Question

The going rate of interest on a 5-year treasury bond is 4.25%. You have one that will pay $3,000 five years from now. How much is the bond worth today?

Select the correct answer.

a. $2,439.46

b. $2,445.66

c. $2,436.36

d. $2,448.76

e. $2,442.56

Your friend offers to pay you an annuity of $2,300 at the end of each year for 3 years in return for cash today. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Select the correct answer.

a. $6,205.25

b. $6,197.95

c. $6,190.65

d. $6,212.55

e. $6,183.35

A new investment opportunity for you is an annuity that pays $1,200 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?

Select the correct answer.

a. $3,415.58

b. $3,468.38

c. $3,450.78

d. $3,433.18

e. $3,397.98

Suppose you earned a $750,000 bonus this year and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

Select the correct answer.

a. $77,806.48

b. $77,809.58

c. $77,812.68

d. $77,815.78

e. $77,803.38

What's the present value of $1,650 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Select the correct answer.

a. $1,228.66

b. $1,217.86

c. $1,220.56

d. $1,223.26

e. $1,215.16

Suppose your credit card issuer states that it charges a 14.75% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

Select the correct answer.

a. 16.24%

b. 15.34%

c. 14.89%

d. 15.79%

e. 16.69%

Billy Thornton borrowed $180,000 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 Billy have to pay in a 30-day month?

Select the correct answer.

a. $1,087.50

b. $1,089.60

c. $1,091.70

d. $1,083.30

e. $1,085.40

Answer 1

1. In this part we need to compute the present value which will be computed by dividing the cash flow by the present value factor as follows:

= 3000 / 1.0425⁵

= $ 2,436.36

option c is the correct answer

2. In this part we need to compute the present value which will be computed by dividing the cash flows by the present value factors as follows:

= 2,300 / 1.055¹ + 2,300 / 1.055² + 2,300 / 1.055³

= $ 6,205.25

option a is the correct answer

3. In this part we need to compute the present value which will be computed by dividing the cash flows by the present value factors as follows:

= 1,200 (We did not discounted this cash flow since it is at the beginning of the year) + 1,200 / 1.055¹ + 1,200 / 1.055²

= $ 3,415.58

option a is the correct answer.

4. We will be using the financial calculator to solve this part:

Plug the following figures in the calculator

PV = 750,000

I/Y = 8.25

N = 20

FV = 0

CPT PMT, which will give us 77,815.78

So the correct answer is option d

5. We will be using the financial calculator to solve this part:

I/Y = 6% / 12 (Since these are monthly payments we need to divide it by 12)

N = 60 (Since there are 5 years so would equal to 60 months)

FV = 1,650

PMT = 0

CPT PV = $ 1,223.26

So the correct answer is option d

6. Effective Annual Rate is calculated by using the following formula:

( 1 + r / m )^m - 1

= (1 + 0.1475 / 12 )¹² - 1

= 0.1579 or 15.79 %

So the correct answer is option d

7. 360 days interest cost = $ 180,000 x 7.25%

= $ 13,050

So the 30 days interest rate would be

= ($ 13,050 / 360) x 30

= $ 1087.5

So the correct answer is option a.