# 10 MCQ The annual payment on a \$1,000 loan

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1. The annual payment on a \$1,000 loan over a four year period at 10% per year interest is \$315.42. The balance immediately after the first payment has been made is nearest to:
(a) \$684.58
(b) \$784.58 – simple test, 1000*.1=100 interest, add to 1000 prin., subtract 315.42 pymt.
(c) \$884.58
(d) \$1,100

2. A permanent scholarship fund is started through a donation of \$100,000. If five scholarships of \$5,000 are awarded each year beginning ten years from now, the rate of return for the invested money is nearest to:
(a) 20%
(b) 14%
(c) 10% – fv(100,000 at 10% for ten years equals approx. 250,000. 10% is 25,000 per year.
(d) 6%

3. You are making \$1,000 monthly deposits into a fund that pays interest at a rate of
6% compounded monthly. What would be the balance at the end of 10 years?
(a) \$163,879 = fv of an annuity, 120 monthly pmts, 6/12 monthly interest, \$1000 pd monthly.
(b) \$158,169
(c) \$127,200
(d) \$159,423

4. You borrow \$20,000 from a bank to be repaid in monthly installments for 3 years
at 9% interest compounded monthly. What is the portion of interest payment for
the 18th payment?
(a) \$150
(b) \$88.28
(c) \$80.04
(d) \$84.17 did amortization schedule. 20,000, 9%, 36 pymts.

5. You are buying your first car and need to borrow \$16,000 over 5 years. If interest is 6%, what are your monthly payments?
(a)\$267
(b)\$309 = pmt(.06/12, 60,16000)
(c)\$347
(d)\$389

6. How many years will it take for the dollar’s purchasing power to be one-half what
it is now, if the general inflation rate is expected to continue at the rate of 6% for
an indefinite period?

(d) About 12 years = 1/1.06, then multiply each succeeding year by 1/1.06, 12 years gets it to \$.4969

7. If you deposit \$1,000 now and are promised payments of \$500 three years from now and \$1500 five years from now, the equation that will yield the correct rate of return is:

(a) 0 = -1000 + 500(P/F,i,3) + 1500(P/F,i,5)
(b) 0 = 1000 + 500(P/F, i, 3) + 1500 (P/F, i, 5)
(c) 1000 = -500(P/F,i,3) – 1500(P/F, i,5)
(d) -1000= 500(P/F,i,3) + 1500 (P/F,i,5)

8. Consider the following project balance profiles for proposed investment projects.

Project Balances
N Project A Project B Project C
0 -\$600 -\$500 -\$200
1 200 300 0
2 300 650 150
NPW – \$416 –
Rate Used 15% ? –

Statement 1—For Project A, the cash flow at the end of year 2 is \$100
Statement 2—For Project C, its net future worth at the end of year 2 is \$150
Statement 3—For Project B, the interest rate used is 25%
Statement 4—For Project A, the rate of return should be greater than 15%

Which of the statement(s) above is (are) correct?
(a) Just Statements 1 and 2
(b) Just Statements 2 and 3 statements 1 and 4 are incorrect. A has a negative return. Choice b is the only possible answer.
(c) Just Statements 1 and 3
(d) Just Statements 2, 3 and 4

9. A couple wants to save for their daughter’s college expenses. The daughter will
enter college 8 years from now and she will need \$40,000, \$41,000, \$42,000 and
\$43,000 in actual dollars for 4 school years. Assume that these college payments
will be made at the beginning of the school year. The future general inflation rate
is estimated to be 6% per year and the annual inflation-free interest rate is 5%.
What is the equal amount, in actual dollars, the couple must save each year until
their daughter goes to college?
(a) \$11,838 : NPV of 11838 annuity at 11% for eight years equals the NPV of the payment stream at 11%.
(b) \$11,945
(c) \$12,142

(d) \$12,538

10. What annual investment is required at 8% per year compounded annually to accumulate to
\$100,000 at the end of 20 years?
(a) \$1400
(b) \$2100
(c) \$2200 = pv of an annuity of \$2,185.22 for 20 years at 8%.
(d) \$5400

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