Chapter 5 The Time Value of Money

8) It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year.

9) Which of the following investments has the highest effective annual return (EAR)? (Assume that all CDs are of equal risk.)

A) a bank CD that pays 7.00 percent interest compounded daily

B) a bank CD that pays 7.10 percent compounded monthly

C) a bank CD that pays 7.30 percent annually

D) a bank CD that pays 7.25 percent compounded semiannually

10) One bank offers you 4% interest compounded semiannually. What is the equivalent rate if interest is compounded quarterly?

A) 3.98%

B) 3.96%

C) 3.92%

D) 1.00%

11) A financial analyst tells you that investing in stocks will allow you to double your money in 7 years. What annual rate of return is the analyst assuming you can earn?

A) 8.76%

B) 9.87%

C) 10.01%

D) 10.41%

12) You believe in the power of compounding and decide to save $1 per day by avoiding the purchase of a soda. You deposit the $1 at the end of each day in a bank account that pays 8% interest compounded daily. You are going to take a trip in 20 years with the money you have accumulated. How much money will you have in 20 years, assuming 365 days per year?

A) $7,500

B) $12,438

C) $18,032

D) $22,456

13) Today is your 20th birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded semiannually. How much will be in the account on your 50th birthday?

A) $159,795

B) $162,183

C) $163,823

D) $170,351

14) Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded quarterly. How much will be in the account on your 50th birthday?

A) $159,795

B) $162,183

C) $163,832

D) $164,631

15) Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded monthly. How much will be in the account on your 50th birthday?

A) $159,795

B) $162,183

C) $163,823

D) $164,631

16) Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded daily. How much will be in the account on your 50th birthday?

A) $159,795

B) $162,183

C) $163,823

D) $164,631

17) Your daughter is born today and you want her to be a millionaire by the time she is 40 years old. open an investment account that promises to pay 11.5% per year. How much money must you deposit today so your daughter will have $1,000,000 by her 35th birthday?

A) $28,575

B) $22,150

C) $20,100

D) $18,940