1. You plan to invest some money in a bank account.

Which of the following banks provides you with the highest effective rate b. Bank 2; 6.0% with monthly compounding.
of interest? c. Bank 3; 6.0% with annual compounding.
d. Bank 4; 6.0% with quarterly compounding.
a. Bank 1; 6.1% with annual compounding.
e. Bank 5; 6.0% with daily (365-day) compounding.

2. Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding? a. $11,973
b. $12,603
a. $205.83 c. $13,267
b. $216.67 d. $13,930
c. $228.07 e. $14,626
d. $240.08
e. $252.08 8. You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year,
beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions,
3. You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account how much will you have 4 years from today?
be worth at the end of 25 years?
a. $16,112
a. $1,122.54 b. $16,918
b. $1,181.62 c. $17,763
c. $1,240.70 d. $18,652
d. $1,302.74 e. $19,584
e. $1,367.88
9. What’s the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?
4. Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years
from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at a. $4,750
the offer price? b. $5,000
c. $5,250
a. 4.37% d. $5,513
b. 4.86% e. $5,788
c. 5.40%
d. 6.00% 10. What’s the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?
e. 6.60%
a. 8.95%
5. Ten years ago, Spielberg Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in b. 9.39%
earnings per share (EPS) over the 10-year period? c. 9.86%
d. 10.36%
a. 15.17% e. 10.88%
b. 15.97%
c. 16.77% 11. What’s the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if
d. 17.61% the interest rate is 5%?
e. 18.49%
a. $8,509
6. Wendy has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple? b. $8,957
c. $9,428
a. 23.99 d. $9,924
b. 25.26 e. $10,446
c. 26.58
d. 27.98 12. Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested
e. 29.46 funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?
7. You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today.
You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make a. $28,843.38
the 3rd deposit, 3 years from now? b. $30,361.46
 c. $31,959.43 a. 6.85%
d. $33,641.50 b. 7.21%
e. $35,323.58 c. 7.59%
d. 7.99%
13. Your grandmother just died and left you $100,000 in a trust fund that pays 6.5% interest. You must spend the money on e. 8.41%
your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How
much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the 18. What is the present value of the following cash flow stream at a rate of 12.0%?
account?
Years: 0 1 2 3 4
a. $24,736 | | | | |
b. $26,038 CFs: $0 $1,500 $3,000 $4,500 $6,000
c. $27,409
d. $28,779 a. $9,699
e. $30,218 b. $10,210
c. $10,747
14. Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each d. $11,284
year, beginning at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw e. $11,849
funds from the account. What is the maximum number of $35,000 withdrawals that he can make and still have at
least $25,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole 19. At a rate of 6.5%, what is the future value of the following cash flow stream?
number.)
Years: 0 1 2 3 4
a. 12 | | | | |
b. 13 CFs: $0 $75 $225 $0 $300
c. 14
d. 15 a. $526.01
e. 16 b. $553.69
c. $582.83
15. Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of d. $613.51
each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw e. $645.80
funds from the account. What is the maximum number of $45,000 withdrawals that she can make and still have at
least $50,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole 20. You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1,
number.) $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would
you earn if you bought this asset?
a. 13
b. 14 a. 4.93%
c. 15 b. 5.19%
d. 16 c. 5.46%
e. 17 d. 5.75%
e. 6.05%
16. Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000,
with the first payment coming one year from today. What rate of return is built into the annuity? 21. What’s the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded
semiannually?
a. 3.44%
b. 3.79% a. $3,089
c. 4.17% b. $3,251
d. 4.58% c. $3,422
e. 5.04% d. $3,602
e. $3,782
17. Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. 22. What’s the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?
You need money today to start a new business, and your uncle offers to give you $120,000 for the annuity. If you
sell it, what rate of return would your uncle earn on his investment? a. $969
b. $1,020
 c. $1,074 28. Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you
d. $1,131 to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

23. Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly a. $7,531
statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%? b. $7,927
c. $8,323
a. 18.58% d. $8,740
b. 19.56% e. $9,177
c. 20.54%
d. 21.57% 29. You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded
e. 22.65% monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to
grow to $250,000? Round fractional months up.
24. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus
interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge a. 23
an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective b. 27
annual rate charged by Midwest versus the rate charged by Riverside? c. 32
d. 38
a. 0.52% e. 44
b. 0.44%
c. 0.36% 30. Your child’s orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front
d. 0.30% payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month
e. 0.24% for 3 years. What nominal annual interest rate is built into the monthly payment plan?

25. Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly a. 12.31%
payments, which amounts to monthly compounding. What is the effective annual rate? b. 12.96%
c. 13.64%
a. 15.27% d. 14.36%
b. 16.08% e. 15.08%
c. 16.88%
d. 17.72% 31. Your subscription to Investing Wisely Weekly is about to expire. You plan to subscribe to the magazine for the rest of your
e. 18.61% life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for
$850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate
26. Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How will remain constant, how many years must you live to make the lifetime subscription the better buy?
much would be in the account after 8 months, assuming each month has 30 days?
a. 7.48
a. $5,178.09 b. 8.80
b. $5,436.99 c. 10.35
c. $5,708.84 d. 12.18
d. $5,994.28 e. 14.33
e. $6,294.00
32. You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also
27. Your uncle will sell you his bicycle shop for $250,000, with "seller financing," at a 6.0% nominal annual rate. The terms of add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8
the loan would require you to make 12 equal end-of-month payments per year for 4 years, and then make an quarters) from now, how much will be in the account three years (12 quarters) from now?
additional final (balloon) payment of $50,000 at the end of the last month. What would your equal monthly
payments be? a. $15,234.08
b. $16,035.88
a. $4,029.37 c. $16,837.67
b. $4,241.44 d. $17,679.55
c. $4,464.67 e. $18,563.53
d. $4,699.66
e. $4,947.01 33. Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5
years. By how much would you reduce the amount you owe in the first year?
 payments will be made. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What
a. $2,404.91 cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?
b. $2,531.49
c. $2,658.06 a. $4,271.67
d. $2,790.96 b. $4,496.49
e. $2,930.51 c. $4,733.15
d. $4,969.81
34. Your sister turned 35 today, and she is planning to save $7,000 per year for retirement, with the first deposit to be made e. $5,218.30
one year from today. She will invest in a mutual fund that's expected to provide a return of 7.5% per year. She
plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age
90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be
made at the end of her first retirement year.

a. $58,601
b. $61,686
c. $64,932
d. $68,179
e. $71,588

35. You borrowed $50,000 which you must repay in 10 years. You plan to make an initial deposit today, then make 9 more
deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate. You expect
to earn 5% on your funds, and you expect a 3% inflation rate. To the nearest dollar, how large must your initial
deposit be to enable you to reach your $50,000 target?

a. $3,008
b. $3,342
c. $3,676
d. $4,044
e. $4,448

36. Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began
putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the
fund. The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is
made on Steve's 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a
"trust fund baby," but he also wants to ensure that Steve is provided for in his old age.
Until now, the grandfather has been disappointed with Ed, hence has not given him anything. However,
they recently reconciled, and the grandfather decided to make an equivalent provision for Ed. He will make the first
payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until
Ed turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much
must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement
nest egg as Steve after the last payment is made on their 65th birthday?

a. $3,726
b. $3,912
c. $4,107
d. $4,313
e. $4,528

37. You are negotiating to make a 7-year loan of $25,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year
1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X,
at the end of each year from Year 4 through Year 7. Breck is essentially riskless, so you are confident the