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CONCEPT CHECKERS
1. The amount an investor will have in 15 years if $1,000 is invested today at an
annual interest rate of 9% will be closest to:
A. $1,350.
B. $3,518.
C. $3,642.
2. Fifty years ago, an investor bought a share of stock for $10. The stock has
paid no dividends during this period, yet it has returned 20%, compounded
annually, over the past 50 years. If this is true, the share price is now closest
to:
A. $4,550.
B. $45,502.
C. $91,004.
3. How much must be invested today at 0% to have $100 in three years?
A. $77.75.
B. $100.00.
C. $126.30.
4. How much must be invested today, at 8% interest, to accumulate enough to
retire a $10,000 debt due seven years from today? The amount that must be
invested today is closest to:
A. $5,835.
B. $6,123.
C. $8,794.
5. An analyst estimates that XYZ’s earnings will grow from $3.00 a share to
$4.50 per share over the next eight years. The rate of growth in XYZ’s
earnings is closest to:
A. 4.9%.
B. 5.2%.
C. 6.7%.
6. If $5,000 is invested in a fund offering a rate of return of 12% per year,
approximately how many years will it take for the investment to reach
$10,000?
A. 4 years.
B. 5 years.
C. 6 years.
7. An investment is expected to produce the cash flows of $500, $200, and
$800 at the end of the next three years. If the required rate of return is 12%,
the present value of this investment is closest to:
A. $835.
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B. $1,175.
C. $1,235.
8. Given an 8.5% discount rate, an asset that generates cash flows of $10 in
Year 1, –$20 in Year 2, $10 in Year 3, and is then sold for $150 at the end of
Year 4, has a present value of:
A. $108.29.
B. $135.58.
C. $163.42.
9. An investor has just won the lottery and will receive $50,000 per year at the
end of each of the next 20 years. At a 10% interest rate, the present value of
the winnings is closest to:
A. $425,678.
B. $637,241.
C. $2,863,750.
10. If $10,000 is invested today in an account that earns interest at a rate of
9.5%, what is the value of the equal withdrawals that can be taken out of the
account at the end of each of the next five years if the investor plans to
deplete the account at the end of the time period?
A. $2,453.
B. $2,604.
C. $2,750.
11. An investor is to receive a 15-year, $8,000 annuity, with the first payment to
be received today. At an 11% discount rate, this annuity’s worth today is
closest to:
A. $55,855.
B. $57,527.
C. $63,855.
12. Given an 11% rate of return, the amount that must be put into an
investment account at the end of each of the next ten years in order to
accumulate $60,000 to pay for a child’s education is closest to:
A. $2,500.
B. $3,588.
C. $4,432.
13. An investor will receive an annuity of $4,000 a year for ten years. The first
payment is to be received five years from today. At a 9% discount rate, this
annuity’s worth today is closest to:
A. $16,684.
B. $18,186.
C. $25,671.
14. If $1,000 is invested today and $1,000 is invested at the beginning of each of
the next three years at 12% interest (compounded annually), the amount an
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investor will have at the end of the fourth year will be closest to:
A. $4,779.
B. $5,353.
C. $6,792.
15. An investor is looking at a $150,000 home. If 20% must be put down and the
balance is financed at 9% over the next 30 years, what is the monthly
mortgage payment?
A. $799.33.
B. $895.21.
C. $965.55.
16. Given daily compounding, the growth of $5,000 invested for one year at 12%
interest will be closest to:
A. $5,600.
B. $5,628.
C. $5,637.
17. Terry Corporation preferred stocks are expected to pay a $9 annual dividend
forever. If the required rate of return on equivalent investments is 11%, a
share of Terry preferred should be worth:
A. $81.82.
B. $99.00.
C. $122.22.
18. A share of George Co. preferred stock is selling for $65. It pays a dividend of
$4.50 per year and has a perpetual life. The rate of return it is offering its
investors is closest to:
A. 4.5%.
B. 6.9%.
C. 14.4%.
19. If $10,000 is borrowed at 10% interest to be paid back over ten years, how
much of the second year’s payment is interest (assume annual loan
payments)?
A. $937.26.
B. $954.25.
C. $1,037.26.
20. What is the effective annual rate for a credit card that charges 18%
compounded monthly?
A. 15.38%.
B. 18.81%.
C. 19.56%.
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CHALLENGE PROBLEMS
1. The Parks plan to take three cruises, one each year. They will take their first
cruise 9 years from today, the second cruise one year after that, and the
third cruise 11 years from today. The type of cruise they will take currently
costs $5,000, but they expect inflation will increase this cost by 3.5% per
year on average. They will contribute to an account to save for these cruises
that will earn 8% per year. What equal contributions must they make today
and every year until their first cruise (ten contributions) in order to have
saved enough at that time for all three cruises? They pay for cruises when
taken.
2. A company’s dividend in 1995 was $0.88. Over the next eight years, the
dividends were $0.91, $0.99, $1.12, $0.95, $1.09, $1.25, $1.42, and $1.26.
Calculate the annually compounded growth rate of the dividend over the
whole period.
3. An investment (a bond) will pay $1,500 at the end of each year for 25 years
and on the date of the last payment will also make a separate payment of
$40,000. If your required rate of return on this investment is 4%, how much
would you be willing to pay for the bond today?
4. A bank quotes certificate of deposit (CD) yields both as annual percentage
rates (APR) without compounding and as annual percentage yields (APY) that
include the effects of monthly compounding. A $100,000 CD will pay
$110,471.31 at the end of the year. Calculate the APR and APY the bank is
quoting.
5. A client has $202,971.39 in an account that earns 8% per year, compounded
monthly. The client’s 35th birthday was yesterday and she will retire when
the account value is $1 million.
A. At what age can she retire if she puts no more money in the account?
B. At what age can she retire if she puts $250 per month into the
account every month, beginning one month from today?

ANSWERS – CHALLENGE PROBLEMS

1. The Parks plan to take three cruises, one each year. They will take their first
cruise 9 years from today, the second cruise one year after that, and the
third cruise 11 years from today. The type of cruise they will take currently
costs $5,000, but they expect inflation will increase this cost by 3.5% per
year on average. They will contribute to an account to save for these cruises
that will earn 8% per year. What equal contributions must they make today
and every year until their first cruise (ten contributions) in order to have
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