Multiple Choice Answers

Question 1
In January of 1997, the U.S. Consumer Price Index (CPI) stood at 159.1. By January of 2011, the level had risen to 220.2. What was the average annual rate of inflation over this time period as measured by the CPI?
A. 2.60%
B. 2.97%
C. 2.35%
D. 3.31%

Question 2 of 20
If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the interest of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end of 10 years, then you have just repaid what type of loan?
A. Compound loan
B. Amortized loan
C. Interest-only loan
D. Discount loan

Question 3 of 20
You just won a lottery – CONGRATULATIONS! Your parents have always told you to plan for the future, so since you already have a well-paying job you decide to invest rather than spend your lottery winnings. The payment schedule from the lottery commission is $100,000 after taxes at end of year one and 19 more payments of exactly $100,000 after taxes in equal annual end-of-the-year deposits (i.e., the first of the next 19 deposits is one year from today) into your account paying 7% compounded annually. How much money will be in your account after the last deposit is made?
A. $2,000,000.00
B. $3,637,896.48
C. $4,486,517.68
D. $4,099,549.23

Question 4 of 20
The one-time payment of money at a future date is often called a ________.
A. perpetuity payment
B. lump-sum payment
C. principal amount
D. present value

Question 5 of 20
Four years ago, Robert’s annual salary was $52,500. Today, he earns $73,800. What has been the average annual rate of growth of Robert’s salary?
A. 8.89%
B. 41.52%
C. 10.38%
D. $5,325 per year

Question 6 of 20
You have an annuity of equal annual end-of-the-year cash flows of $500 that begin two years from today and last for a total of ten cash flows. Using a discount rate of 4%, what are those cash flows worth in today’s dollars?
A. $5,000.00
B. $4,055.45
C. $4,380.24
D. $3,899.47

Question 7 of 20
What type of loan requires both principal and interest payments as you go by making equal payments each period?
A. Interest-only loan
B. Amortized loan
C. Compound loan
D. Discount loan

Question 8 of 20
For much of the 20th century, new car prices rose at an annual rate of 5.73%. Given a beginning new car price of $600, how long did it take for the average new car price to rise to $16,950? Please round to the nearest year.
A. 70 years
B. 100 years
C. 40 years
D. 60 years

Question 9 of 20
You just won the Publisher’s Clearing House Sweepstakes and the right to 20 after-tax ordinary annuity cash flows of $163,291.18. Assuming a discount rate of 7.50%, what is the present value of your lottery winnings? Use a calculator to determine your answer.
A. $3,265,823.60
B. $1,664,670.52
C. $1,789,520.81
D. There is not enough information to answer this question.

Question 10 of 20
Johnson has an annuity due that pays $600 per year for 15 years. What is the present value of the cash flows if they are discounted at an annual rate of 7.50%?
A. $9,675.00
B. $5,296.27
C. $5,693.49
D. $9,000.00

Question 11 of 20
You have accumulated $800,000 for your retirement. How much money can you withdraw in equal annual beginning-of-the-year cash flows if you invest the money at a rate of 7% for thirty years?
A. $64,469.12
B. $8,469.12
C. $60,251.52
D. $9,061.96

Question 12 of 20
If for the next 40 years you place $3,000 in equal year-end-deposits into an account earning 8% per year, how much money will be in the account at the end of that time period?
A. $777,169.56
B. $2,606,942.58
C. $839,343.12
D. $120,000.00

Question 13 of 20
You have just turned 25 and may now spend a portion of the trust fund your parents established for you. The terms of the trust fund allow you to withdraw 60 beginning-of-the-year cash flows of $100,000 each. An investment firm has offered to pay you cash for all of the fund today. If the rate they use to discount the cash flows is 16% per year, what is their offer price today for your pension fund?
A. $6,000,000.00
B. $724,901.63
C. $4,605,750,853
D. $624,915.20

Question 14 of 20
A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?
A. The FV is $224.00.
B. The FV is $224.72.
C. The PV is $178.00.
D. This question is irrelevant because there are no two-year investments that earn an average of 6% per year.

Question 15 of 20
Which of the following is NOT a form of perpetuity?
A. Preferred stock that pays the same dividend forever
B. A philanthropic endowment fund that pays the same charitable amount every year forever
C. A British consol bond
D. All are examples of perpetuities.

Question 16 of 20
Twelve years ago, you paid for the right to twelve $25,000 annual end-of-the-year cash flows. If discounting the cash flows at an annual rate of 8%, what did you pay for these cash flows back then?
A. $203,474.11
B. $188,401.95
C. $300,000.00
D. $474,428.16

Question 17 of 20
Which of the following is NOT true with regard to an amortization table?
A. The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment.
B. The total payment is calculated by using the present value of an annuity formula.
C. The interest payment for a period is equal to the periodic interest rate multiplied by the beginning-of-the-period principal balance.
D. All of the above are true.

Question 18 of 20
The furniture store offers you no-money-down on a new set of living room furniture. Further, you may pay for the furniture in three equal annual end-of-the-year payments of $1,000 each with the first payment to be made one year from today. If the discount rate is 6%, what is the present value of the furniture payments?
A. $3,183.60
B. $2,833.39
C. $3,000.00
D. $2,673.01

Question 19 of 20
Which is greater, the present value of a five-year ordinary annuity of $300 discounted at 10%, or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?
A. The two annuities are of equal value.
B. The first annuity because the cash flows occur sooner.
C. The second annuity because the cash flows are discounted at a lower interest rate.
D. The answer to this question cannot be determined.

Question 20 of 20
What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date?
A. Discount loan
B. Interest-only loan
C. Amortized loan
D. Compound loan