1. Which of the following best describes the difference between an annuity due and an ordinary annuity?

1.

Which of the following best describes the difference between an annuity due and an ordinary annuity?

An ordinary annuity pays at the beginning of the period, but an annuity due pays at the end.

An ordinary annuity has a limited life, but an annuity due goes on forever.

An ordinary annuity pays at the end of the period, but an annuity due pays at the beginning.

An ordinary annuity goes on forever, but an annuity due has a limited life.

2.

Which of the following gives the smallest effective yield? Assume that one year is 365 days.

18.60% APR compounded daily

19.00% APR compounded quarterly

20.40% APR compounded annually

18.65% APR compounded monthly

3.

In order to determine the future value of some lump sum, we must use the process of

compounding.

discounting.

risk analysis.

annuity analysis.

none of the above

4.

You bought a new car today which cost you $20,000. You financed the entire cost with a 5-year loan at 4.00%. If you make payments at the end of each month starting a month from now, how much is your monthly payment?

$374.38

$884.04

$850.04

$368.33

5.

Suppose you want to establish a fund that will pay $5,000 a year forever to your favorite charity. If the discount rate is 8%, how much do you have to set a side today?

$65,000

$70,000

$67,500

$62,500

6.

If you deposit $10,000 in an account with annual rate of 9% compounded semiannually, how long will it take for you to have $2,000,000 in the account?

120.37 years

60.18 years

61.48 years

53.43 years

7.

You want $15,000 fifteen years from now. If you can earn 8% per year in your savings account, how much do you have to deposit in today?

$6,818

$7,128

$5,261

$4,729

8.

You are planning to retire 40 years from now. If your retirement account pays an annual rate of 6% compounded monthly and you start making a monthly contribution of $400 a month today, how much will you have when you retire in 40 years?

$742,857

$800,579

$796,596

$787,429

9.

How does a perpetuity differ from an ordinary annuity?

A perpetuity is another name for an ordinary annuity.

A perpetuity has only a limited numbers of cash flows while an ordinary annuity has payments that continue forever.

A perpetuity is another name for an annuity due.

A perpetuity has payments that go on forever while an ordinary annuity has a limited numbers of cash flows.

10.

Today, a round-trip plane ticket from Los Angeles to New York costs $350. If the average annual inflation rate is 2.5%, who much will the ticket cost 30 years from now?

$763.81

$658.24

$612.50

$734.15