mouse123

A $500 investment offers a 7.5% annual rate of return. How much will it be worth in four years?

A) $892.

B) $668.

C) $650.

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N = 4; I/Y = 7.5; PV = –500; PMT = 0; CPT → FV = 667.73.
or: 500(1.075)4 = 667.73

mouse123

A certain investment product promises to pay $25,458 at the end of 9 years. If an investor feels this investment should produce a rate of return of 14%, compounded annually, what’s the most he should be willing to pay for it?

A) $9,426.

B) $7,829.

C) $7,618.

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N = 9; I/Y = 14; FV = -25,458; PMT = 0; CPT → PV = $7,828.54.
or: 25,458/1.149 = 7,828.54

mouse123

Given a 5% discount rate, the present value of $500 to be received three years from today is:

A) $400.

B) $578.

C) $432.

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N = 3; I/Y = 5; FV = 500; PMT = 0; CPT → PV = 431.92.
or: 500/1.053 = 431.92.

mouse123

A local bank offers a certificate of deposit (CD) that earns 5.0% compounded quarterly for three and one half years. If a depositor places $5,000 on deposit, what will be the value of the account at maturity?

A) $5,949.77.

B) $5,931.06.

C) $5,875.00.

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The value of the account at maturity will be: $5,000 × (1 + 0.05 / 4)(3.5 × 4) = $5.949.77;
or with a financial calculator: N = 3 years × 4 quarters/year + 2 = 14 periods; I = 5% / 4 quarters/year = 1.25; PV = $5,000; PMT = 0; CPT → FV = $5,949.77.

mouse123

The value in 7 years of $500 invested today at an interest rate of 6% compounded monthly is closest to:

A) $760.

B) $780.

C) $750.

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PV = -500; N = 7 × 12 = 84; I/Y = 6/12 = 0.5; compute FV = 760.18

mouse123

Natalie Brunswick, neurosurgeon at a large U.S. university, was recently granted permission to take an 18-month sabbatical that will begin one year from today. During the sabbatical, Brunswick will need $2,500 at the beginning of each month for living expenses that month. Her financial planner estimates that she will earn an annual rate of 9% over the next year on any money she saves. The annual rate of return during her sabbatical term will likely increase to 10%. At the end of each month during the year before the sabbatical, Brunswick should save approximately:

A) $3,356.

B) $3,505.

C) $3,330.

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This is a two-step problem. First, we need to calculate the present value of the amount she needs over her sabbatical. (This amount will be in the form of an annuity due since she requires the payment at the beginning of the month.) Then, we will use future value formulas to determine how much she needs to save each month (ordinary annuity).
Step 1: Calculate present value of amount required during the sabbatical
Using a financial calculator: Set to BEGIN Mode, then N = 12 × 1.5 = 18; I/Y = 10 / 12 = 0.8333; PMT = 2,500; FV = 0; CPT → PV = 41,974
Step 2: Calculate amount to save each month
Make sure the calculator is set to END mode, then N = 12; I/Y = 9 / 12 = 0.75; PV = 0; FV = 41,974; CPT → PMT = -3,356

mouse123

John is getting a $25,000 loan, with an 8% annual interest rate to be paid in 48 equal monthly installments. If the first payment is due at the end of the first month, the principal and interest values for the first payment are closest to:

Principal

Interest

A) $443.65    $166.67

B) $410.32 $200.00

C) $443.65    $200.00

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Calculate the payment first:
N = 48; I/Y = 8/12 = 0.667; PV = 25,000; FV = 0; CPT PMT = 610.32.
Interest = 0.006667 × 25,000 = $166.67; Principal = 610.32 – 166.67 = $443.65 .

mouse123

An individual borrows $200,000 to buy a house with a 30-year mortgage requiring payments to be made at the end of each month. The interest rate is 8%, compounded monthly. What is the monthly mortgage payment?

A) $1,467.53.

B) $2,142.39.

C) $1,480.46.

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With PV = 200,000; N = 30 × 12 = 360; I/Y = 8/12; CPT → PMT = $1,467.53.

mouse123

Marc Schmitz borrows $20,000 to be paid back in four equal annual payments at an interest rate of 8%. The interest amount in the second year’s payment would be:

A) $6038.40.

B) $1116.90.

C) $1244.90.

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With PV = 20,000, N = 4, I/Y = 8, computed Pmt = 6,038.42. Interest (Yr1) = 20,000(0.08) = 1600. Interest (Yr2) = (20,000 − (6038.42 − 1600))(0.08) = 1244.93

mouse123

It will cost $20,000 a year for four years when an 8-year old child is ready for college. How much should be invested today if the child will make the first of four annual withdrawals 10-years from today? The expected rate of return is 8%.

A) $66,243.

B) $33,138.

C) $30,683.

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First, find the present value of the college costs as of the end of year 9. (Remember that the PV of an ordinary annuity is as of time = 0. If the first payment is in year 10, then the present value of the annuity is indexed to the end of year 9). N = 4; I/Y = 8; PMT = 20,000; CPT → PV = $66,242.54. Second, find the present value of this single sum: N = 9; I/Y = 8; FV = 66,242.54; PMT = 0; CPT → PV = 33,137.76.