REVIEW CHAPTER 1

1. You have $500 that you would like to invest. The following interest rates are
being offered by ANZ. Which is the best deal?
a. 8.9% compounded annually.
b. 8.8% compounded quarterly.
c. 8.65% compounded monthly.
d. All of the deals are indifferent.

2. You deposit $800 into a bank account today. Approximately how much
interest (in dollar amount) will be earned in just the second year if the
interest rate is 6% p.a compounded annually?

a. $50.88
b. $48
c. $96
d. $105.62

3. Five years from now will receive cash flows of $75 per year. These CF will
continue forever. If the interest rate is 6% p.a, what is the present value of
these cash flows?

a. $799.68
b. $894.22
c. $934.07
d. $990.12

4. Clara enters into a loan agreement to borrow $210,000 to help finance the
purchase of her new home. She plans to make a down payment of $32,500
and borrow the remainder from the First Bank. The loan agreement specifies
the term of 25 years with monthly repayment at the fixed rate of 10% p.a.
(compounded monthly). What is her monthly payment?
a. $1,612.94
b. $1,908.27
c. $7,894.68
d. $19,554.83

5. Floyd Ferres invested $3,000 into an account 5 years ago. Today his account
has grown to have a balance of $3,927.5. Given that his account offered
 monthly compounding of interest, the interest rate (APR) on this account is
was closest to:

a. 5% p.a.
b. 5.25% p.a.
c. 5.47% p.a.
d. 5.54% p.a.

6. Joe purchases a $100 perpetuity on which payments begin in one year. Lynn
purchases a $100 perpeptuity on which payments begin immediately. Both
annuities pay annual payments. The applicable discount rate is 10%. Which
one of the following statement is true?

a. Joe’s perpetuity is worth $100 more than Lynn’s.

b. Lynn’s perpetuity is worth $100 more than Joe’s.
c. Joe’s perpetuity is worth $90.91 more than Lynn’s.
d. Lynn’s perpetuity is worth $90.01 more than Joe’s.

7. An effective annual rate must be greater than an annual percentage rate. a.

True
b. False

8. You deposit $1,000 into a bank account today. Approximately how much
interest rate (in dollar amount) will be earned in just the second year if the
interest rate is 8% p.a. compounded annually?

a. $86.4

b. $93.31
c. $105.62
d. $160

9. Your great aunt left you an inheritance in the form of a trust. The trust
agreement states that you are to receive $3,600 on the first day of each year,
starting immediately and continuing for 20 years. What is the value of this
inheritance today if the applicable interest rate is 6.75% p.a.? a. $40,311.16
b. $41,516.01
c. $42,909.29
d. $43,333.33
10. Dagny Taggart has just taken out a $400,000 mortage loan to finance for her
new home. The mortage has a 30 year term with monthly payments and has
an interest rate of 5.4% p.a. How much principal still owes on the loan after
12 years?

a. $309,888.96
b. $129,216.79
c. $237,662.53
d. $209,540.74

11. You have just won the lottery prize. You have options to choose to receive
$25,000 five years from now or $70,000 eleven years from now. At what
implied compound interest rate should you be indifferent between two
options?

a. 12.25%
b. 18.72%
c. 22.87% lOMoARcPSD|15427778

d. Not be able to determine

12. How much will accumulate in an account with an initial deposit of $100, and
which earn 10% interest compounded quarterly for 3 years?

a. 107.79
b. 133.1
c. 134.49
d. 313.14

13. Three years from now, John will establish a trust fund to give his heirs
$100,000 a year forever. The fund is expected to earn a 5.75% p.a. rate of
return. How much money he deposit today to establish this trust fund?

a. 1,739,130.43
b. 1,534,523.30
c. 1,555,146.84
d. 1,470,588.03
14. You will receive an inheritance of $500,000 in 20 years on your 40 th
birthday. What is the value of the inheritance today if the discount rate is
10%?

a. $74,321.81
b. $500,000
c. $50,000
d. $3,363,749
15. How long must one wait for an initial investment of $1,210 to triple in value
if the investment earns 8% p.a.?
a. Over 14 years
b. Over 15 years
c. Over 22 years
d. More information is needed to determine the answer

16. What is the present value of the following payment stream, discounted at 8%
p.a.: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at
the end of year 3?

a. 5,144.03
b. 5,423.87
c. 5,520.00
d. 5,022.11

17. The process of interest being earned on previously-earned interest is termed

as: a. Net present value
b. Capital interest
c. Compounding
d. Principal interest

18. Imagine that your goal is to retire 34 years from today with $1,000,000 in
savings. Assuming that you currently (i.e., today) have $5,000 in savings,
what interest rate must you earn on that savings to hit your goal?
a. 16.86%
b. 48.82%
c. 4.882%
d. 20%
19. Suppose you invest $10,000 with an interest rate at 6%, what is the payment
after one year?

a. $600
b. $1,000
c. $10,000
d. $10,600

20. Imagine that you deposit $6,000 a year, starting one year from today, for 4
years in savings account paying 6% per annum. How much money will you
have at the end of year 4?

a. 27,822.56
b. 24,000
c. 30,299.44
d. 26,247.70

21. John, a financial manager of APC, is comparing 2 investment options, both

pay at 8% p.a., compounded annually with the total of 120,000 of income.
Option A pays three annual payments of $40,000 each. Option B pays three
annual payments starting with $20,000 the first year followed by two annual
payments of $50,000 each. Which investment option should you choose?
(PVA = 103,083.87; PVB = 101,077.07)
a. It does not matter. Both options provide $120,000 of income b. Option A
is better, because it has the higher future value at the end of year 3.
c. Option B is better, because it has a higher present value. d.
Option A is better, because it has a higher present value.

22. Ferris invested $3,000 into an account five years ago. Today his account has
grown to have a balance of $3,927.50. Given that his account offered
monthly compounding of interest, the interest rate on this account is was
closest to: a. 5%
b. 5.25%
c. 5.40%
d. 5.54%

23. John wants to establish a trust fund to give his heirs $100,000 a year forever.
The fund is expected to earn a 5.75% p.a. rate of return. How much money
he deposit today to establish this trust?
 a. $1,700,000
b. $1,716,067
c. $1,739,130
d. $1,800,000

24. John plans to make deposits of $500, $200, $300 and $400 respectively on
the last day of each year for the next four years. If the account earns 6%
p.a., how much money can John withdraw after 5 years from now? a.
$1,511.89
b. $1,538.23
c. $1,551.09
d. $1,630.52

25. Different banks offer different interest rates. Which bank is the most
attractive?
DAB compounded yearly at 15% p.a.
SCB compounded monthly at 14.5 p.a.
BIDV compounded semi-monthly at
14.675% at 14.675% p.a. VCB
compounded quarterly at 14.75%
p.a. a. DAB
b. SCB
c. BIDV
d. VCB

26. An interest rate quoted as 6% p.a. compounded monthly means interest is

paid at a rate of 6% each month. a. True
b. False

27. Three years from now you will begin to receive cash flows of $100 per year.
These cash flows will continue forever. If the discount rate is 6% p.a., what
is the present value of these cash flows? a. $1,320.16 b. $1,399.36
c. $1,483.33
d. $1,572.33

28. You decides to start saving for a vacation to Europe. Starting from today,
you will deposit $1,000 into a bank account at the beginning of each of the
next 10 years. If the interest rate is 5.625%, how much will you have to
spend on your vacation? a. $12,259.63
b. $12,950.96
 c. $13,679.45
d. $14,495.48

29. Ten years ago you enter into a 30-year $250,000 mortgage at a fixed rate of
12% p.a. (compounding monthly). How much do you still owe the bank
now? a. $524,395.61
b. $450,948.47
c. $233,544.96
d. None of the above is corrected.

30. Nine years ago, Ann entered into a $34,000 mortgage loan of 20 year and at
a fixed rate of 12%
p.a. (compounded monthly) with HSBC. Ann decides to refinance her loan
with ANZ who offers 10% p.a. (compound monthly) for mortgage loan.
There is no cost associated with this refinancing. What is her monthly
savings from this refinancing? a. $32.31
b. $30.12
c. $17.46
d. Not be able to determine
31,69
31. Rob and Laura wish to purchase a new home. The price is $187,500 and they
plan to pay a down payment of $37,500. The First Bank will lend them the
remainder at 10% p.a. compounded monthly for 30 years. The first payment
is due one month from today. What is the amount of their monthly payment?
a. $1,316.36
b. $1,645.45
c. $5,675.49
d. $15,922.49

32. You intend to enter into a 4 – year mortgage loan to finance for your new
car. The maximum repayment that you can afford to pay is $125 a month on
a car loan. If the interest rate is 7.9%: the most expensive car that you
should be looking at is _____; and the amount of interest that you will pay
during the first month of your mortgage is ____. a. $4,849.53; $31.93
b. $5,130.10; $33.77
c. $5,150.00; $125.00
d. $5,163.75; $33.99

33. A dollar today is worth less than a dollar tomorrow

a. True
 b. False

34. You should never compare cash flows occuring at different times without
first discounting them to a common date a. True b. False

35. How much will accumulate in an account with an initial deposit of $100, and
which earns 10% interest compounded quarterly for 3 years? a. $107.69
b. $133.10
c. $134.49
d. $313.84

36. John wants to establish a trust fund to give his heirs $30,000 in 10 years.
The fund is expected to earn a 6% rate of return. How much money he
deposit today to establish this trust? a. $400,000
b. $300,000
c. $500,000
d. Others
37. How long must one wait for an initial investment of $1,000 to triple in value
if the investment earns 9% p.a.?
a. Over 14 years
b. Over 15 years
c. Over 22 years
d. Over 12 years

38. Assume the total expense for your current year in college equals $20,000.
Approximately how much would your parents have needed to invest 21
years ago in an account paying 8% compounded annually to cover this
amount? a. $952.00
b. $1,600.00
c. $1,728.00
d. $3,973.00

39. A car dealer offers to sell you a car with the following deals: Option 1: Pay
cash $11,000 now; Option 2: $5,000 down and $4,000 at the end of each
year for the next two years. Which option you choose, know 10% rate of
return? a. Option 1
b. Option 2

40. For a given amount, the lower the interest rate, the more the future value.
 a. True
b. False

41. Compound interest pays interest for each time period on the original
investment plus the accumulated interest. a. True
b. False

42. To calculate present value, we discount the future value by some interest rate
r, the discount rate.
a. True
b. False

43. All other things equal, the annuity received at the end of each period has
greater present value than does one received at the beginning of each period.

a. True

b. False
44. John wants to establish a trust fund to give his heirs $50,000 a year forever.
The fund is expected to earn a 5% rate of return. How much money he
deposit today to establish this trust? a. $1,250,000 b. $1,150,000
c. $1,000,000
d. $1,300,000

45. Any sequence of equally spaced, level cash flows is called an annuity. An
annuity is also known as a perpetuity. a. True
b. False

46. What is the present value of the following set of cash flows at an interest rate
of 7%: $1,000 today, $2,000 at end of year 1, $4,000 at end of year 3, and
$6,000 at end of year 5? a. $10,412.27
b. $21,345.90
c. $11,120
d. $6,000

47. A cash-strapped young professional offers to buy your car with four, equal
annual payments of $3,000, beginning 2 years from today. Assuming you're
indifferent to cash versus credit, that you can invest at 10%, and that you
 want to receive $9,000 for the car, should you accept? a. Yes, present value
is $9,510
b. Yes, present value is $11,372

c. No, present value is $8,645

d. No, present value is $7,461

48. What will be the monthly payment on a home mortgage of $75,000 at

12% interest, to be amortized over 30 years? a. $771.46
b. $775.90
c. $1,028.61
d. $1,034.53

49. A recent ANZ Bank ad offered the following nominal rates for a 3-year term
deposit:
- Interest paid monthly with APR of 7.90%

- Interest paid quarterly with APR of 8.10%

- Interest paid annually with APR of 8.15%
What is effective interest of each option? Which is the best choice?

50. Dagny Taggart has just taken out a $800,000 mortgage loan to finance for her new home. The mortgage
has a 30-year term with quarterly payments and has an interest rate (APR) of 6% p.a. How much principal
Dagny still owes on the loan after 10 years? 668,953

51. .$50,000 is borrowed, to be repaid in three equal, annual payments with 10%
interest. Approximately how much principal is amortized with the

first payment? a. $2,010.60

b. $5,000
c. $15,105.74
d. $20,105.74

52. Your real estate agent mentions that homes in your price range require a
payment of approximately $1,200 per month over 30 years at 9% interest.
What is the approximate size of the mortgage with these terms? a. $128,035
b. $147,940
c. $149,140
 d. $393,120

53. The effective annual rate (EAR) for a loan with a stated APR of 8%
compounded monthly is closest to: a. 7.72%
b. 8%
c. 8.30%
d. 8.66%

54. A credit card account that charges the interest at the rate of 1.4% per
month would have an effective annual rate (EAR) of _______ and an annual
percentage rate (APR) of _________.
a. 16.8%; 18.16%
b. 18.16%; 16.8%
c. 18.16%; 18.6%
d. 16.80%; 18.60%