A Kuhle Review



A Kuhle Review

Finance 101 – Quiz #4

1. You will receive a single payment of $20,000 twenty years from today. The appropriate interest rate is 6%, compounded annually. Find the present value of the payment. FV = 20000; I=6; n=20; comp PV = $6,236.09

2. An investment costs $8,200 in 1988. Twenty years later the investment is worth $95,000. What was the annual rate of return on the investment?

PV = -8200; n=20; 95000 = FV; comp i = 13%

3. Your client plans to save $12,000 per year for the next 22 years. The savings will be deposited at the end of each year into a savings account paying 5%. How much will your client have accumulated at the end of the 22nd year?

-12000 = pmt; 22 = n; 5 = I; comp FV = $462,062.57

4. The present value of an annuity is $72,000. The annual interest rate is 5% (APR). The annuity makes 12 annual payments over 12 years. What is the amount of each payment?

72000 = PV; 5 = i; 12 = n; comp pmt = $8,123.43

5. An annuity pays $450 every quarter for 10 years. The annual interest rate is 7%, compounded quarterly. What is the present value of the annuity?

-450 = pmt; 40 = n; 7/4 = 1.75 = i; comp PV = $12,867.40

6. Your mortgage payment is $1,800 per month. It is a 20-year mortgage at an annual percentage rate of 6%, compounded monthly. How much did you borrow?

-1800 = pmt; 6/12 = .5 = I; 20x12=240 = n; comp PV = $251,245.39

7. An annuity makes fixed payments. What happens to the present value and future value of the annuity as the interest rate decreases? If the interest rate decreases, then the present value will increase because the denominator (discount factor) in the PV equation gets smaller. The FV will decrease because the compound factor is smaller.

8. For any positive interest rate, which one of the following set of cash flows has the greatest present value? Explain your answer. C, because it results in the greatest PV.

Year 1 Year 2

Cash Flows of A $0 $1,200

Cash Flows of B $600 $600

Cash Flows of C $1,200 $0

9. You are given the option of receiving $12,000 now or an annuity of $2,000 per year for 6 years? Which option would you take and explain why. You would take the lump sum now because it is worth more than the PV of either cash flow.

10. You are trying to choose between four investment alternatives. Each investment offers a single risk-free payment. Which of the following investments has the greatest value? Explain your selection.

- The investment that pays $95,000 in 8 years.

- The investment that pays $98,000 in 6 years. Pays highest amt, quickest

- The investment that pays $76,000 in 7 years.

- The investment that pays $90,000 in 12 years.

11. Which of the following provides the greatest effective annual yield?

i % compounded monthly; more frequent compounding

i % compounded quarterly

i % compounded semi-annually

i % compounded annually

12. The reason that money has a time value is due to interest rates? T or F

13. Seven years ago today, you deposited $4,500 in an account that pays 3% compounded annual. If you left that money in the account and reinvested all the interest payments, how much is that account worth today?

-4500 = PV; 3 = i; 7 =n; comp FV = $5534.43

14. You own a security that will pay you a one-time payment of $175,000 ten years from today. If the annual rate of return is 6%, what is the value of this amount today?

10 = n; 175000 = FV; 6 = i; Comp PV = $97,719.09

15. Your mortgage payment is $950 per month. It is a 30 year mortgage at 6% compounded monthly. How much did you borrow?

360 = n; -950 = pmt; 6/12 = .5 = i; comp PV = $158,452.03

16. You are saving for a down payment on a house. The down payment needed is $25,000 exactly four years from today. You will make monthly deposits in an account that earns 12% (APR) compounded monthly. How much must you deposit each month?

-25000 = FV; 12/12 = 1 = i; 48 = n; comp pmt = $408.35

17. You plan to borrow $15,000 to purchase a car at an interest rate of 6.7% APR. You will repay the loan with even monthly payments for 36 months. What are your monthly payments? n= 36; 15000 = PV; 6.7/12 = .5583 = i; comp pmt = $461.10

18. Your client plans to make payments of $800 per month for the next 20 years into a retirement account. If the account is expected to yield 10% per year, what is the expected amount your client will have at the end of 20 years?

-800 = pmt; 20x12 = 240 = n; 10/12 =.8333 = i; comp FV = $607,495.07

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1. $6,236.09 2. 13% 3. $438,075.43 4. $665.92 5. $12,867.40

6. $251,245.39 7. + and - 8. C 9. $12,000 now

10. $98,000 in 6 years 11. i % monthly 12. T 13. $5,534.43 14. $97,719.08

15. $158,452.03 16. $408.35 17. $461.10 18. $607,463.56

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