Chapter 6 Practice Questions and Solutions

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) Which one of the following would have the greatest present value, assuming a positive 1)
discount rate?
A) $1,000 today plus $200 a month for a year.
B) $1,000 today plus $400 a month for six months.
C) $2,200 today plus $200 a month for six months.
D) $1,000 today plus $100 a month for 2 years.
E) $2,200 today plus $100 a month for a year.

2) What is the total future value six years from now of $50 received in one year, $200 2)
received in two years, and $800 received in six years if the discount rate is 8%?
A) $1,050.00
B) $1,269.15
C) $1,145.56
D) $1,237.21
E) $1,047.93

3) You just borrowed $12,750 from the bank to use in your business. The loan terms 3)
require you to pay the interest annually with the entire principle due in six years. The
interest rate is 8.95%. How much will you pay to the bank in year five of the loan?
A) $1,141.13
B) $1,106.67
C) $1,203.17
D) $1,424.58
E) $1,244.98

4) You own a bond issued by the Canadian Pacific railroad that promises to pay the holder 4)
$100 annually forever. You plan to sell the bond five years from now. If similar
investments yield 8% at that time, how much will the bond be worth?
A) $1,250.00
B) $918.79
C) $1,014.28
D) $1,958.20
E) $1,489.42

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5) Calculate the present value of a growing annuity given the following information: 5)
current cash flows: $90,000; cash flow growth rate = 2%; timeframe = 20 years;
required rate of return = 5%.
A) $1,339,886
B) $1,359,886
C) $1,319,886
D) $1,349,886
E) $1,329,886

6) Starting today, Stephen is going to contribute $200 on the first of each month to his 6)
retirement account. His employer will contribute an additional 50% of the amount
Stephen contributes. If both Stephen and his employer continue to do this and he can
earn a monthly rate of 0.75%, how much will Stephen have in his retirement account 40
years from now?
A) $1,672,413
B) $1,404,396
C) $1,414,929
D) $936,264
E) $943,286

7) You would like to establish a trust fund that will provide $50,000 a year forever for 7)
your heirs. The trust fund is going to be invested very conservatively so the expected
rate of return is only 2.75%. How much money must you deposit today to fund this gift
for your heirs?
A) $1,333,333.33
B) $1,818,181.82
C) $1,425,000.00
D) $1,666,666.67
E) $1,375,000.00

8) You plan on withdrawing monthly payments for the next ten years and have deposited 8)
$100,000 in an account. If the rate of return is 8% compounded monthly, determine the
value of the monthly withdrawals.
A) $2,013.28
B) $1,213.28
C) $1,413.28
D) $1,813.28
E) $1,613.28

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 9) What is the future value at the end of year 3 of the following set of cash flows if the 9)
interest rate is 8%?

Year 0 1 2 3
Cash Flow -$1,500 $100 $100 $1,600

A) $3,714.21
B) $1,824.64
C) $366.89
D) $2,698.13
E) -$64.93

10) How much will you pay on a 25 year, $400,000 mortgage if you make monthly payment 10)
at the beginning of month? Interest is 3.5% compounded annually.
A) $1,985 B) $1,968 C) $1,973 D) $1,991 E) $1,979

11) On the day you enter college, you work out a deal with your local bank such that you 11)
borrow $9,600 for four years. The terms of the loan include an interest rate of 5.9%.
The terms also stipulate that the principle is due in full one year after you graduate.
Interest is to be paid annually at the end of each year. Assume that you complete college
in four years. How much will you pay the bank one year after you graduate?
A) $10,166.40
B) $11,865.60
C) $12,432.00
D) $566.40
E) $2,265.60

12) You are considering investing $750 in a 10 year annuity. The rate of return you require 12)
is 6.5%. What annual cash flow from the annuity will provide the required return?
A) $104.33 B) $102.96 C) $114.31 D) $70.77 E) $129.27

13) You have a 25-year $400,000 mortgage with a 3.5% rate of interest (compounded 13)
monthly) that you make monthly payments on. What is the balance of the loan at the end
of year 20?
A) $110,077
B) $120,077
C) $130,077
D) $100,077
E) $90,077

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14) You just won the lottery! As your prize you will receive $1,500 a month for ten years. If 14)
you can earn 9.3% on your money, what is this prize worth to you today?
A) $117,814.92
B) $112,001.73
C) $110,757.83
D) $111,616.20
E) $116,908.87

15) You are buying a previously owned car today at a price of $4,950. You are paying $750 15)
down in cash and financing the balance for 42 months at 8.45%. What is the amount of
each loan payment?
A) $135.60 B) $108.54 C) $115.86 D) $115.05 E) $136.55

16) You are considering a job offer. The job offers an annual salary of $42,000, $45,000, 16)
and $48,000 a year for the next three years, respectively. The offer also includes a
starting bonus of $1,000 payable immediately. What is this offer worth to you today at a
discount rate of 5.5%?
A) $122,118.24
B) $121,866.67
C) $122,333.33
D) $121,616,06
E) $122,609.14

17) Sun Woo wants to purchase an annuity that will pay him $1,000 a month for fifteen 17)
years. If he can negotiate a 4.5% rate of return, how much will he have to pay today in
order to purchase this annuity?
A) $130,720
B) $154,327
C) $96,489
D) $185,171
E) $123,185

18) Master Meter is planning on constructing a new $20 million facility. The company plans 18)
to pay 20% of the cost in cash and finance the balance. How much will each monthly
loan payment be if they can borrow the necessary funds for 30 years at 9% compounded
monthly?
A) $148,016
B) $160,925
C) $133,667
D) $128,740
E) $141,982

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19) You are buying a pre-owned car today at a price of $9,200. You are paying $1,500 19)
down in cash and financing the balance for 60 months at 7.25%. What is the amount of
each loan payment?
A) $154.06 B) $153.27 C) $152.46 D) $153.38 E) $154.89

20) You borrow $7,900 to buy a car. The terms of the loan call for monthly payments for 20)
five years at a 6.5% rate of interest. What is the amount of each payment?
A) $154.57 B) $153.74 C) $153.80 D) $154.68 E) $154.39

21) Your employer contributes $25 a week to your retirement plan. Assume that you work 21)
for your employer for another twenty years and that the applicable discount rate is 5%.
Given these assumptions, what is this employee benefit worth to you today?
A) $16,430.54
B) $15,920.55
C) $16,519.02
D) $13,144.43
E) $16,446.34

22) Your grandmother has promised to send you $50 a month for four years while you are 22)
in college. At a 5% discount rate, what are these payments worth to you when you first
start college?
A) $2,171.15
B) $2,127.57
C) $2,191.11
D) $2,180.19
E) $2,089.07

23) Janet plans on saving $3,000 a year and expects to earn 8.5%. How much will Janet 23)
have at the end of twenty-five years if she earns what she expects?
A) $244,868.92
B) $230,702.57
C) $236,003.38
D) $256,063.66
E) $219,317.82

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24) Mari Ann is a beautician who currently leases her shop. She would like to buy her own 24)
building as she feels that it could be an investment which would provide a retirement
income for her several years from now. To achieve this goal, Mari Ann has decided to
save $500 a month, starting today, for the next five years. She expects to earn 6.45%,
compounded monthly, on her savings. How much will she have saved by the end of the
five years that she can use to buy a building?
A) $36,909.18
B) $35,481.14
C) $36,945.45
D) $35,291.45
E) $35,306.18

25) You need to borrow $18,000 to buy a truck. The current loan rate is 9.9% compounded 25)
monthly and you want to pay the loan off in equal monthly payments over five years.
What is the size of your monthly payment?
A) $455.66 B) $374.04 C) $381.56 D) $363.39 E) $394.69

26) This morning you borrowed $3,900 at 7.75% interest. You are to repay the loan 26)
principle plus all of the loan interest in one lump sum two years from today. How much
will you have to pay in two years?
A) $4,202.25
B) $4,527.92
C) $4,404.19
D) $4,465.11
E) $4,241.41

27) Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust 27)
pays a guaranteed 4% rate of return. How much will you receive each year if the trust is
required to pay you all of the interest earnings on an annual basis?
A) $4,000 B) $6,000 C) $3,750 D) $5,400 E) $4,500

28) You are borrowing money today at an 8% interest rate. You will repay the principle plus 28)
all the interest in one lump sum of $6,500 three years from today. How much are you
borrowing?
A) $6,018.52
B) $5,204.16
C) $5,572.70
D) $5,000.00
E) $5,159.91

29) The preferred stock of ABC Co. offers an 8.4% rate of return. The stock is currently 29)
priced at $50.00 per share. What is the amount of the annual dividend?
A) $2.10 B) $6.40 C) $4.20 D) $8.60 E) $5.00

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Answer Key
Testname: CHAPTER 6 PRACTICE QUESTIONS

1) C
2) C
3) A
4) A
5) C
6) C
7) B
8) B
9) E
10) A
11) A
12) A
13) A
14) E
15) C
16) A
17) A
18) D
19) D
20) A
21) A
22) A
23) C
24) B
25) C
26) B
27) B
28) E
29) C