Time Value of Money
Question 1 You have just won the lottery. The Lottery Corporation offers you two options:
- a lump-sum payment of $1 million, or
- an annual installment of $100,000 over the next 15 years.
At what interest rate, r, will you be indifferent between the two options?
Select one:
a. 10.00%
b. 7.75%
c. 5.56%
d. 2.74%
e. 50.00%
Question 5 Juliet has a 10-year mortgage of $500,000 with an interest rate of 3.5% APR, compounded quarterly. Mortgage payments are made at the beginning of each month. What is the balance remaining on this mortgage after the 60th payment?
Select one:
a. $216,077
b. $270,937
c. $275,065
d. $266,797
e. $250,000
Question 6
A 10-year investment will pay $1,800 at the end of this year, and the payments will grow at a rate of 5% per year. The required return is 12%. What is the present value of this investment?
Select one:
a. $5,590.53
b. $6,985.47
c. $10,170.40
d. $12,228.16
e. $25,714.29
Question 7
An investment will pay $225 per year (indefinitely), starting in one year's time. The annual payments will grow at a rate of 3% per year. If the price of this investment is $2,000, what is its rate of return?
Select one:
a. 11.25%
b. 14.00%
c. 14.25%
d. 15.00%
e. 17.25%
Question 8
Mike Smith just turned 16 years old. He wishes to buy a used car in two years, and he is willing to spend $8,000. He plans to work part-time and put all his monthly earnings into a bank account that will pay 0.25% interest per month. How much must he save per month in order to be able to purchase the car in two years?
Select one:
a. $754.72
b. $416.67
c. $405.33
d. $333.33
e. $323.85
Question 9 Given the following information, calculate the rate of return.
Price = $282.51 Time to maturity = 10 years Annual payment = $50 Type = annuity due
Select one:
a. 10.00%
b. 11.65%
c. 12.00%
d. 15.73%
e. 17.70%
Question 10 What is the effective annual rate on an investment that pays an interest of 6.25% continuously?
Select one:
a. 6.45%
b. 6.72%
c. 6.35%
d. 4.47%
e. 8.68%