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You need a 30-year,fixed-rate mortgage to buy a new home for $240,000.Your mortgage bank will lend you the money at a 7.5 percent APR for this 360-month loan,with interest compounded monthly.However,you can only afford monthly payments of $850,so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.What will be the amount of the balloon payment if you are to keep your monthly payments at $850?


A) $1,112,464
B) $1,113,316
C) $1,114,480
D) $1,115,840
E) $1,116,315

F) A) and B)
G) C) and D)

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An ordinary annuity is best defined by which one of the following?


A) increasing payments paid for a definitive period of time
B) increasing payments paid forever
C) equal payments paid at regular intervals over a stated time period
D) equal payments paid at regular intervals of time on an ongoing basis
E) unequal payments that occur at set intervals for a limited period of time

F) B) and C)
G) A) and D)

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John's Auto Repair just took out a $52,000,10-year,8 percent,interest-only loan from the bank.Payments are made annually.What is the amount of the loan payment in year 10?


A) $7,120
B) $8,850
C) $13,264
D) $49,000
E) $56,160

F) B) and E)
G) C) and E)

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Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica.The package requires that you pay $20,000 today,$35,000 one year from today,and a final payment of $45,000 on the day you depart three years from today.What is the cost of this vacation in today's dollars if the discount rate is 9.75 percent?


A) $85,931
B) $88,695
C) $90,219
D) $90,407
E) $92,478

F) A) and B)
G) C) and D)

Correct Answer

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You plan on saving $5,200 this year,nothing next year,and $7,500 the following year.You will deposit these amounts into your investment account at the end of each year.What will your investment account be worth at the end of year three if you can earn 8.5 percent on your funds?


A) $13,528.12
B) $13,621.57
C) $13,907.11
D) $14,526.50
E) $14,779.40

F) B) and D)
G) A) and D)

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You are buying a previously owned car today at a price of $3,500.You are paying $300 down in cash and financing the balance for 36 months at 8.5 percent.What is the amount of each loan payment?


A) $101.02
B) $112.23
C) $118.47
D) $121.60
E) $124.40

F) A) and E)
G) B) and E)

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Which of the following statements related to interest rates are correct? I.Annual interest rates consider the effect of interest earned on reinvested interest payments. II.When comparing loans,you should compare the effective annual rates. III.Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. IV.Annual and effective interest rates are equal when interest is compounded annually.


A) I and II only
B) II and III only
C) II and IV only
D) I, II, and III only
E) II, III, and IV only

F) B) and E)
G) C) and D)

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Nadine is retiring at age 62 and expects to live to age 85.On the day she retires,she has $402,000 in her retirement savings account.She is somewhat conservative with her money and expects to earn 6 percent during her retirement years.How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death?


A) $1,909.92
B) $2,147.78
C) $2,219.46
D) $2,416.08
E) $2,688.77

F) C) and D)
G) A) and E)

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Which one of the following statements related to annuities and perpetuities is correct?


A) An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually.
B) A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.
C) Most loans are a form of a perpetuity.
D) The present value of a perpetuity cannot be computed, but the future value can.
E) Perpetuities are finite but annuities are not.

F) A) and E)
G) C) and D)

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You are going to loan a friend $550 for one year at a 6 percent rate of interest,compounded annually.How much additional interest could you have earned if you had compounded the rate continuously rather than annually?


A) $0.84
B) $1.01
C) $1.10
D) $1.23
E) $1.28

F) A) and C)
G) A) and E)

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Which one of the following statements correctly states a relationship?


A) Time and future values are inversely related, all else held constant.
B) Interest rates and time are positively related, all else held constant.
C) An increase in the discount rate increases the present value, given positive rates.
D) An increase in time increases the future value given a zero rate of interest.
E) Time and present value are inversely related, all else held constant.

F) C) and D)
G) A) and B)

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What is the interest rate charged per period multiplied by the number of periods per year called?


A) effective annual rate
B) annual percentage rate
C) periodic interest rate
D) compound interest rate
E) daily interest rate

F) B) and D)
G) All of the above

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You are considering two loans.The terms of the two loans are equivalent with the exception of the interest rates.Loan A offers a rate of 7.75 percent,compounded daily.Loan B offers a rate of 8 percent,compounded semi-annually.Which loan should you select and why?


A) A; the effective annual rate is 8.06 percent.
B) A; the annual percentage rate is 7.75 percent.
C) B; the annual percentage rate is 7.68 percent.
D) B; the effective annual rate is 8.16 percent.
E) The loans are equivalent offers so you can select either onE.

F) A) and B)
G) A) and C)

Correct Answer

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Your car dealer is willing to lease you a new car for $245 a month for 48 months.Payments are due on the first day of each month starting with the day you sign the lease contract.If your cost of money is 6.5 percent,what is the current value of the lease?


A) $10,331.03
B) $10,386.99
C) $12,197.74
D) $12,203.14
E) $13,008.31

F) B) and E)
G) A) and E)

Correct Answer

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You need $25,000 today and have decided to take out a loan at 7 percent for five years.Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.


A) interest-only loan
B) amortized loan with equal principal payments
C) amortized loan with equal loan payments
D) discount loan
E) balloon loan where 50 percent of the principal is repaid as a balloon payment

F) C) and E)
G) B) and D)

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You want to buy a new sports coupe for $41,750,and the finance office at the dealership has quoted you an 8.6 percent APR loan compounded monthly for 48 months to buy the car.What is the effective interest rate on this loan?


A) 8.28 percent
B) 8.41 percent
C) 8.72 percent
D) 8.87 percent
E) 8.95 percent

F) D) and E)
G) A) and E)

Correct Answer

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You would like to establish a trust fund that will provide $120,000 a year forever for your heirs.The trust fund is going to be invested very conservatively so the expected rate of return is only 5.75 percent.How much money must you deposit today to fund this gift for your heirs?


A) $2,086,957
B) $2,121,212
C) $2,300,000
D) $2,458,122
E) $2,500,000

F) C) and E)
G) A) and D)

Correct Answer

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How is the principal amount of an interest-only loan repaid?


A) The principal is forgiven over the loan period so does not have to be repaid.
B) The principal is repaid in equal increments and included in each loan payment.
C) The principal is repaid in a lump sum at the end of the loan period.
D) The principal is repaid in equal annual payments.
E) The principal is repaid in increasing increments through regular monthly payments.

F) A) and C)
G) A) and D)

Correct Answer

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What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume annual compounding.


A) $301,115
B) $306,492
C) $310,868
D) $342,908
E) $347,267

F) B) and C)
G) A) and D)

Correct Answer

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You have some property for sale and have received two offers.The first offer is for $89,500 today in cash.The second offer is the payment of $35,000 today and an additional $70,000 two years from today.If the applicable discount rate is 11.5 percent,which offer should you accept and why?


A) You should accept the $89,500 today because it has the higher net present value.
B) You should accept the $89,500 today because it has the lower future value.
C) You should accept the first offer as it has the greatest value to you.
D) You should accept the second offer because it has the larger net present value.
E) It does not matter which offer you accept as they are equally valuablE.

F) A) and D)
G) C) and D)

Correct Answer

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