1

Please match each formula to its description.

1. Present value of an ordinary annuity
2. Future value of an ordinary annuity
3. Present value of a perpetuity
4. Value of an annuity due
5. Present value of a growing annuity
6. Present value of a growing perpetuity
7. Effective annual interest rate

a.(CF / i) x [(1 + i)ⁿ- 1]

b.CF₁/ (i - g)

c.Ordinary annuity value x (1 + i)

d.(1 + Quoted interest rate / m)^m- 1

e.CF / i

f.(CF / i) x [1 - 1 / (1 + i)ⁿ]

g.CF₁/ (i - g) x [1 - [(1 + g) / (1 + i)]ⁿ]

QUESTION 2

William deposited$25,000today that would earn an interest at the rate of3percentfor a period of2years.The amount of$25,000represents the:

1. present value of an annuity
2. future value of an annuity
3. present value
4. future value

QUESTION 3

Anna will receive $15,000 from a bank deposit after 2 years which had an interest of 3.5%. The amount of $15,000 represents the:

1. present value of an annuity
2. future value of an annuity
3. present value
4. future value

QUESTION 4

If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called:

1. a perpetuity.
2. an ordinary annuity.
3. an annuity due.
4. a growing perpetuity.

QUESTION 5

If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called:

1. a perpetuity.
2. an ordinary annuity.
3. an annuity due.
4. a growing perpetuity.

QUESTION 6

Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called:

1. an annuity due.
2. agrowing perpetuity.
3. an ordinary annuity.
4. a growing annuity.

QUESTION 7

A firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called:

1. an annuity due.
2. a growing perpetuity.
3. an ordinary annuity.
4. a growing annuity.

QUESTION 8

Ifthediscountrateispositive,thepresent value of multiple cash flows is:

1. greater than the sum of the cash flows.
2. equal to the sum of all the cash flows.
3. less than the sum of the cash flows.
4. toinfinityandbeyond.

QUESTION 9

If the interest rate is positive, the future value of a perpetuity is:

1. lessthanonemillion.
2. equal to one million.
3. less than the sum of the cash flows.
4. infinity.

QUESTION 10

Which of the following statements is true of loanamortization?

1. With an amortized loan, a bigger proportion of each month's payment goes toward interest in the early periods.
2. With an amortized loan, a bigger proportion of each month's payment goes toward interest in the later periods.
3. With an amortized loan, a smaller proportion of each month's payment goes toward interest in the early periods.
4. With an amortized loan, the interest portion of each month's payment remains unchanged.

QUESTION 11

What is the appropriate interest rate to use when making interest rate comparisons if there is more than one compounding period per year?

1. The effective annual interest rate (EAR)
2. The annual percentage rate (APR)
3. The quoted interest rate
4. The simple interest rate

QUESTION 12

Dynamics Telecommunications Corporationhas made an investment in another company that will guarantee it a cash flow of$22,500each year for the next five years.If the company uses a discount rate of15percent on its investments,what is the present value of this investment?

QUESTION 13

Cecelia Thomas is a sales executive at a Baltimore firm.She is25years old and plans to invest$3,000every year in aretirementaccount,beginning at the end of this year until she turns65years old.If the investment will earn9.75percent annually,how much will she have in40years,when she turns65?

QUESTION 14

The Elkridge Bar and Grill has a seven-year loan in the amount of $25,000 with Bank of America.It plans to repay the loan in seven equal installments made at the end of each year.If the rate of interest is 8.0 percent, how much will each payment be?

QUESTION 15

AnnaKashfiis retiring at the end of the year.She would like to make sure she receives payments of $10,000 a year forever, starting when she retires.If she can earn 6.5 percent annually, how much does Anna need to invest to produce the desired cash flow?

QUESTION 16

AnnaKashfi(from above) is retiring at the end of the year.She would like to make sure she receives payments of $10,000 a year forever, starting when she retires, but now she would like these payments to grow by 1.5 percent each year.If she can earn 6.5 percent annually, how much does Anna need to invest to produce the desired cash flow?

QUESTION 17

Sharon Kabana won the state lottery and will receive a payment of $89,729.45 at the end of each year for the next 20 years.If the going rate of interest is 7.25 percent, what is the present value of her lottery winnings?

QUESTION 18

What is the present value of Sharon Kabana's lottery winnings (above) if the payments begin today instead of one year from today?

QUESTION 19

If the APR is 9.65 percent, what is the effective annual interest rate (EAR), in percent, if the compounding is quarterly?

QUESTION 20

Assume you will start working as soon as you graduate from college.You plan to start saving for your retirement on your 25th birthday and retire on your 65th birthday.After retirement, you expect to live until you are at least 85.You wish to be able to withdraw $50,000 every year from the time of your retirement until you are 85 years old (i.e., for 20 years).What is the dollar amount you need to invest every year, starting at age 26 and ending at age 65 (i.e., for 40 years), to be able to accomplish this plan if the interest rate is 10 percent?