1. You were recently admitted to college, and your Aunt Tillie has agreed to fund the tuition for your education. The admissions representative at your college says that tuition might rise approximately 5 percent per year. Aunt Tillie has agreed to deposit a lump sum today that will cover your tuition for four years, but she needs to know the amount of the initial deposit. Your aunt is no longer able to take care of herself, so she also wants to set aside a lump sum of money to pay her rent in an assisted-living facility for the next three years. The facility has agreed not to raise her rent, if she signs a three year lease upfront. It's now four years later, and thanks to your aunt's generosity, you have graduated from college. She has offered to lend you the money to buy your first, new car. You are interested in calculating the payment amount on a $35,000 car loan at 6 percent for five years. She has also agreed to accept five annual payments instead of monthly payments. It seems there's no end to Aunt Tillie's generosity. She has now agreed to loan you $10,000 for the down payment on a home. You have decided to structure the loan, so that the payment amount remains constant through the term of the contract and you can budget for a consistent loan payment each month. Which of the following formulas can be used to correctly calculate your annual loan payments to Aunt Tillie for the car loan? 35,000 = C x (1/1.056)/.05 $35,000 = C x (1/1.065)/.06 $35,000 = C x (1/1.055)/.05 $35,000 = C x (1/1.066)/.06 Question 2.2. You were recently admitted to college, and your Aunt Tillie has agreed to fund the tuition for your education. The admissions representative at your college says that tuition might rise approximately 5 percent per year. Aunt Tillie has agreed to deposit a lump sum today that will cover your tuition for four years, but she needs to know the amount of the initial deposit. Your aunt is no longer able to take care of herself, so she also wants to set aside a lump sum of money to pay her rent in an assisted-living facility for the next three years. The facility has agreed not to raise her rent, if she signs a three year lease upfront. It's now four years later, and thanks to your aunt's generosity, you have graduated from college. She has offered to lend you the money to buy your first, new car. You are interested in calculating the payment amount on a $35,000 car loan at 6 percent for five years. She has also agreed to accept five annual payments instead of monthly payments. It seems there's no end to Aunt Tillie's generosity. She has now agreed to loan you $10,000 for the down payment on a home. You have decided to structure the loan, so that the payment amount remains constant through the term of the contract and you can budget for a consistent loan payment each month. If Aunt Tillie also wants to reward you with a graduation gift of cash and she deposits $1,000 in an account at the end of each year for the next four years, for how many years will the money earn interest? Four Five Three It depends on what term she selects Question 3.3. You were recently admitted to college, and your Aunt Tillie has agreed to fund the tuition for your education. The admissions representative at your college says that tuition might rise approximately 5 percent per year. Aunt Tillie has agreed to deposit a lump sum today that will cover your tuition for four years, but she needs to know the amount of the initial deposit. Your aunt is no longer able to take care of herself, so she also wants to set aside a lump sum of money to pay her rent in an assisted-living facility for the next three years. The facility has agreed not to raise her rent, if she signs a three year lease upfront. It's now four years later, and thanks to your aunt's generosity, you have graduated from college. She has offered to lend you the money to buy your first, new car. You are interested in calculating the payment amount on a $35,000 car loan at 6 percent for five years. She has also agreed to accept five annual payments instead of monthly payments. It seems there's no end to Aunt Tillie's generosity. She has now agreed to loan you $10,000 for the down payment on a home. You have decided to structure the loan, so that the payment amount remains constant through the term of the contract and you can budget for a consistent loan payment each month. Which of the following calculations will you perform to determine the amount of the initial deposit necessary to fund your college education? Future value with single cash flow Future value with multiple cash flows Present value with single cash flow Present value with multiple cash flows Question 4.4. Which of the following factors affects the rate of return of an investment at maturity? Interest rate Length of time PV All of the Above Question 5.5. If you invested $1000 today at a rate of 5% for five years, and periodically you withdrew the interest earned, what type of interest is calculated for during the term of the investment? Simple interest Compound interest Interest on interest Future value interest Question 6.6. How does the element of time affect future and present value calculations? The element of time has no affect on future and present value calculations. The value of money increases over time in future value calculations; the value of money decreases over time in present value calculations. The value of money decreases over time in future value calculations; the value of money increases over time in present value calculations. The value of money increases over time in present value calculations; the value of money decreases over time in future value calculations. Question 7.7. You were recently admitted to college, and your Aunt Tillie has agreed to fund the tuition for your education. The admissions representative at your college says that tuition might rise approximately 5 percent per year. Aunt Tillie has agreed to deposit a lump sum today that will cover your tuition for four years, but she needs to know the amount of the initial deposit. Your aunt is no longer able to take care of herself, so she also wants to set aside a lump sum of money to pay her rent in an assisted-living facility for the next three years. The facility has agreed not to raise her rent, if she signs a three year lease upfront. It's now four years later, and thanks to your aunt's generosity, you have graduated from college. She has offered to lend you the money to buy your first, new car. You are interested in calculating the payment amount on a $35,000 car loan at 6 percent for five years. She has also agreed to accept five annual payments instead of monthly payments. It seems there's no end to Aunt Tillie's generosity. She has now agreed to loan you $10,000 for the down payment on a home. You have decided to structure the loan, so that the payment amount remains constant through the term of the contract and you can budget for a consistent loan payment each month. What should you keep in mind if Aunt Tillie asks your opinion about two different annuities she is considering as an investment? Decreasing a discount rate lowers the present value Increasing a discount rate lowers the future value Increasing a discount rate lowers the present value. Decreasing a discount rate increase the future value Question 8.8. What is the relationship between an interest rate and a discount rate in time value of money calculations? There is no relationship between an interest rate and a discount rate. A discount rate represents how much an amount of money decreases, as in a future value calculation; an interest rate represents how much an amount of money increases, as in a present value calculation. An interest rate represents how much an amount of money increases, as in a present value calculation; a discount rate represents how much an amount of money decreases, as in a future value calculation. An interest rate represents how much an amount of money increases, as in a future value calculation; a discount rate represents how much an amount of money decreases, as in a present value calculation. Question 9.9. You were recently admitted to college, and your Aunt Tillie has agreed to fund the tuition for your education. The admissions representative at your college says that tuition might rise approximately 5 percent per year. Aunt Tillie has agreed to deposit a lump sum today that will cover your tuition for four years, but she needs to know the amount of the initial deposit. Your aunt is no longer able to take care of herself, so she also wants to set aside a lump sum of money to pay her rent in an assisted-living facility for the next three years. The facility has agreed not to raise her rent, if she signs a three year lease upfront. It's now four years later, and thanks to your aunt's generosity, you have graduated from college. She has offered to lend you the money to buy your first, new car. You are interested in calculating the payment amount on a $35,000 car loan at 6 percent for five years. She has also agreed to accept five annual payments instead of monthly payments. It seems there's no end to Aunt Tillie's generosity. She has now agreed to loan you $10,000 for the down payment on a home. You have decided to structure the loan, so that the payment amount remains constant through the term of the contract and you can budget for a consistent loan payment each month. Which of the following calculations should you use to determine the initial deposit amount to pay for her expenses in the assisted-living facility Present value for annuity cash flows Future value for multiple cash flows Future value for single cash flow Future value for variable cash flow Question 10.10. You were recently admitted to college, and your Aunt Tillie has agreed to fund the tuition for your education. The admissions representative at your college says that tuition might rise approximately 5 percent per year. Aunt Tillie has agreed to deposit a lump sum today that will cover your tuition for four years, but she needs to know the amount of the initial deposit. Your aunt is no longer able to take care of herself, so she also wants to set aside a lump sum of money to pay her rent in an assisted-living facility for the next three years. The facility has agreed not to raise her rent, if she signs a three year lease upfront. It's now four years later, and thanks to your aunt's generosity, you have graduated from college. She has offered to lend you the money to buy your first, new car. You are interested in calculating the payment amount on a $35,000 car loan at 6 percent for five years. She has also agreed to accept five annual payments instead of monthly payments. It seems there's no end to Aunt Tillie's generosity. She has now agreed to loan you $10,000 for the down payment on a home. You have decided to structure the loan, so that the payment amount remains constant through the term of the contract and you can budget for a consistent loan payment each month. With regard to the loan for a down payment on your mortgage, what drawback exists with the loan you want compared to a loan in which payments decrease through the term of the loan? Higher interest payments A longer term A larger down payment Less interest expense deduction for income tax purposes