Test Bank For Foundations of Finance 10TH Edition By Keown/Martin/Petty |

Joe borrowed $10,000 at 10% per year and promised to pay it back in equal annual installments at the end of each of the next 5 years. Joe's payment will be $2,100 [($10,000/5) + ($10,000 × 10%)]. Answer: FALSE Diff: 2 Page Ref: 163 Keywords: Time Value of Money, Amortization Schedule Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 7) The present value of a deferred annuity (e.g., an annuity that starts 10 years from today) can be calculated in two steps: (1) calculate the future value of the annuity, and (2) calculate the present value of the amount determined in step (1). Answer: TRUE Diff: 1 Page Ref: 158 Keywords: Annuity Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 8) The present value of an annuity increases as the discount rate increases. Answer: FALSE Diff: 1 Page Ref: 160 Keywords: Present Value, Annuity, Discount Rate Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 9) To evaluate or compare investment proposals, we must adjust the value of all cash flows to a common date. Answer: TRUE Diff: 1 Page Ref: 160 Keywords: Time Value of Money Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 10) An example of an annuity is the interest received from bonds. Answer: TRUE Diff: 1 Page Ref: 158 Keywords: Annuity Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 11) Bill saves $3,000 per year in his IRA starting at age 25 and continuing to age 65, when he retires. The amount Bill has in his IRA at age 65 can be characterized as the future value of an annuity. Answer: TRUE Diff: 1 Page Ref: 158 Keywords: Future Value of an Annuity Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 12) When repaying an amortized loan, the interest payments increase over time due to the compounding process. Answer: FALSE Diff: 1 Page Ref: 163 Keywords: Loan Amortization, Interest Payments Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 13) The value of a bond investment, which provides fixed interest payments, will increase when discounted at an 8% rate rather than at an 11% rate. Answer: TRUE Diff: 1 Page Ref: 160 Keywords: Discount Rate, Present Value, Annuity Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 14) The future value of a 10-year ordinary annuity is twice as much as the future value of an otherwise identical 5-year annuity. Answer: FALSE Diff: 1 Page Ref: 158 Keywords: Future Value, Annuity, Time Periods Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 15) The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity. Answer: TRUE Diff: 1 Page Ref: 162 Keywords: Future Value, Annuity Due, Ordinary Annuity Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 16) If the interest rate is positive, a six-year ordinary annuity of $500 per year must have a present value over $3,000. Answer: FALSE Diff: 1 Page Ref: 160 Keywords: Ordinary Annuity, Present Value Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 17) A compound annuity involves depositing or investing a single sum of money and allowing it to compound for a certain number of years. Answer: FALSE Diff: 1 Page Ref: 158 Keywords: Compound Annuity Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 18) Two sisters each open IRAs in 2011 and plan to invest $3,000 per year for the next 30 years. Mary makes her first deposit on January 1, 2011, and will make all future deposits on the first day of the year. Jane makes her first deposit on December 31, 2011, and will continue to make her annual deposits on the last day of each year. At the end of 30 years, the difference in the value of the IRAs (rounded to the nearest dollar), assuming an interest rate of 7% per year, will be A) $19,837. B) $12,456. C) $6,300. D) $210. Answer: A Diff: 2 Page Ref: 158, 162 Keywords: Time Value of Money, Future Value, Annuity, Annuity Due Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 19) You have the choice of two equally risk annuities, each paying $5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth? A) the annuity due B) the ordinary annuity C) Since we don't know the interest rate, we can't find the value of the annuities and hence we cannot tell which one is better. D) either one because they have the same present value Answer: A Diff: 2 Page Ref: 158, 162 Keywords: Annuity Due, Ordinary Annuity, Present Value Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 20) D'Anthony borrowed $50,000 today that he must repay in 15 annual end-of-year installments of $5,000. What annual interest rate is D'Anthony paying on his loan? A) 2.222% B) 3.333% C) 5.556% D) 33.33% Answer: C Diff: 2 Page Ref: 163 Keywords: Loan Amortization, Interest Rate, Annuity Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 21) Assume you are to receive a 10-year annuity with annual payments of $1000. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 10. You will invest each payment in an account that pays 9 percent compounded annually. Although the annuity payments stop at the end of year 10, you will not withdraw any money from the account until 25 years from today, and the account will continue to earn 9% for the entire 25-year period. What will be the value in your account at the end of Year 25 (rounded to the nearest dollar)? A) $48,359 B) $35,967 C) $48,000 D) $55,340 Answer: D Diff: 2 Page Ref: 158 Keywords: Future Value, Annuity, Single Sum Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 22) You deposit $5,000 per year at the end of each of the next 25 years into an account that pays 8% compounded annually. How much could you withdraw at the end of each of the 20 years following your last deposit if all withdrawals are the same dollar amount? (The twenty-fifth and last deposit is made at the beginning of the 20-year period. The first withdrawal is made at the end of the first year in the 20-year period.) A) $18,276 B) $27,832 C) $37,230 D) $43,289 Answer: C Diff: 3 Page Ref: 158 Keywords: Annuity, Future Value, Present Value, Payment Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 23) Your grandparents deposit $2,000 each year on your birthday, starting the day you are born, in an account that pays 7% interest compounded annually. How much will you have in the account on your 21st birthday, just after your grandparents make their deposit? A) $101,802 B) $98,016 C) $86,058 D) $79,640 Answer: B Diff: 3 Page Ref: 158 Keywords: Annuity, Future Value Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 24) You can buy a $50 savings bond today for $25 and redeem the bond in 10 years for its full face value of $50. You could also put your money in a money-market account that pays 7% interest per year. Which option is better, assuming they are of equal risk? A) The money-market account is better because it pays more interest. B) The money-market account is better because it requires a smaller investment. C) The savings bond is better because it earns a higher interest rate. D) The money market and savings bond both earn 7% interest, so they are equal in value. Answer: C Diff: 2 Page Ref: 158 Keywords: Time Value of Money, Interest Rates Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 25) A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives. Which of the following statements is MOST correct? A) Because of the time value of money, the man will always be better off taking the $500,000 up front. B) The higher the interest rate, the more likely the man will prefer the $500,000 lump sum. C) If the man expects to live more than 10 years, then he will prefer the annuity. D) If the man is certain the company will not default on its future payments, he should select the $50,000 per year. Answer: B Diff: 2 Page Ref: 158 Keywords: Ordinary Annuity Learning Obj.: L.O. 5.2 AACSB: Reflective Thinking 26) A financial advisor tells you that you can make your child a millionaire if you just start saving early. You decide to put an equal amount each year into an investment account that earns 7.5% interest per year, starting on the day your child is born. How much would you need to invest each year (rounded to the nearest dollar) to accumulate a million for your child by the time he is 35 years old? (Your last deposit will be made on his 34th birthday.) A) $6,031 B) $7,910 C) $12,500 D) $20,347 Answer: A Diff: 2 Page Ref: 160 Keywords: Annuity, Payments Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 27) You are 21 years old today. Your grandparents set up a trust fund that will pay you $25,000 per year for 20 years, starting on your 65th birthday to supplement your retirement. If the trust can earn 7.5% per year, how much will your grandparents need to put in the trust fund today (rounded to the nearest $10)? A) $11,370 B) $22,310 C) $5,250 D) $17,450 Answer: A Diff: 2 Page Ref: 160 Keywords: Annuity, Present Value Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 28) You estimate you'll need $200,000 per year for 25 years starting on your 65th birthday to live on during your retirement. Today is your 50th birthday and you want to make equal deposits into an account paying 9% interest per year, the first deposit today and the last deposit on your 64th birthday. How much must each deposit be (rounded to the nearest $10)? A) $99,920 B) $85,840 C) $66,909 D) $49,380 Answer: C Diff: 3 Page Ref: 162 Keywords: Annuity, Present Value, Future Value, Annuity Due Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 29) It is your 6th birthday today. You have a trust fund with $50,000 that is earning 8% per year. You expect to withdraw $30,000 per year for 7 years starting on your 22nd birthday for graduate school. How much money will be left in the trust fund after your last withdrawal (rounded to the nearest $10)? A) $125,660 B) $35,780 C) $4,140 D) You will not have enough money to pay for graduate school. Answer: C Diff: 2 Page Ref: 162 Keywords: Annuity, Future Value, Single Sum Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 30) You own an annuity due contract that will pay you $3,000 per year for 12 years. You need money to pay back a loan in 5 years, and you are afraid if you get the annuity payments annually you will spend the money and not be able to pay back your loan. You decide to sell your annuity for a lump sum of cash to be paid to you five years from today. If the interest rate is 8%, what is the equivalent value of your 12- year annuity if paid in one lump sum five years from today? A) $22,008 B) $18,000 C) $35,876 D) $38,880 Answer: C Diff: 2 Page Ref: 158 Keywords: Ordinary Annuity, Future Value, Present Value Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 31) Your daughter is born today and you want her to be a millionaire by the time she is 35 years old. You open an investment account that promises to pay 12% per year. How much money must you deposit each year, starting on her 1st birthday and ending on her 35th birthday, so your daughter will have $1,000,000 by her 35th birthday? A) $2,317 B) $3,455 C) $5,777 D) $9,450 Answer: A Diff: 1 Page Ref: 158 Keywords: Annuity, Payments Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 32) You sell valuable artifacts from your household estate for $200,000 and want to use the money to supplement your retirement. You receive the money on your 60th birthday, the day you retire. You want to withdraw equal amounts at the end of each of the next 25 years. What constant amount can you withdraw each year and have nothing remaining at the end of 20 years if you are earning 7% interest per year? A) $17,162 B) $28,318 C) $37,574 D) $49,113 Answer: A Diff: 1 Page Ref: 160 Keywords: Annuity, Payments Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 33) You inherit $300,000 from your parents and want to use the money to supplement your retirement. You receive the money on your 65th birthday, the day you retire. You want to withdraw equal amounts at the end of each of the next 20 years. What constant amount can you withdraw each month and have nothing remaining at the end of 20 years if you are earning 7% interest compounded monthly? A) $1,200 B) $1,829 C) $2,326 D) $2,943 Answer: C Diff: 1 Page Ref: 160 Keywords: Annuity, Payments Learning Obj.: L.O. 5.2 AACSB: Analytical Thinking 34) Your company has received a $50,000 loan from an industrial finance company. The annual payments are $6,202.70. If the company is paying 9 percent interest per year, how many loan payments must the company make?