 7.5%.
If the first payment is due at the end of the first month, what is Sarahs monthly car payment?

A) $483.58.
B) $416.67.
C) $480.57.

A-

N = 48; I/Y = 7.5 / 12 = 0.625; PV = 20,000; FV = 0; CPT → PMT = 483.58.

83.What is the present value of a 10-year, $100 annual annuity due if interest rates are 0%?

A) $900.
B) $1,000.
C) No solution.

B- $1,000.

When I/Y = 0 you just sum up the numbers since there is no interest earned.

84.A local bank offers a certificate of deposit (CD) that earns 5.0% compounded quarterly for three and
one half years. If a depositor places $5,000 on deposit, what will be the value of the account at maturity?

A) $5,931.06.
B) $5,949.77.
C) $5,875.00.

B- $5,949.77.
 (3.5 × 4)
The value of the account at maturity will be: $5,000 × (1 + 0.05 / 4) = $5.949.77;
or with a financial calculator: N = 3 years × 4 quarters/year + 2 = 14 periods; I = 5% / 4 quarters/year =
1.25; PV = $5,000; PMT = 0; CPT → FV = $5,949.77.

85.Whats the effective rate of return on an investment that generates a return of 12%, compounded
quarterly?

A) 12.55%.
B) 14.34%.
C) 12.00%.

A- 12.55%.

4
(1 + 0.12 / 4) − 1 = 1.1255 − 1 = 0.1255.

86.As the number of compounding periods increases, what is the effect on the EAR? EAR:

A) increases at a decreasing rate.

B) increases at an increasing rate.
C) does not increase.

87.An investor has the choice of two investments. Investment A offers interest at 7.25% compounded
quarterly. Investment B offers interest at the annual rate of 7.40%. Which investment offers the higher
dollar return on an investment of $50,000 for two years, and by how much?

A) Investment B offers a $36.92 greater return.

B) Investment A offers a $53.18 greater return.
C) Investment A offers a $122.18 greater return.

B- Investment A offers a $53.18 greater return.

Investment A: I = 7.25 / 4; N = 2 × 4 = 8; PV = $50,000; PMT = 0; CPT → FV = $57,726.98

Investment B: I = 7.40; N = 2; PV = $50,000; PMT = 0; CPT → FV = $57,673.80
Difference = investment A offers a $53.18 greater dollar return.

88.If $2,000 a year is invested at the end of each of the next 45 years in a retirement account yielding
8.5%, how much will an investor have at retirement 45 years from today?

A) $901,060.
B) $100,135.
C) $90,106.

A- $901,060.

N = 45; PMT = –2,000; PV = 0; I/Y = 8.5%; CPT → FV = $901,060.79.

89.If $2,500 were put into an account at the end of each of the next 10 years earning 15% annual
interest, how much would be in the account at the end of ten years?
 A) $41,965.
B) $27,461.
C) $50,759.

C-

N = 10; I = 15; PMT = 2,500; CPT → FV = $50,759.

90.Natalie Brunswick, neurosurgeon at a large U.S. university, was recently granted permission to take
an 18-month sabbatical that will begin one year from today. During the sabbatical, Brunswick will need
$2,500 at the beginning of each month for living expenses that month. Her financial planner estimates
that she will earn an annual rate of 9% over the next year on any money she saves. The annual rate of
return during her sabbatical term will likely increase to 10%. At the end of each month during the year
before the sabbatical, Brunswick should save approximately:

A) $3,505.
B) $3,356.
C) $3,330.

B-

This is a two-step problem. First, we need to calculate the present value of the amount she needs over
her sabbatical. (This amount will be in the form of an annuity due since she requires the payment at the
beginning of the month.) Then, we will use future value formulas to determine how much she needs to
save each month (ordinary annuity).

Step 1:Â Calculate present value of amount required during the sabbatical

Using a financial calculator: Set to BEGIN Mode, then N = 12 × 1.5 = 18; I/Y = 10 / 12 = 0.8333; PMT =
2,500; FV = 0; CPT → PV = 41,974

Step 2:Â Calculate amount to save each month

Make sure the calculator is set to END mode, then N = 12; I/Y = 9 / 12 = 0.75; PV = 0; FV = 41,974;
CPT → PMT = -3,356

91.Peter Wallace wants to deposit $10,000 in a bank certificate of deposit (CD). Wallace is considering
the following banks:

 Bank A offers 5.85% annual interest compounded annually.

 Bank B offers 5.75% annual interest rate compounded monthly.
 Bank C offers 5.70% annual interest compounded daily.

Which bank offers the highest effective interest rate and how much?

A) Bank B, 5.90%.
B) Bank A, 5.85%.
C) Bank C, 5.87%.

A- Effective interest rates:

Bank A = 5.85 (already annual compounding)

Bank B, nominal = 5.75; C/Y = 12; effective = 5.90

Bank C, nominal = 5.70, C/Y = 365; effective = 5.87

Hence Bank B has the highest effective interest rate.

92.What is the total present value of $200 to be received one year from now, $300 to be received 3 years
from now, and $600 to be received 5 years from now assuming an interest rate of 5%?

A) $919.74.
B) $980.89.
C) $905.87.

A-

3 5
200 / (1.05) + 300 / (1.05) + 600 / (1.05) = 919.74.

93.An annuity will pay eight annual payments of $100, with the first payment to be received three years
from now. If the interest rate is 12% per year, what is the present value of this annuity? The present value
of:

a lump sum discounted for 3 years, where the lump sum is the present value of an ordinary
A)
annuity of 8 periods at 12%.
B) an ordinary annuity of 8 periods at 12%.
a lump sum discounted for 2 years, where the lump sum is the present value of an ordinary
C)
annuity of 8 periods at 12%.

C- a lump sum discounted for 2 years, where the lump sum is the present value of an ordinary annuity of
8 periods at 12%.

The PV of an ordinary annuity (calculation END mode) gives the value of the payments one period before
the first payment, which is a time = 2 value here. To get a time = 0 value, this value must be discounted
for two periods (years).

94.A local bank offers an account that pays 8%, compounded quarterly, for any deposits of $10,000 or
more that are left in the account for a period of 5 years. The effective annual rate of interest on this
account is:

A) 8.24%.
B) 4.65%.
C) 9.01%.

A- 8.24%.
 m 4
(1 + periodic rate) − 1 = (1.02) − 1 = 8.24%.

95.What is the maximum price an investor should be willing to pay (today) for a 10 year annuity that will
generate $500 per quarter (such payments to be made at the end of each quarter), given he wants to
earn 12%, compounded quarterly?

A) $11,557.
B) $6,440.
C) $11,300.

A-

Using a financial calculator: N = 10 × 4 = 40; I/Y = 12 / 4 = 3; PMT = -500; FV = 0; CPT → PV = 11,557.

96.Given: an 11% annual rate compounded quarterly for 2 years; compute the future value of $8,000
today.

A) $8,962.
B) $9,939.
C) $9,857.

B- $9,939.

Divide the interest rate by the number of compound periods and multiply the number of years by the
number of compound periods. I = 11 / 4 = 2.75; N = (2)(4) = 8; PV = 8,000.

97.Jamie Morgan needs to accumulate $2,000 in 18 months. If she can earn 6% at the bank,
compounded quarterly, how much must she deposit today?

A) $1,829.08.
B) $1,832.61.
C) $1,840.45.

A-
Each quarter of a year is comprised of 3 months thus N = 18 / 3 = 6; I/Y = 6 / 4 = 1.5; PMT = 0; FV =
2,000; CPT → PV = $1,829.08.

98.If $1,000 is invested at the beginning of the year at an annual rate of 48%, compounded quarterly,
what would that investment be worth at the end of the year?

A) $1,048.
B) $4,798.
C) $1,574.

C- $1,574.

N = 1 × 4 = 4; I/Y = 48/4 = 12; PMT = 0; PV = –1,000; CPT → FV = 1,573.52.

99.Given: $1,000 investment, compounded monthly at 12% find the future value after one year.

A) $1,126.83.
B) $1,121.35.
C) $1,120.00.

C-

Divide the interest rate by the number of compound periods and multiply the number of years by the
number of compound periods. I = 12 / 12 = 1; N = (1)(12) = 12; PV = 1,000.

100.If a $45,000 car loan is financed at 12% over 4 years, what is the monthly car payment?

A) $1,185.
B) $985.
 C) $1,565.

A-

N = 4 × 12 = 48; I/Y = 12/12 = 1; PV = –45,000; FV = 0; CPT → PMT = 1,185.02