Fin 3403 Review 2 (ch5,6,7)

Fin 3403 Review 2
Student: ___________________________________________________________________________
1. The process of accumulating interest on an investment over time to earn more interest is called:

A. growth.
B. compounding.
C. aggregation.
D. accumulation.
E. discounting.

2. Interest earned on the reinvestment of previous interest payments is called _____ interest.

A. free
B. annual
C. simple
D. interest on
E. compound

3. Interest earned only on the original principal amount invested is called _____ interest.

A. free
B. annual
C. simple
D. interest on
E. compound

4. The process of finding the present value of some future amount is often called:

A. growth.
B. discounting.
C. accumulation.
D. compounding.
E. reduction.

5. What is the future value of $2,896 invested for twelve years at 6.5 percent compounded annually?

A. $5,827.32
B. $6,023.44
C. $6,049.45
D. $6,165.86
E. $6,218.03

6. Today you earn a salary of $28,500. What will be your annual salary fifteen years from now if you earn
annual raises of 3.5 percent?

A. $47,035.35
B. $47,522.89
C. $47,747.44
D. $48,091.91
E. $48,201.60

7. Your grandmother invested one lump sum 17 years ago at 4.25 percent interest. Today, she gave you the
proceeds of that investment which totaled $5,539.92. How much did your grandmother originally invest?

A. $2,700.00
B. $2,730.30
C. $2,750.00
D. $2,768.40
E. $2,774.90

8. What is the present value of $13,450 to be received four years from today if the discount rate is 5.25
percent?

A. $10,854.20
B. $10,960.59
C. $10,974.21
D. $10,982.18
E. $11,003.14

9. Forty years ago, your father invested $2,500. Today that investment is worth $107,921. What is the average
rate of return your father earned on his investment?

A. 8.50 percent
B. 9.33 percent
C. 9.50 percent
D. 9.87 percent
E. 9.99 percent

10. Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today, both Joe and Marie's
investments are each worth $8,500. Which one of the following statements is correct concerning their
investments?

A. Three years from today, Joe's investment will be worth more than Marie's.
B. Last year, Marie's investment was worth more than Joe's.
C. Joe has earned more interest on interest than Marie.
D. Marie earned an annual interest rate of 27.73 percent.
E. Joe earned an annual interest rate of 6.45 percent.

11. You collect model cars. One particular model increases in value at a rate of 5 percent per year. Today, the
model is worth $29.50. How much additional money can you make if you wait ten years to sell the model rather
than selling it five years from now?

A. $9.98
B. $10.40
C. $10.86
D. $11.03
E. $11.24

12. Alpo, Inc. invested $500,000 to help fund a company expansion project scheduled for eight years from now.
How much additional money will they have eight years from now if they can earn 9 percent rather than 7
percent on this money?

A. $58,829.69
B. $86,991.91
C. $118,009.42
D. $126,745.19
E. $137,188.23

13. The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

A. effective annual
B. annual percentage
C. periodic interest
D. compound interest
E. daily interest

14. A loan where the borrower receives money today and repays a single lump sum at some time in the future is
called a(n) _____ loan.

A. amortized
B. continuous
C. balloon
D. pure discount
E. interest-only

15. Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9 percent, how much can
Todd afford to borrow to buy a car?

A. $6,961.36
B. $8,499.13
C. $8,533.84
D. $8,686.82
E. $9,588.05

16. The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary
periods. The money will be set aside in a separate savings account which pays 3.25 percent interest
compounded monthly. They deposit the first $1,500 today. If the company had wanted to deposit an equivalent
lump sum today, how much would they have had to deposit?

A. $82,964.59
B. $83,189.29
C. $83,428.87
D. $83,687.23
E. $84,998.01

17. You are comparing two annuities with equal present values. The applicable discount rate is 7.5 percent. One
annuity pays $5,000 on the first day of each year for twenty years. How much does the second annuity pay each
year for twenty years if it pays at the end of each year?

A. $4,651
B. $5,075
C. $5,000
D. $5,375
E. $5,405

18. What is the future value of $2,400 a year for three years at an 8 percent rate of interest?

A. $6,185.03
B. $6,847.26
C. $7,134.16
D. $7,791.36
E. $8,414.67

19. Your insurance agent is trying to sell you an annuity that costs $100,000 today. By buying this annuity, your
agent promises that you will receive payments of $384.40 a month for the next 40 years. What is the rate of
return on this investment?

A. 3.45 percent
B. 3.47 percent
C. 3.50 percent
D. 3.52 percent
E. 3.55 percent

20. You have been investing $120 a month for the last 15 years. Today, your investment account is worth
$47,341.19. What is your average rate of return on your investments?

A. 9.34 percent
B. 9.37 percent
C. 9.40 percent
D. 9.42 percent
E. 9.46 percent

21. A 9 percent preferred stock pays an annual dividend of $4.50. What is one share of this stock worth today?

A. $.41
B. $4.50
C. $5.00
D. $45.00
E. $50.00

22. What is the annual percentage rate on a loan with a stated rate of 2 percent per quarter?

A. 2.00 percent
B. 2.71 percent
C. 4.04 percent
D. 8.00 percent
E. 8.24 percent

23. What is the effective annual rate if a bank charges you 7.64 percent compounded quarterly?

A. 7.79 percent
B. 7.86 percent
C. 7.95 percent
D. 7.98 percent
E. 8.01 percent

24. The specified date on which the principal amount of a bond is repaid is called the bond's:

A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.

25. The annual coupon of a bond divided by its face value is called the bond's:

A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.

26. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a _____ bond.

A. par
B. discount
C. premium
D. zero coupon
E. floating rate

27. The relationship between nominal rates, real rates, and inflation is known as the:

A. Miller and Modigliani theorem.
B. Fisher effect.
C. Gordon growth model.
D. term structure of interest rates.
E. interest rate risk premium.

28. A Treasury bond has an asked quote of 100:12 and a bid quote of 100:11. One bond:

A. can be purchased at a price of $1,003.75.
B. can be sold at a price of $1,003.75.
C. has a spread of 10 basis points.
D. has a yield to maturity that lies between 11 and 12 percent.
E. can be sold to a dealer at a price of $1,001.10.

29. A General Co. bond has an 8 percent coupon and pays interest annually. The face value is $1,000 and the
current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?

A. 7.79 percent
B. 7.82 percent
C. 8.00 percent
D. 8.04 percent
E. 8.12 percent

30. Party Time, Inc. has a 6 percent coupon bond that matures in 11 years. The bond pays interest semiannually.
What is the market price of a $1,000 face value bond if the yield to maturity is 12.9 percent?

A. $434.59
B. $580.86
C. $600.34
D. $605.92
E. $947.87

31. High Noon Sun, Inc. has a 5 percent, semiannual coupon bond with a current market price of $988.52. The
bond has a par value of $1,000 and a yield to maturity of 5.29 percent. How many years is it until this bond
matures?

A. 4.0 years
B. 4.5 years
C. 6.5 years
D. 8.0 years
E. 9.0 years

32. Ted's Co. offers a zero coupon bond with an 11.3 percent yield to maturity. The bond matures in 16 years.
What is the current price of a $1,000 face value bond?

A. $178.78
B. $180.33
C. $188.36
D. $190.09
E. $192.18

Fin 3403 Review 2 Key

1. The process of accumulating interest on an investment over time to earn more interest is called:

a. growth.
B. compounding.
c. aggregation.
d. accumulation.
e. discounting.

Ross - 005 Chapter... #2
Topic: COMPOUNDING
Type: Definition

2. Interest earned on the reinvestment of previous interest payments is called _____ interest.

a. free
b. annual
c. simple
D. interest on
e. compound

Topic: INTEREST ON INTEREST
Type: Definition

3. Interest earned only on the original principal amount invested is called _____ interest.

a. free
b. annual
C. simple
d. interest on
e. compound

Topic: SIMPLE INTEREST
Type: Definition

4. The process of finding the present value of some future amount is often called:

a. growth.
B. discounting.
c. accumulation.
d. compounding.
e. reduction.

Topic: DISCOUNTING
Type: Definition

5. What is the future value of $2,896 invested for twelve years at 6.5 percent compounded annually?

a. $5,827.32
b. $6,023.44
c. $6,049.45
D. $6,165.86
e. $6,218.03

Topic: FUTURE VALUE
Type: Problem

6. Today you earn a salary of $28,500. What will be your annual salary fifteen years from now if you earn
annual raises of 3.5 percent?

a. $47,035.35
b. $47,522.89
C. $47,747.44
d. $48,091.91
e. $48,201.60

Topic: FUTURE VALUE
Type: Problem

7. Your grandmother invested one lump sum 17 years ago at 4.25 percent interest. Today, she gave you the
proceeds of that investment which totaled $5,539.92. How much did your grandmother originally invest?

a. $2,700.00
B. $2,730.30
c. $2,750.00
d. $2,768.40
e. $2,774.90

Topic: PRESENT VALUE
Type: Problem

8. What is the present value of $13,450 to be received four years from today if the discount rate is 5.25
percent?

a. $10,854.20
B. $10,960.59
c. $10,974.21
d. $10,982.18
e. $11,003.14

Topic: PRESENT VALUE
Type: Problem

9. Forty years ago, your father invested $2,500. Today that investment is worth $107,921. What is the average
rate of return your father earned on his investment?

a. 8.50 percent
b. 9.33 percent
c. 9.50 percent
D. 9.87 percent
e. 9.99 percent

Topic: INTEREST RATE FOR MULTIPLE PERIODS
Type: Problem

10. Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today, both Joe and Marie's
investments are each worth $8,500. Which one of the following statements is correct concerning their
investments?

a. Three years from today, Joe's investment will be worth more than Marie's.
b. Last year, Marie's investment was worth more than Joe's.
c. Joe has earned more interest on interest than Marie.
D. Marie earned an annual interest rate of 27.73 percent.
e. Joe earned an annual interest rate of 6.45 percent.

Topic: INTEREST RATE FOR MULTIPLE PERIODS
Type: Problem

11. You collect model cars. One particular model increases in value at a rate of 5 percent per year. Today, the
model is worth $29.50. How much additional money can you make if you wait ten years to sell the model rather
than selling it five years from now?

a. $9.98
B. $10.40
c. $10.86
d. $11.03
e. $11.24

Topic: FUTURE VALUE AND TIME CHANGES
Type: Problem

12. Alpo, Inc. invested $500,000 to help fund a company expansion project scheduled for eight years from now.
How much additional money will they have eight years from now if they can earn 9 percent rather than 7
percent on this money?

a. $58,829.69
b. $86,991.91
c. $118,009.42
d. $126,745.19
E. $137,188.23

Topic: FUTURE VALUE AND RATE CHANGES
Type: Problem

13. The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

a. effective annual
B. annual percentage
c. periodic interest
d. compound interest
e. daily interest

Topic: ANNUAL PERCENTAGE RATE
Type: Definition

14. A loan where the borrower receives money today and repays a single lump sum at some time in the future is
called a(n) _____ loan.

a. amortized
b. continuous
c. balloon
D. pure discount
e. interest-only

Topic: PURE DISCOUNT LOAN
Type: Definition

15. Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9 percent, how much can
Todd afford to borrow to buy a car?

a. $6,961.36
B. $8,499.13
c. $8,533.84
d. $8,686.82
e. $9,588.05

Topic: ORDINARY ANNUITY AND PRESENT VALUE
Type: Problem

16. The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary
periods. The money will be set aside in a separate savings account which pays 3.25 percent interest
compounded monthly. They deposit the first $1,500 today. If the company had wanted to deposit an equivalent
lump sum today, how much would they have had to deposit?

a. $82,964.59
B. $83,189.29
c. $83,428.87
d. $83,687.23
e. $84,998.01

Topic: ANNUITY DUE AND PRESENT VALUE
Type: Problem

17. You are comparing two annuities with equal present values. The applicable discount rate is 7.5 percent. One
annuity pays $5,000 on the first day of each year for twenty years. How much does the second annuity pay each
year for twenty years if it pays at the end of each year?

a. $4,651
b. $5,075
c. $5,000
D. $5,375
e. $5,405

Topic: ORDINARY ANNUITY VERSUS ANNUITY DUE
Type: Problem

18. What is the future value of $2,400 a year for three years at an 8 percent rate of interest?

a. $6,185.03
b. $6,847.26
c. $7,134.16
D. $7,791.36
e. $8,414.67

Topic: ORDINARY ANNUITY AND FUTURE VALUE
Type: Problem

19. Your insurance agent is trying to sell you an annuity that costs $100,000 today. By buying this annuity, your
agent promises that you will receive payments of $384.40 a month for the next 40 years. What is the rate of
return on this investment?

A. 3.45 percent
b. 3.47 percent
c. 3.50 percent
d. 3.52 percent
e. 3.55 percent

Topic: ORDINARY ANNUITY INTEREST RATE
Type: Problem

20. You have been investing $120 a month for the last 15 years. Today, your investment account is worth
$47,341.19. What is your average rate of return on your investments?

a. 9.34 percent
b. 9.37 percent
c. 9.40 percent
d. 9.42 percent
E. 9.46 percent

Topic: ORDINARY ANNUITY INTEREST RATE
Type: Problem

21. A 9 percent preferred stock pays an annual dividend of $4.50. What is one share of this stock worth today?

a. $.41
b. $4.50
c. $5.00
d. $45.00
E. $50.00

Topic: PERPETUITY PRESENT VALUE
Type: Problem

22. What is the annual percentage rate on a loan with a stated rate of 2 percent per quarter?

a. 2.00 percent
b. 2.71 percent
c. 4.04 percent
D. 8.00 percent
e. 8.24 percent

Topic: ANNUAL PERCENTAGE RATE
Type: Problem

23. What is the effective annual rate if a bank charges you 7.64 percent compounded quarterly?

a. 7.79 percent
B. 7.86 percent
c. 7.95 percent
d. 7.98 percent
e. 8.01 percent

Topic: EFFECTIVE ANNUAL RATE
Type: Problem

24. The specified date on which the principal amount of a bond is repaid is called the bond's:

a. coupon.
b. face value.
C. maturity.
d. yield to maturity.
e. coupon rate.

Topic: MATURITY
Type: Definition

25. The annual coupon of a bond divided by its face value is called the bond's:

a. coupon.
b. face value.
c. maturity.
d. yield to maturity.
E. coupon rate.

Topic: COUPON RATE
Type: Definition

26. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a _____ bond.

a. par
b. discount
C. premium
d. zero coupon
e. floating rate

Topic: PREMIUM BONDS
Type: Definition

27. The relationship between nominal rates, real rates, and inflation is known as the:

a. Miller and Modigliani theorem.
B. Fisher effect.
c. Gordon growth model.
d. term structure of interest rates.
e. interest rate risk premium.

Topic: FISHER EFFECT
Type: Definition

28. A Treasury bond has an asked quote of 100:12 and a bid quote of 100:11. One bond:

A. can be purchased at a price of $1,003.75.
b. can be sold at a price of $1,003.75.
c. has a spread of 10 basis points.
d. has a yield to maturity that lies between 11 and 12 percent.
e. can be sold to a dealer at a price of $1,001.10.

Topic: BID VERSUS ASKED PRICES
Type: Concept

29. A General Co. bond has an 8 percent coupon and pays interest annually. The face value is $1,000 and the
current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?

A. 7.79 percent
b. 7.82 percent
c. 8.00 percent
d. 8.04 percent
e. 8.12 percent
insert graphic

Topic: YIELD TO MATURITY
Type: Problem

30. Party Time, Inc. has a 6 percent coupon bond that matures in 11 years. The bond pays interest semiannually.
What is the market price of a $1,000 face value bond if the yield to maturity is 12.9 percent?

a. $434.59
b. $580.86
C. $600.34
d. $605.92
e. $947.87

Topic: PRICE OF COUPON BOND
Type: Problem

31. High Noon Sun, Inc. has a 5 percent, semiannual coupon bond with a current market price of $988.52. The
bond has a par value of $1,000 and a yield to maturity of 5.29 percent. How many years is it until this bond
matures?

a. 4.0 years
B. 4.5 years
c. 6.5 years
d. 8.0 years
e. 9.0 years

Topic: TIME TO MATURITY OF COUPON BOND
Type: Problem

32. Ted's Co. offers a zero coupon bond with an 11.3 percent yield to maturity. The bond matures in 16 years.
What is the current price of a $1,000 face value bond?

a. $178.78
B. $180.33
c. $188.36
d. $190.09
e. $192.18

Topic: PRICE OF ZERO COUPON BOND
Type: Problem

Category # of Questions
Ross - 005 Chapter... 12
Topic: ANNUAL PERCENTAGE RATE 2
Topic: ANNUITY DUE AND PRESENT VALUE 1
Topic: BID VERSUS ASKED PRICES 1
Topic: COMPOUNDING 1
Topic: COUPON RATE 1
Topic: DISCOUNTING 1
Topic: EFFECTIVE ANNUAL RATE 1
Topic: FISHER EFFECT 1
Topic: FUTURE VALUE 2
Topic: FUTURE VALUE AND RATE CHANGES 1
Topic: FUTURE VALUE AND TIME CHANGES 1
Topic: INTEREST ON INTEREST 1
Topic: INTEREST RATE FOR MULTIPLE PERIODS 2
Topic: MATURITY 1
Topic: ORDINARY ANNUITY AND FUTURE VALUE 1
Topic: ORDINARY ANNUITY AND PRESENT VALUE 1
Topic: ORDINARY ANNUITY INTEREST RATE 2
Topic: ORDINARY ANNUITY VERSUS ANNUITY DUE 1
Topic: PERPETUITY PRESENT VALUE 1
Topic: PREMIUM BONDS 1
Topic: PRESENT VALUE 2
Topic: PRICE OF COUPON BOND 1
Topic: PRICE OF ZERO COUPON BOND 1
Topic: PURE DISCOUNT LOAN 1
Topic: SIMPLE INTEREST 1
Topic: TIME TO MATURITY OF COUPON BOND 1
Topic: YIELD TO MATURITY 1
Type: Concept 1
Type: Definition 10
Type: Problem 21

Fin 3403 Review 2 (ch5,6,7)

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