finance data bank

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 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.

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 semi-annually
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

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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, 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. $89,000
E. $96,120

104. On the day you entered college, you borrowed $18,000 on an interest-only, four-year 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 interest-only loan instead of an amortized loan, which would be cheaper?

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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, 6-year 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