Financial Institutions Instruments and Markets Christopher Viney Peter Phillips- Test Bank
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Sample Test
Chapter 03 Testbank
Student: ___________________________________________________________________________
1.
A financial contract is:
1. a
piece of advice provided by financial planners.
2. an
agreement that involves only book entries and does not result in any cash
flows.
3. an arrangement,
agreement or investment that produces cash flows.
4. an
agreement that results in a profit for the businesses concerned.
2.
The calculation that expresses the ratio of net cash inflows to
net cash outflows produced by a financial contract is known as:
1. net
present value.
2. net
profit.
3. internal
rate of return.
4. rate
of return.
3.
The rate of return can be shown as:
1.
1.
1.
1.
4.
A principle that a dollar is worth more the sooner it is to be
received, all other things equal, is:
1. the time
value of money.
2. the
value of money.
3. Fisher’s
effect.
4. net
present value.
5.
A method of calculating interest in which, during the entire
term of the loan, interest is computed on the original sum borrowed is the:
1. present
value method.
2. simple
interest method.
3. compound
interest method.
4. interest
rate method.
6.
The amount that corresponds to today’s value of a promised
future sum can be shown as:
1.
1.
1.
1.
7.
A process by which, through the operation of interest, a present
sum becomes a greater sum in the future is:
1. the
additive principle.
2. the
accumulation principle.
3. the
compounding principle.
4. the
discounting principle.
8.
The interest rate where interest is charged at the same
frequency as the quoted interest rate is the:
1. nominal
interest rate.
2. real
interest rate.
3. compound
interest rate.
4. effective
interest rate.
9.
The value, as at the date of the final cash flow promised in a
financial contract, that is equivalent to the stream of promised cash flows is
the:
1. present
value of a contract.
2. future
value of a contract.
3. terminal
value of a contract.
4. discounted
value of a contract.
10.
An annuity in which the first cash flow is to occur immediately
is known as a/an:
1. ordinary
annuity.
2. ordinary
perpetuity.
3. annuity
due.
4. growth
annuity.
11.
An annuity in which the first cash flow is to occur after a time
period that exceeds the time period between each subsequent cash flow is known
as a/an:
1. deferred
annuity.
2. growth
annuity.
3. ordinary
annuity.
4. annuity
due.
12.
You have $10 000 to invest. If you invest it at 11.2% p.a. for
six months, then invest the initial $10 000 together with any interest for a
further 12 months at 12.7% p.a., what will be the value of your investment at
the end of the 18-month period?
901.
$11 901.12
902.
$12 532.24
903.
$11 830.00
904.
$12 241.36
905.
You have borrowed $1000 from a friend to pay for unforeseen car
repairs, with an agreement to pay interest at an annual rate of 18%,
compounding daily. If you repaid your friend after 90 days, how much would you
need to repay?
1044.
$1044.38
1045.
$1045.00
1046.
$1045.37
1047.
$1043.56
14.
If you invest $47 000 for five years at 9.7% p.a. (interest paid
annually and then reinvested), what is the value of your investment at the end
of the five-year period?
910.
$81 910.13
911.
$74 667.39
912.
$56 560.22
913.
$62 046.56
15.
What will your investment be worth in 10 years if you invest $15
000 at 12.5% p.a., payable at maturity, and your tax rate (paid annually) is 30
cents in the dollar?
1. $34
097
2. $48
710
3. $32
473
4. $34
704
16.
Calculate the average annual rate of return on an investment of
$1000 that accumulates to $2005 in five years’ time.
14.
14.93%
15.
8.8%
16.
100.5%
17.
17.63%
17.
If a term deposit paid an interest rate of 24% p.a. over the
past six months, and the current balance is $1008, what was the amount initially
invested?
812.
$812.90
813.
$681.08
814.
$900.00
815.
$975.00
18.
Assume that on 1 January 2011 you deposit $1000 into a savings
account that pays 8% p.a. If the bank compounds interest annually, how much
will you have in your account on 1 January 2014?
1292.
$1292.43
1293.
$1357.61
1294.
$1259.71
1295.
$1439.16
19.
Assume that on 1 January 2011 you deposit $1000 into a savings
account that pays 8% p.a. If the bank compounds interest quarterly, how much
will you have in your account on 1 January 2014?
1268.
$1268.24
1269.
$1349.13
1270.
$1301.15
1271.
$1483.09
20.
Suppose you deposited $250 at the end of 2011, 2012, 2013 and
2014. How much would you have in your account on 1 January 2015, based on
annual compounding of 8% by your bank?
1025.
$1025.25
1026.
$1235.53
1027.
$1183.53
1028.
$1126.53
21.
You want to deposit amounts in the bank at the end of 2011,
2012, 2013 and 2014, so that you have $1259.71 in your account on 1 January
2015. Calculate how large each of your payments would need to be if the bank
compounds quarterly at 8% p.a.
279.
$279.56
280.
$259.83
281.
$284.19
282.
$314.93
22.
Assume that you will require $1000 in four years’ time. Suppose
that you can afford to deposit only $186.29 at the end of each year, the first
deposit to be made in one year’s time. What interest rate would you require to
reach your target if the bank compounds annually?
1. 15%
p.a.
2. 18.5%
p.a.
3. 20%
p.a.
4. 22.5%
p.a.
23.
You have a goal to raise $1000 in four years’ time. If your
mother gives you $400 at the end of the first year, you make six deposits of
equal amounts every six months thereafter, and all the money is deposited in a
bank, which pays 8% p.a., compounded semi-annually, how large must each of the
six payments be for you to reach your target?
74.
$74.46
75.
$65.55
76.
$82.74
77.
$77.26
24.
Calculate the effective annual interest rate corresponding to
12% p.a., compounded quarterly.
11.
11.9%
12.
12.55%
13.
12.45%
14.
12.71%
25.
What is the present value of $500 payable in 10 years’ time if
the interest rate is 6% p.a.?
290.
$290.50
291.
$335.60
292.
$895.40
293.
$279.20
26.
What is the present value of the following cash flow stream,
discounted at 7% p.a.: Year 1, $100; Year 2, $400; Years 3 through 20, $300?
2859.
$2859.20
2860.
$3563.40
2861.
$3078.63
2862.
$2782.40
27.
What is the implied interest rate if you borrow $85 000 and
promise to pay back $201 229 at the end of 10 years?
1. 9%
p.a.
2. 18%
p.a.
3. 11%
p.a.
4. 13%
p.a.
28.
Karen has borrowed $12 000 in student loans at an annual
interest rate of 9%. If she repays $1500 per annum, how long (to the nearest
year) will it take to repay the loan?
1. 10
years
2. 15
years
3. 12
years
4. 17 years
29.
If the nominal interest rate is 12% p.a. and the inflation rate
is expected to be 5% p.a., what is the real rate of interest?
106.
106.7%
107.
6.7%
108.
7%
109.
8.2%
30.
If a term deposit offers an interest rate of 10% p.a.,
compounding continuously, how much will an initial investment of $50 000 be
worth after one year?
1. $55
258
2. $135
914
3. $62
519
4. $98
352
31.
What is the effective annual interest rate corresponding to a
nominal interest rate of 10% p.a., compounding continuously?
10.
10.5%
11.
10.9%
12.
12.5%
13.
13%
32.
Calculate the value of an investment at the end of its fourth
year if the initial investment is $10 000 and it produces the following annual
rates of return: Year 1, gain 15%; Year 2, gain 17%; Year 3, loss 5%; Year 4,
gain 4%.
1. $14
295
2. $13
100
3. $13
293
4. $11
957
33.
Calculate the present value of the following cash flows assuming
they occur at the end of each year and the interest rate is 12% p.a.: Year 0,
($12 000); Year 1, $5670; Year 2, $11 250.
2030.
$2030.93
2031.
$26 030.93
2032.
$28 920
2033.
($1163.19)
34.
Calculate the present value of a government security that
promises to pay $100 p.a. forever, assuming an interest rate of 11% per annum.
1. $90
2. $1100
3. $909
4. Infinity.
35.
Debt Ltd borrowed $100 000 from its local bank to finance the
purchase of new equipment. Annual payments are required over five years at a
fixed interest rate of 10% p.a. How much is each annual payment?
398.
$27 398.18
399.
$20 000.00
400.
$26 379.75
401.
$24 444.12
36.
Debt Ltd borrowed $100 000 from its local bank to finance the
purchase of new equipment. Annual payments are required over five years at a
fixed interest rate of 10% p.a. How much is each annual payment?
398.
$27 398.18
399.
$20 000.00
400.
$26 379.75
401.
$24 444.12
37.
Five years ago, you entered into a loan agreement to borrow $100
000. The loan was to be paid off over 20 years through equal monthly
instalments. If the interest rate was fixed at 12% p.a. for the entire loan
term, how much do you pay per month?
1. $949
2. $1066
3. $1101
4. $1223
38.
John has just been employed by a prestigious firm, drawing an annual
salary of $300 000, paid at the end of each year. He plans to work for five
years before retiring. He buys a new luxury home with mortgage repayments of
$5000 per month for the next 20 years (payable at the end of each month), and
donates $10 000 per annum forever to his favourite charity. What annual amount,
in present value terms, can John withdraw for the first five years of his
retirement from the remainder of his savings? Assume an annual interest rate of
6% p.a.
1. $93
926
2. $246
819
3. $94
754
4. $112 754
39.
Kristy has to make rental payments of $1000 at the start of
every month, throughout the four-year duration of her university course. Her
university fees are $4000 to be paid at the start of each year. She earns $1500
per month (paid at the end of each month) from a part-time job. Assume an
interest rate of 8% p.a. and that she keeps the part-time job for the next four
years. How much money, in present value terms, can she withdraw each month for
the next four years?
1. $144
2. $126
3. $55
4. $177
40.
Matthew earns $10 000 per month for the next 25 years, after
which he retires. During the first five years of retirement, he withdraws $6000
at the start of each month, after which he dies. His son, Sean, inherits the
remainder of Matthew’s savings. It is further stipulated in Matthew’s will that
Sean will be paid the money in equal payments at the start of every month, for
the next 20 years. Given a fixed interest rate of 9% p.a., calculate the amount
of the monthly payments that Sean receives.
1. $98
250
2. $97
340
3. $98
270
4. $97
519
41.
Joe has to pay $50 000 in 1.5 years’ time. If the interest rate
is 15% p.a., compounded continuously, how much does she owe in present value
terms?
1. $46
387
2. $49
077
3. $39
926
4. $37
041
42.
If you have a choice to earn simple interest on $20 000 for
three years at 9% or annually compounding interest at 8.5% for three years
which one will pay more interest and by how much?
50.
Simple interest by $50.00
51.
Compound interest by $122.97
52.
Compound interest by $145.78
53.
Simple interest by $150.00
43.
Your parents give you $120 per week for living expenses while
you are doing a three-year degree in finance. If the interest rate is 6.5% per
annum, what is this cash flow worth when you start your degree?
1. $15
125
2. $16
998
3. $26
026
4. $27
330
44.
What is the difference between daily and monthly compounding for
a nominal interest rate of 7% per annum?
1. 0.06%
2. 0.04%
3. 0.02%
4. 0.01%
45.
The term ______________ is used to describe the ‘rate of return’
when the financial contract is in the form of debt.
________________________________________
46.
An __________ interest rate is one where the frequency of
payment does not match the time period specified by the interest rate.
________________________________________
47.
Continuous interest rates are an example of where the future sum
grows _____________.
________________________________________
48.
A principle-and-interest loan is a common example of an
__________ annuity.
________________________________________
49.
The ______ interest rate is an interest rate calculated after
taking out the effects of inflation.
________________________________________
50.
The annuity where the cash flows continue forever is called a
________.
________________________________________
51.
An individual is offered the sum of $100 000 to be received
after 5 years. If the relevant interest rate is 8% p.a., compounding annually,
then the present value of this promised sum is $68 058.32.
True False
52.
The distinguishing feature of an annuity due is that the time
period between the payment of each successive cash flow differs to the
frequency with which the interest compounds.
True False
53.
In an interest-only loan, the principle reduces by a small
amount at first, and more rapidly towards the end of the loan.
True False
54.
An individual borrowed $100 000 at a fixed interest rate of 12%
p.a. for the entire loan term of 20 years. If the loan is to be repaid through
equal monthly instalments, then the regular repayment to the nearest dollar is $1101.
True False
55.
A lender offers a nominal interest rate on a loan of 6% p.a.
compounding quarterly. This corresponds to an effective interest rate of
6.136%.
True False
56.
The nominal interest rate is difference between the inflation
rate and the real rate of interest.
True False
Chapter 03 Testbank Key
1.
A financial contract is:
1. a
piece of advice provided by financial planners.
2. an
agreement that involves only book entries and does not result in any cash
flows.
3. an arrangement,
agreement or investment that produces cash flows.
4. an
agreement that results in a profit for the businesses concerned.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.02 Fundamental concepts of financial mathematics
2.
The calculation that expresses the ratio of net cash inflows to
net cash outflows produced by a financial contract is known as:
1. net
present value.
2. net
profit.
3. internal
rate of return.
4. rate
of return.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.02 Fundamental concepts of financial mathematics
3.
The rate of return can be shown as:
1.
1.
1.
1.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.02 Fundamental concepts of financial mathematics
4.
A principle that a dollar is worth more the sooner it is to be
received, all other things equal, is:
1. the
time value of money.
2. the
value of money.
3. Fisher’s
effect.
4. net
present value.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.02 Fundamental concepts of financial mathematics
5.
A method of calculating interest in which, during the entire
term of the loan, interest is computed on the original sum borrowed is the:
1. present
value method.
2. simple
interest method.
3. compound
interest method.
4. interest
rate method.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.03 Simple interest
6.
The amount that corresponds to today’s value of a promised
future sum can be shown as:
1.
1.
1.
1.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.03 Simple interest
7.
A process by which, through the operation of interest, a present
sum becomes a greater sum in the future is:
1. the
additive principle.
2. the
accumulation principle.
3. the
compounding principle.
4. the
discounting principle.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
8.
The interest rate where interest is charged at the same
frequency as the quoted interest rate is the:
1. nominal
interest rate.
2. real
interest rate.
3. compound
interest rate.
4. effective
interest rate.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and making
comparisons using the effective interest rate
Section: 3.04 Compound interest
9.
The value, as at the date of the final cash flow promised in a
financial contract, that is equivalent to the stream of promised cash flows is
the:
1. present
value of a contract.
2. future
value of a contract.
3. terminal
value of a contract.
4. discounted
value of a contract.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.02 Value, as at any date, contracts
involving multiple cash flows
Section: 3.05 Valuation of contracts with multiple cash flows
10.
An annuity in which the first cash flow is to occur immediately
is known as a/an:
1. ordinary
annuity.
2. ordinary
perpetuity.
3. annuity
due.
4. growth
annuity.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.03 Distinguish between different types of
annuity and calculate their present value and future value
Section: 3.06 Annuities
11.
An annuity in which the first cash flow is to occur after a time
period that exceeds the time period between each subsequent cash flow is known
as a/an:
1. deferred
annuity.
2. growth
annuity.
3. ordinary
annuity.
4. annuity
due.
AACSB: Analytic
Blooms: Knowledge
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.03 Distinguish between different types of
annuity and calculate their present value and future value
Section: 3.06 Annuities
12.
You have $10 000 to invest. If you invest it at 11.2% p.a. for
six months, then invest the initial $10 000 together with any interest for a
further 12 months at 12.7% p.a., what will be the value of your investment at
the end of the 18-month period?
901.
$11 901.12
902.
$12 532.24
903.
$11 830.00
904.
$12 241.36
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
13.
You have borrowed $1000 from a friend to pay for unforeseen car
repairs, with an agreement to pay interest at an annual rate of 18%,
compounding daily. If you repaid your friend after 90 days, how much would you
need to repay?
1044.
$1044.38
1045.
$1045.00
1046.
$1045.37
1047.
$1043.56
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
14.
If you invest $47 000 for five years at 9.7% p.a. (interest paid
annually and then reinvested), what is the value of your investment at the end
of the five-year period?
910.
$81 910.13
911.
$74 667.39
912.
$56 560.22
913.
$62 046.56
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
15.
What will your investment be worth in 10 years if you invest $15
000 at 12.5% p.a., payable at maturity, and your tax rate (paid annually) is 30
cents in the dollar?
1. $34
097
2. $48
710
3. $32
473
4. $34
704
AACSB: Analytic
Blooms: Application
Difficulty: Hard
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
16.
Calculate the average annual rate of return on an investment of
$1000 that accumulates to $2005 in five years’ time.
14.
14.93%
15.
8.8%
16.
100.5%
17.
17.63%
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
17.
If a term deposit paid an interest rate of 24% p.a. over the
past six months, and the current balance is $1008, what was the amount
initially invested?
812.
$812.90
813.
$681.08
814.
$900.00
815.
$975.00
AACSB: Analytic
Blooms: Application
Difficulty: Hard
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
18.
Assume that on 1 January 2011 you deposit $1000 into a savings
account that pays 8% p.a. If the bank compounds interest annually, how much
will you have in your account on 1 January 2014?
1292.
$1292.43
1293.
$1357.61
1294.
$1259.71
1295.
$1439.16
AACSB: Analytic
Blooms: Application
Difficulty: Easy
EQUIS: Apply knowledge
Est Time: < 1 minute
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
19.
Assume that on 1 January 2011 you deposit $1000 into a savings
account that pays 8% p.a. If the bank compounds interest quarterly, how much
will you have in your account on 1 January 2014?
1268.
$1268.24
1269.
$1349.13
1270.
$1301.15
1271.
$1483.09
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
20.
Suppose you deposited $250 at the end of 2011, 2012, 2013 and
2014. How much would you have in your account on 1 January 2015, based on
annual compounding of 8% by your bank?
1025.
$1025.25
1026.
$1235.53
1027.
$1183.53
1028.
$1126.53
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.04 Apply your knowledge of annuities to
solve a range of problems, including problems involving principal-and-interest
loan contracts
Section: 3.06 Annuities
21.
You want to deposit amounts in the bank at the end of 2011,
2012, 2013 and 2014, so that you have $1259.71 in your account on 1 January
2015. Calculate how large each of your payments would need to be if the bank
compounds quarterly at 8% p.a.
279.
$279.56
280.
$259.83
281.
$284.19
282.
$314.93
AACSB: Analytic
Blooms: Application
Difficulty: Hard
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.04 Apply your knowledge of annuities to
solve a range of problems, including problems involving principal-and-interest
loan contracts
Section: 3.06 Annuities
22.
Assume that you will require $1000 in four years’ time. Suppose
that you can afford to deposit only $186.29 at the end of each year, the first
deposit to be made in one year’s time. What interest rate would you require to
reach your target if the bank compounds annually?
1. 15%
p.a.
2. 18.5%
p.a.
3. 20%
p.a.
4. 22.5%
p.a.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.04 Apply your knowledge of annuities to
solve a range of problems, including problems involving principal-and-interest
loan contracts
Section: 3.06 Annuities
23.
You have a goal to raise $1000 in four years’ time. If your
mother gives you $400 at the end of the first year, you make six deposits of
equal amounts every six months thereafter, and all the money is deposited in a
bank, which pays 8% p.a., compounded semi-annually, how large must each of the
six payments be for you to reach your target?
74.
$74.46
75.
$65.55
76.
$82.74
77.
$77.26
AACSB: Analytic
Blooms: Application
Difficulty: Hard
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.04 Apply your knowledge of annuities to
solve a range of problems, including problems involving principal-and-interest
loan contracts
Section: 3.06 Annuities
24.
Calculate the effective annual interest rate corresponding to
12% p.a., compounded quarterly.
11.
11.9%
12.
12.55%
13.
12.45%
14.
12.71%
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
25.
What is the present value of $500 payable in 10 years’ time if
the interest rate is 6% p.a.?
290.
$290.50
291.
$335.60
292.
$895.40
293.
$279.20
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
26.
What is the present value of the following cash flow stream,
discounted at 7% p.a.: Year 1, $100; Year 2, $400; Years 3 through 20, $300?
2859.
$2859.20
2860.
$3563.40
2861.
$3078.63
2862.
$2782.40
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.02 Value, as at any date, contracts
involving multiple cash flows
Section: 3.05 Valuation of contracts with multiple cash flows
27.
What is the implied interest rate if you borrow $85 000 and
promise to pay back $201 229 at the end of 10 years?
1. 9%
p.a.
2. 18%
p.a.
3. 11%
p.a.
4. 13%
p.a.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
28.
Karen has borrowed $12 000 in student loans at an annual
interest rate of 9%. If she repays $1500 per annum, how long (to the nearest
year) will it take to repay the loan?
1. 10
years
2. 15
years
3. 12
years
4. 17
years
AACSB: Analytic
Blooms: Application
Difficulty: Hard
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.04 Apply your knowledge of annuities to
solve a range of problems, including problems involving principal-and-interest
loan contracts
Section: 3.07 Principal-and-interest loan contracts
29.
If the nominal interest rate is 12% p.a. and the inflation rate
is expected to be 5% p.a., what is the real rate of interest?
106.
106.7%
107.
6.7%
108.
7%
109.
8.2%
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
30.
If a term deposit offers an interest rate of 10% p.a.,
compounding continuously, how much will an initial investment of $50 000 be
worth after one year?
1. $55
258
2. $135
914
3. $62
519
4. $98
352
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
31.
What is the effective annual interest rate corresponding to a
nominal interest rate of 10% p.a., compounding continuously?
10.
10.5%
11.
10.9%
12.
12.5%
13.
13%
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
32.
Calculate the value of an investment at the end of its fourth
year if the initial investment is $10 000 and it produces the following annual
rates of return: Year 1, gain 15%; Year 2, gain 17%; Year 3, loss 5%; Year 4,
gain 4%.
1. $14
295
2. $13
100
3. $13
293
4. $11
957
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.04 Compound interest
33.
Calculate the present value of the following cash flows assuming
they occur at the end of each year and the interest rate is 12% p.a.: Year 0,
($12 000); Year 1, $5670; Year 2, $11 250.
2030.
$2030.93
2031.
$26 030.93
2032.
$28 920
2033.
($1163.19)
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.02 Value, as at any date, contracts
involving multiple cash flows
Section: 3.05 Valuation of contracts with multiple cash flows
34.
Calculate the present value of a government security that
promises to pay $100 p.a. forever, assuming an interest rate of 11% per annum.
1. $90
2. $1100
3. $909
4. Infinity.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
EQUIS: Apply knowledge
Est Time: 1-3 minutes
Graduate Attributes: Problem solving
Learning Objective: 3.01 Understand and solve problems involving
simple interest and compound interest, including accumulating, discounting and
making comparisons using the effective interest rate
Section: 3.06 Annuities
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