FINANCE PROBLEMS -YOU INVEST $1,000 IN AN ACCOUNT THAT PAYS INTEREST AT 12 PERCENT ANNUAL RATE. HOW MUCH WOULD YOUR INVESTMENT GROW TO IN 5 YEARS?

You invest $1,000 in an account that pays interest at 12 percent annual rate. How much would your investment grow to in 5 years?

a. 1,806

b. 1,762

c. 1,600

d. 1,272

You invest $1,000 in an account that pays interest at 12 percent annual rate, compounded quarterly. How much would your investment

grow to in 5 years?

a. 1,762

b. 1,272

c. 1,806

d. 1,600

You invest $1,000 in an investment that grew to $60,000 in 35 years. What annual rate of interest did you earn?

a. 5.25%

b. 12.41%

c. 10.17%

d. 8.24%

You plan to purchase a BMW M5 sedan in six years for $85,000. You have saved $30,000 for the car and plan to invest this money to purchase the car. What rate of interest would you have to earn to be able to purchase the car after six years?

a. 17%

b. 13%

c. 15%

d. 19%

You plan to purchase a BMW M5 sedan for $85,000. You have saved $30,000 for the car and plan to invest this money to purchase the car. How many years would you have to wait if you can earn 12 percent annual rate, compounded quarterly?

a. 8.81

b. 35.23

c. 6.53

d. 19.54

How long would it take to quadruple your money at an annual rate of 8 percent?

a. 19 years

b. 18 years

c. 17 years

d. 16 years

You purchased a rare baseball card for $6,000 as an investment. Three years later you accidentally spilled coffee on it while working on your finance homework, and were forced to sell it for $4,500. What rate of return did you earn? (Hint: It is negative!)

a. –8.86%

b. –14.22

c. –9.14%

d. –11.1%

Your rich uncle has promised to pay you $20,000 as a gift upon graduation in 2 years. You plan to invest it for 5 more years at 8.5 percent compounded monthly and use the money you have after 7 years as a down payment to purchase a house. What will be the amount of the down payment?

a. 36,180

b. 28,500

c. 30,540

d. 40,400

Shady Investment Company offers an investment that promises to double your money in 15 months. This investment promises to credits interest to your account every quarter. What quarterly rate must the investment earn to meet the promised return?

a. 22.59

b. 14.87

c. 59.48

d. 36.99

Loan Shark Company provides short term loans. They will loan you $4 today and expect $5 back in one week! What is the APR for this loan?

a. 25%

b. 1,300%

c. 1,125%

d. 125%

Loan Shark Company provides short term loans. They will loan you $4 today and expect $5 back in one week! What is the EAR for this loan?

a. 1,300,000.00%

b. 67,600.00%

c. 10,947,544.25%

d. 875,287.42%

Recently, the Islanders signed Rick DiPietro to a 15 year contract. The contract is for equal payments of $4.5 million each year for the next 15 years. If you assume a 10 percent discount rate, what is the true value (i.e. PV) of this contract?

a. $85 million

b. $34 million

c. $67.5 million

d. $143 million

Recently, the Islanders signed Rick DiPietro to a 15 year contract. The contract is for equal payments of $4.5 million each year for thenext 15 years. If you assume a 10 percent discount rate, what is the future value of this contract?

a. $67.5 million

b. $34 million

c. $143 million

d. $85 million

You plan to retire with $500,000 savings. You can make a deposit of $150 per month into a retirement saving account that pays 12 percent annual interest compounded monthly. How many years will you have to wait to retire?

a. 98 years

b. 30 years

c. 18 years

d. 277 years

You plan to retire with $500,000 savings. How much should you deposit annually into a retirement saving account that pays 10 percent annual interest if you plan to retire in 15 years?

a. $47,258

b. $15,737

c. $33,333

d. $18,415

You buy a house worth $350,000 with 20% down payment and a 30-year mortgage on the remaining value. If your monthly payment is $1,500, what is the annual percentage rate (APR) for the mortgage?

a. 2.82%

b. 4.98%

c. 6.12%

d. 5.10%

You buy a house worth $350,000 with 20% down payment and a 30-year mortgage on the remaining value. If your monthly payment is $1,500, what is the effective annual rate (EAR) for the mortgage?

a. 6.12%

b. 5.10%

c. 4.98%

d. 2.82%

You borrow $350,000 at 8 percent compounded monthly. How many years will it take to pay back the loan if the monthly payment is $2,960?

a. 10

b. 19.5

c. 156

d. 233.6

Note: Use this information for next two questions.

Ms. Patricia Sullivan plans to create a fund from her lottery winnings to meet three objectives. First, she wants to create a fund so that her mother can withdraw $20,000 per month for the remainder of her expected life of 20 years. Second, she wants to pay the down payment for her brother to buy a house upon graduation from college four years from now. She expects that he will need $100,000 for down

payment at that time. Finally, she wants to retire after 15 years and be able to withdraw $30,000 per month starting a month from her retirement. She expects to live for 30 years after retirement. All monies earn 8 percent compounded monthly and all cash flows occur at the end of the relevant period.

How much money does she need to invest today to meet her first objective?

a. $3.7 million

b. $2.4 million

c. $4.5 million

d. $3.2 million

How much money does she need to invest today to meet all three objectives?

a. $2.4 million

b. $3.2 million

c. $4.5 million

d. $3.7 million

You plan to purchase a car. The dealer is offering special financing at an annual percentage rate (APR) of 8 percent for 100 percent of the car value. The inflation premium is 3.5 percent. If the pure rate in the market is 3 percent, what is the risk premium using the multiplicative form?

a. 4.72%

b. 2.69%

c. 7.48%

d. 1.31%

e. 6.24%

The real rate is 4.2 percent and the nominal APR is 7 percent. What is the expected inflation premium? Use exact formulation.

a. 7.48%

b. 6.24%

c. 2.69%

d. 1.31%

e. 4.72%

The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the nominal APR rate? Use exact formulation.

a. 11.00%

b. 8.75%

c. 11.39%

d. 6.09%

e. 6.00%

The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the real rate? Use exact formulation.

a. 8.75%

b. 11.00%

c. 6.09%

d. 6.00%

e. 11.39%

The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the risk-free rate? Use exact formulation. (Hint: Set risk premium equal to zero!)

a. 6.09%

b. 7.50%

c. 8.75%

d. 7.62%

e. 6.00%

The APR on a financial security is 12 percent. If the inflation premium is 4 percent and the pure rate is 3 percent, what risk premium is required by the market?

a. 4.74%

b. 3.81%

c. 5.00%

d. 5.37%

e. 4.56%

Use the following information for this and the following three questions.

A bank wishes to earn a pure rate of 2 percent, and the inflation premium is 1.6%. The bank uses the Fair Issac Corporation (FICO) score to determine car loan rate for its customers. Based on an automobile loan applicant’s FICO score, it uses the following risk premium adjustment to the rate it quotes.

FICO Score Risk Premium %

>740           1.00%

720-739      1.10%

700-719      1.30%

680-699      1.60%

660-679     1.90%

640-659     2.20%

620-639     2.50%

<620           7.50%

What annual percentage rate will it quote to John Smith who has a FICO score of 645?

a. 6.22%

b. 5.60%

c. 11.40%

d. 5.91%

e. 5.29%

If John Smith’s FICO score drops to 615, what will be the percent change in the APR?

a. – 29.43%

b. 92.91%

c. 11.40%

d. 29.43%

e. – 92.91%

Jane Smith applies for a car loan to the bank and the bank quotes her an APR of 4.98 percent. In which range does Jane Smith’s FICO score fall?

a. 660-679

b. 720-739

c. 680-699

d. >740

e. 700-719

The average FICO score in the United States is about 692. What is the APR rate offered by the bank to the average customer?

a. 5.29%

b. 5.91%

c. 6.22%

d. 11.40%

 

e. 5.60%