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1. Which of the following statements is most correct ?

a. If annual compounding is used, the effective annual rate equals the simple rate.

b. If annual compounding is used, the effective annual rate equals the periodic rate.

c. If a loan has a 12 percent simple rate with semiannual compounding, its effective annual rate is equal to 11.66 percent.

d. Both the first and second answers are correct.

e. Both the first and third answers are correct.

2. Why is the present value of an amount to be received (paid) in the future less than the future amount?

a. Deflation causes investors to lose purchasing power when their dollars are invested for greater than one year.

b. Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future.

c. Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted.

d. Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future.

e. None of the above is a correct answer.

3. Which of the following statements is correct?

a. For all positive values of r and n, FVIFr, n > 1.0 and PVIFAr, n > n.

b. You may use the PVIF tables to find the present value of an uneven series of payments. However, the PVIFA tables can never be of use, even if some of the payments constituten annuity (for example, $100 each year for Years 3,4, and 5), because the entire series does not constitute an annuity.

c. If a bank uses quarterly compounding for saving accounts, the simple rate will be greater than the effective annual rate.

d. The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases.

e. All of the above statements are false.

4. A recent advertisement in the financial section of a magazine carried the following claim: "Invest your money with us at 14 percent, compounded annually, and we guarantee to double your money sooner than you imagine." Ignoring taxes, how long would it take to double your money at a simple rate of 14 percent, compounded annually? (Points : 1)

a. Approximately 3.5 years

b. Approximately 5 years

c. Exactly 7 years

d. Approximately 10 years

e. Exactly 14 years

5. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?

a. $1,171

b .$1,126

c. $1,082

d. $1,163

e. $1,008

6. If a 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment? (Points : 1)

a. $240.42

b. $263.80

c. $300.20

e. $315.38

d. $346.87

a. If annual compounding is used, the effective annual rate equals the simple rate.

b. If annual compounding is used, the effective annual rate equals the periodic rate.

c. If a loan has a 12 percent simple rate with semiannual compounding, its effective annual rate is equal to 11.66 percent.

d. Both the first and second answers are correct.

e. Both the first and third answers are correct.

2. Why is the present value of an amount to be received (paid) in the future less than the future amount?

a. Deflation causes investors to lose purchasing power when their dollars are invested for greater than one year.

b. Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future.

c. Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted.

d. Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future.

e. None of the above is a correct answer.

3. Which of the following statements is correct?

a. For all positive values of r and n, FVIFr, n > 1.0 and PVIFAr, n > n.

b. You may use the PVIF tables to find the present value of an uneven series of payments. However, the PVIFA tables can never be of use, even if some of the payments constituten annuity (for example, $100 each year for Years 3,4, and 5), because the entire series does not constitute an annuity.

c. If a bank uses quarterly compounding for saving accounts, the simple rate will be greater than the effective annual rate.

d. The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases.

e. All of the above statements are false.

4. A recent advertisement in the financial section of a magazine carried the following claim: "Invest your money with us at 14 percent, compounded annually, and we guarantee to double your money sooner than you imagine." Ignoring taxes, how long would it take to double your money at a simple rate of 14 percent, compounded annually? (Points : 1)

a. Approximately 3.5 years

b. Approximately 5 years

c. Exactly 7 years

d. Approximately 10 years

e. Exactly 14 years

5. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?

a. $1,171

b .$1,126

c. $1,082

d. $1,163

e. $1,008

6. If a 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment? (Points : 1)

a. $240.42

b. $263.80

c. $300.20

e. $315.38

d. $346.87

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