Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. The of a perpetual stream of equal, annual returns (PMT) discounted at i% per year is equal a present value; PMT/ b. present value; PMT Xi future value; PMT/ d. future value: PMT xi to d 2. A perpetuity has a cash flow of $18.75 and a discount rate of 6%. What is the value of the perpetuity? a. $187.50 b. $318.00 - c. $66.67 d. none of the above b. 3. If an 8-year annuity duc has a Future Value (FV) of $10,000 and the interest rate is 7%, what is the amount of each annuity payment? a. $926 - $950 b) $951 - $975 c. More than $975 d. $901 - $925 e. Less than $900 a 4. The process of finding present values is frequently called a discounting b. leasing c. annualizing d. Compounding 5. The payment or receipt of equal amounts, at the end of a scrics of cqual periods, for a specified amount of time is called a(n) a. simple interest b. annuity due c. ordinary annuity d. Perpetuity 4 6. When you purchased a car, you borrowed $20,000 from the bank and agreed to make monthly payments of $423.17 for 5 years. What rate of interest is the bank charging you? a. 9.82% b. 5.00% c. 25.39% d. 10.00% Page 2 of 12 7. Which of the following is a FALSE statement? @ The EAR is generally less than the nominal or quoted rate of interest. b. Future values decrease with decreases in interest rates c. Future values and interest rates move in the same direction. d. Compounding means earning interest on interest. -- 8. You have borrowed $10,000 to pay off your Spring Break trips. You plan to make monthly payments over a 10-year period. If the loan's interest rate is 10% compounded monthly, how much interest will you pay over the life of the loan? a. $3,753 b. $2,195 c. $5,856 d. $6,987 9. You sold 100 shares of stock today for $30 per share that you paid $20 for 6 years ago Determine the average annual rate of return on your investment, assuming the stock paid no dividends. a. 7% b. 150% c. 8.33% d. 25% 10. You have just borrowed $30,000 to buy a new car. The loan agreement calls for 48 monthly payments of $704.55 each to begin one month from today. If the interest is compounded monthly, then what is the effective annual rate (EAR) on this loan? a. 7.54% b. 6.17% c. 7.06% d. 6.00% e. 6.67% 11. What is the rate of return on an investment if you lend $1,000 and are repaid $1,254.70 two years later? a. 4% b. 18% c. 12% d. 25% e. 6% 12. A four-year annuity of $1,000 annual payments at the beginning of each year, with a 10% interest rate is worth how much today? a. $3,486.85 b. $3169.87 c. $2,914.67 d. none of the above. Page 3 of 12
