Finance Exam 2

Katlyn needs to invest $5,318 today for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?



Present value

Future value

Factor value

Compound value

Complex value

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 9 percent interest. Approximately how long must you wait for your investment to double in value?



7 years

14 years

12 years

6 years

8 years

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the



future value.

discounted value.

complex value.

true value.

present value.

Tomas earned $89 in interest on his savings account last year and has decided to leave the $89 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called:Multiple Choice

duplicating.

compounding.

multiplying.

indexing.

discounting.

Given an interest rate of zero percent, the future value of a lump sum invested today will always:


be infinite in value.

decrease if the investment time period is lengthened.

be equal to $0.

remain constant, regardless of the investment time period.

decrease if the investment time period is shortened.

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?

12 percent interest for 5 years

8 percent interest for 9 years

6 percent interest for 10 years

6 percent interest for 3 years

7 percent interest for 9 years

Today, Charity wants to invest less than $3,000 with the goal of receiving $3,000 back some time in the future. Which one of the following statements is correct?Multiple Choice

The length of time she must wait to reach her goal is directly related to the interest rate she earns.

The period of time she has to wait decreases as the amount she invests increases.Correct

The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal.

She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest.

The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest.

Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value? Multiple Choice

3 percent simple interest

4 percent interest, compounded annuallyCorrect

4 percent simple interest

2 percent interest, compounded annually

3 percent interest, compounded annually

The future value of a lump-sum investment will increase if you:Multiple Choice

decrease the interest rate.

increase the time period.Correct

decrease the time period.

decrease the number of compounding periods.

decrease the lump-sum amount.

The relationship between the present value and the investment time period is best described as:Multiple Choice

direct.

parallel.

ambiguous.

unrelated.

inverse.

Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?Multiple Choice

6.80 percent interest, compounded annually

6.75 percent interest, compounded annually

6.5 percent simple interestCorrect

6.5 percent interest, compounded annually

6.6 percent simple interest

South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:Multiple Choice

will be greater if you invest with South Central Bank.

is the same regardless of which bank you choose because they both pay simple interest.

will be greater if you invest with Northern Bank.Correct

is the same regardless of which bank you choose because they both pay the same rate of interest.

is the same regardless of which bank you choose because the time period is the same for both banks.

You are due to receive a lump-sum payment of $1,650 in five years. Assuming a discount rate of 3.5 percent interest, what would be the value of the payment in Year 3?Multiple Choice

$1,540.29

$1,488.21

$1,389.26

$1,296.89

$1594.20

Lew has $3,600 that he wants to invest for 5 years. He can invest this amount at his credit union and earn 2.2 percent simple interest. Or, he can open an account at Compass Bank and earn 2.15 percent interest, compounded annually. If he decides to invest at Compass Bank for 5 years, he will:Multiple Choice

earn $6 more than if he had invested with his credit union.

have a total balance of $4,012 in his account after 5 years.

earn the same amount as if he had invested with the credit union.

earn $8 more than if he had invested with his credit union.

have a total balance of $3,680 in his account after one year.

Which one of the following will increase the present value of a lump-sum future amount to be received in 15 years?

A decrease in the future value

Changing to compound interest from simple interest

A decrease in the interest rate

An increase in the time period

An increase in the interest rate

Jessica invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?Multiple Choice

She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest.Correct

She will earn the same amount of interest each year.

Her interest for Year 2 will be equal to $2,000 × .065 × 2.

She will be earning simple interest.

She will earn an increasing amount of interest each year even if she should decide to withdraw the interest annually rather than reinvesting the interest.

You deposit $1,200 into an account that earns 1.75 percent interest in three years. If you deposit an additional $1,200 in the same account 2 years later, how much would be in the account six years from now?Multiple Choice

$2,506.48

$2,663.29

$2,572.46

$2,485.11

$2,528.22

You are due to receive a lump-sum payment of $1,350 in five years. If you could invest that money at 4.5 percent interest for three years, how much would it be worth eight years from now?

$1,682.35

$1,540.57

$1,919.84

$1,410.75

$1,474.23

You need to have $35,000 in cash in three years to pay for an important family event. You want a reasonably safe investment vehicle but would like to earn some interest on your funds. How much would you have to invest today into a 5-year CD earning 1.1 percent annual interest to have exactly $35,000 available in five years?Multiple Choice

$30,156.19

$31,476.67

$32,618.92

$34,511.68

$33,136.93

You have $12,500 you want to invest for the next 30 years. You are offered an investment plan that will pay you 7 percent per year for the next 10 years and 9.5 percent per year for the last 20 years. How much will you have at the end of the 30 years?Multiple Choice

$101,516.38

$119,874.49

$209,092.54

$151,018.51

$190,253.91

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?Multiple Choice

Paying interest only at the end of the investment period rather than throughout the investment period

Paying interest only on the principal amount

Increasing the interest rate

Paying simple interest rather than compound interest

Shortening the investment time period

By definition, a bank that pays simple interest on a savings account will pay interest: Multiple Choice

only if all previous interest payments are reinvested.

only on the principal amount originally invested.

only at the beginning of the investment period.

on interest.

on both the principal amount and the reinvested interest.

The interest rate used to compute the present value of a future cash flow is called the:Multiple Choice

current rate.

prime rate.

simple rate.

discount rate.

compound rate.

Which one of the following is a correct statement, all else held constant? Multiple Choice

The period of time is directly related to the interest rate.

The present value is directly related to the interest rate.

The future value is inversely related to the period of time.

The present value is inversely related to the future value.

The future value is directly related to the interest rate.

Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called: Multiple Choice

extrapolating.

discounting.

compounding.

simplifying.

aggregating.

Scott borrowed $2,500 today at an APR of 7.4 percent. The loan agreement requires him to repay $2,685 in one lump-sum payment one year from now. This type of loan is referred to as a(n):Multiple Choice

pure discount loan.

compound interest loan.

quoted rate loan.

interest-only loan.

amortized loan.

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must: Multiple Choice

charge interest annually.

have a zero percent interest rate.

require the accrued interest be paid in full with each monthly payment.

have a one-year term.

must be partially amortized with each loan payment.

Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?Multiple Choice

Interest-only

Complex

Pure discount

Amortized

Compound

Assume all else is equal. When comparing savings accounts, you should select the account that has the: Multiple Choice

highest effective annual rate.

highest stated rate.

lowest annual percentage rate.

lowest effective annual rate.

highest annual percent rate.

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are:Multiple Choice

amortized payments.

a perpetuity due.

an annuity due.

a perpetuity.

an ordinary annuity.

Which one of the following statements is correct?Multiple Choice

The EAR is always greater than the APR.

The APR is equal to the EAR for a loan that charges interest monthly.

The EAR, rather than the APR, should be used to compare both investment and loan options.

The APR on a monthly loan is equal to (1 + monthly interest rate)12raise to the power of 12 − 1.

The APR is the best measure of the actual rate you are paying on a loan.

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?Multiple Choice

Present value

Consol

Perpetuity

Lump sum

Annuity

Which one of the following statements concerning annuities is correct?Multiple Choice

An annuity is an unending stream of equal payments occurring at equal intervals of time.

The future value of an annuity decreases as the interest rate increases.

An annuity due has payments that occur at the beginning of each time period.

If unspecified, you should assume an annuity is an annuity due.

The present value of an annuity is equal to the cash flow amount divided by the discount rate.

Which one of the following has the highest effective annual rate?Multiple Choice

6 percent compounded every 2 years

6 percent compounded annually

6 percent compounded daily

6 percent compounded semiannually

6 percent compounded quarterly

Scott borrowed $2,500 today at an APR of 7.4 percent. The loan agreement requires him to repay $2,685 in one lump-sum payment one year from now. This type of loan is referred to as a(n):Multiple Choice

compound interest loan.

pure discount loan.

amortized loan.

quoted rate loan.

interest-only loan.

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:Multiple Choice

charge interest annually.Correct

must be partially amortized with each loan payment.

have a one-year term.

require the accrued interest be paid in full with each monthly payment.

have a zero percent interest rate.

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:Multiple Choice

compounded rate.

annual percentage rate.Correct

simple rate.

perpetual rate.

effective annual rate.

Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:Multiple Choice

stated rate.

annual percentage rate.

quoted rate.

simplified rate.

effective annual rate.

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?Multiple Choice

Lump sum

Present value

Perpetuity

Consol

Annuity

Which statement is true?Multiple Choice

All else equal, an ordinary annuity is more valuable than an annuity due.

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.Correct

An annuity with payments at the beginning of each period is called an ordinary annuity.

All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.

All else equal, a decrease in the number of payments increases the future value of an annuity due.