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86. You grandfather won a lottery years ago. The value
of his winnings at the time was $50,000. He invested this money such that it
will provide annual payments of $2,400 a year to his heirs forever. What is the
rate of return?
A. 4.75 percent
B. 4.80 percent
C. 5.00 percent
D. 5.10 percent
E. 5.15 percent
87. The preferred stock of Casco has a 5.48 percent
dividend yield. The stock is currently priced at $59.30 per share. What is the
amount of the annual dividend?
A. $2.80
B. $2.95
C. $3.10
D. $3.25
E. $3.40
88. Your credit card company charges you 1.65 percent
interest per month. What is the annual percentage rate on your account?
A. 18.95 percent
B. 19.80 percent
C. 20.90 percent
D. 21.25 percent
E. 21.70 percent
89. What is the annual percentage rate on a loan with
a stated rate of 2.25 percent per quarter?
A. 9.00 percent
B. 9.09 percent
C. 9.18 percent
D. 9.27 percent
E. 9.31 percent
90. You are paying an effective annual rate of 18.974
percent on your credit card. The interest is compounded monthly. What is the
annual percentage rate on this account?
A. 17.50 percent
B. 18.00 percent
C. 18.25 percent
D. 18.64 percent
E. 19.00 percent
91. What is the effective annual rate if a bank
charges you 9.50 percent compounded quarterly?
A. 9.62 percent
B. 9.68 percent
C. 9.72 percent
D. 9.84 percent
E. 9.91 percent
92. Your credit card company quotes you a rate of 17.9
percent. Interest is billed monthly. What is the actual rate of interest you
are paying?
A. 19.03 percent
B. 19.21 percent
C. 19.44 percent
D. 19.57 percent
E. 19.72 percent
93. The Pawn Shop loans money at an annual rate of 21
percent and compounds interest weekly. What is the actual rate being charged on
these loans?
A. 23.16 percent
B. 23.32 percent
C. 23.49 percent
D. 23.56 percent
E. 23.64 percent
94. 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 semiannually. 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.
95. You have $5,600 that you want to use to open a
savings account. There are five banks located in your area. The rates paid by
banks A through E, respectively, are given below. Which bank should you select
if your goal is to maximize your interest income?
A. 3.26 percent, compounded annually
B. 3.20 percent, compounded monthly
C. 3.25 percent, compounded semiannually
D. 3.10 percent, compounded continuously
E. 3.15 percent, compounded quarterly
96. What is the effective annual rate of 14.9 percent
compounded continuously?
A. 15.59 percent
B. 15.62 percent
C. 15.69 percent
D. 15.84 percent
E. 16.07 percent
97. What is the effective annual rate of 9.75 percent
compounded continuously?
A. 10.17 percent
B. 10.24 percent
C. 10.29 percent
D. 10.33 percent
E. 10.47 percent
98. City Bank wants to appear competitive based on
quoted loan rates and thus must offer a 7.75 percent annual percentage rate on
its loans. What is the maximum rate the bank can actually earn based on the
quoted rate?
A. 8.06 percent
B. 8.14 percent
C. 8.21 percent
D. 8.26 percent
E. 8.58 percent
99. You are going to loan a friend $900 for one year
at a 5 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. $0.97
B. $1.14
C. $1.23
D. $1.36
E. $1.41
.14
100. You are borrowing money today at 8.48 percent,
compounded annually. You will repay the principal plus all the interest in one
lump sum of $12,800 two years from today. How much are you borrowing?
A. $9,900.00
B. $10,211.16
C. $10,877.04
D. $11,401.16
E. $11,250.00
101. This morning, you borrowed $9,500 at 7.65 percent
annual interest. You are to repay the loan principal plus all of the loan
interest in one lump sum four years from today. How much will you have to
repay?
A. $12,757.92
B. $12,808.13
C. $12,911.89
D. $13,006.08
E. $13,441.20
102. On this date last year, you borrowed $3,400. You
have to repay the loan principal plus all of the interest six years from today.
The payment that is required at that time is $6,000. What is the interest rate
on this loan?
A. 8.01 percent
B. 8.45 percent
C. 8.78 percent
D. 9.47 percent
E. 9.93 percent
103. John's Auto Repair just took out an $89,000,
10year, 8 percent, interestonly 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. $89,000
E. $96,120
104. On the day you entered college, you borrowed
$18,000 on an interestonly, fouryear loan at 5.25 percent from your local
bank. Payments are to be paid annually. What is the amount of your loan payment
in year 2?
A. $945
B. $1,890
C. $3,600
D. $5,106
E. $6,250
105. On the day you entered college you borrowed
$25,000 from your local bank. The terms of the loan include an interest rate of
4.75 percent. The terms stipulate that the principal is due in full one year
after you graduate. Interest is to be paid annually at the end of each year.
Assume that you complete college in four years. How much total interest will
you pay on this loan?
A. $5,266.67
B. $5,400.00
C. $5,937.50
D. $6,529.00
E. $6,607.11
106. You just acquired a mortgage in the amount of
$249,500 at 6.75 percent interest, compounded monthly. Equal payments are to be
made at the end of each month for thirty years. How much of the first loan
payment is interest? (Assume each month is equal to 1/12 of a year.)
A. $925.20
B. $1,206.16
C. $1,403.44
D. $1,511.21
E. $1,548.60
107. On June 1, you borrowed $212,000 to buy a house.
The mortgage rate is 8.25 percent. The loan is to be repaid in equal monthly
payments over 15 years. The first payment is due on July 1. How much of the
second payment applies to the principal balance? (Assume that each month is
equal to 1/12 of a year.)
A. $603.32
B. $698.14
C. $1,358.56
D. $1,453.38
E. $2,056.70
108. This morning, you borrowed $150,000 to buy a
house. The mortgage rate is 7.35 percent. The loan is to be repaid in equal
monthly payments over 20 years. The first payment is due one month from today.
How much of the second payment applies to the principal balance? (Assume that
each month is equal to 1/12 of a year.)
A. $268.84
B. $277.61
C. $917.06
D. $925.83
E. $1,194.67
Essay
Questions
109. Explain the difference between the effective annual rate (EAR) and the annual percentage rate (APR). Of the two, which one has the greater importance and why?
110. You are considering two annuities, both of which pay a total of $20,000 over the life of the annuity. Annuity A pays $2,000 at the end of each year for the next 10 years. Annuity B pays $1,000 at the end of each year for the next 20 years. Which annuity has the greater value today? Is there any circumstance where the two annuities would have equal values as of today? Explain.
111. Why might a borrower select an interestonly loan instead of an amortized loan, which would be cheaper?
4
112. Kristie owns a perpetuity which pays $12,000 at the end of each year. She comes to you and offers to sell you all of the payments to be received after the 10^{th} year. Explain how you can determine the value of this offer.
Multiple
Choice Questions
113. Western Bank offers you a $21,000, 6year term loan
at 8 percent annual interest. What is the amount of your annual loan
payment?
A. $4,228.50
B. $4,542.62
C. $4,666.67
D. $4,901.18
E. $5,311.07
114. First Century Bank wants to earn an effective
annual return on its consumer loans of 10 percent per year. The bank uses daily
compounding on its loans. By law, what interest rate is the bank required to
report to potential borrowers?
A. 9.23 percent
B. 9.38 percent
C. 9.53 percent
D. 9.72 percent
E. 10.00 percent

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