Sample finance quiz: Future value, present value, implied interest rate, calculating annual payments and more...

Chapter 4 practice problems

1. What is the future value, where present value=1000, r=6% and t=1?
a. 1060.00
b. 1600.00
c. 943.40
d. 900.00

2. What is the future value, where present value=1000, r=6% and t=10?
a. 1600.00
b. 400.00
c. 1790.85
d. 1645.32

3. What is the present value, where future value = 1000, r=6% and t=1?
a. 1060.00
b. 1600.00
c. 943.40
d. 900.00

4. What is the present value, where future value = 1000, r=6% and t=5?
a. 1300.00
b. 747.26
c. 545.38
d. 700.00

5. What is the present value, where future value = 1000, r=6% and t=10?
a. 558.39
b. 1600.00
c. 400.00
d. 428.32

6. Calculate the interest rate implied, where PV=1000, t=5, FV=1436.
a. 5.6%
b. 6.2%
c. 7.5%
d. 9.2%

7. Calculate the interest rate implied, where PV=1000, t=11, FV=1750.
a. 5.2%
b. 3.7%
c. 7.5%
d. 9.2%

8. How long will it take for $500 to grow to $1,000 at 8% per year?
a. 6 yrs
b. 7
c. 8
d. 9

9. How long will it take for $500 to grow to $700 at 5% per year?
a. 9.1 yrs
b. 10.9
c. 11.7
d. 13.2

10. A famous quarterback just signed a $10 million contract providing $2 million a year for 5 years. The interest rate is 10%. The quarterback's contract present value is?
a. 5.2 million
b. 6.0
c. 7.6
d. 8.9

11. A less famous receiver just signed an $8 million contract providing $3 million now and $1 million for the next 5 years. The interest rate is 10%. The receiver's contract present value is?
a. 3.8 million
b. 5.6
c. 7.2
d. 8.8

12. What is the present value of a 5-year annuity of $100 if the discount rate is 6%?
a. 326.25
b. 421.24
c. 532.83
d. 601.23

13. Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual year-end payments. If the interest rate is 7%, what is the annual payment?
a. 189.65
b. 220.21
c. 295.23
d. 401.89
14. The $40 million lottery payment that you just won actually pays $2 million per year for 20 years. If the discount rate is 5%, and the first payment comes in 1 year, what is the present value of the winnings?
a. 40.00 million
b. 38.26
c. 24.92
d. 19.64

15. You believe you will need to have saved $500,000 by the time you retire in 35 years. If the interest rate is 9% per year, how much must you save each year until retirement to meet your retirement goal?
a. 3230.77
b. 2317.92
c. 1875.01
d. 1306.00

Chapter 5

16. Most bonds in the US make coupon payments semiannually.
a. True
b. False

17. When the market interest rate exceeds the coupon rate, bonds sell for less than face value.
a. True
b. False

18. The yield to maturity is defined as the discount rate that makes the present value of the bond's payments equal its price.
a. True
b. False

19. Junk bonds have higher credit quality than Treasury securities.
a. True
b. False

20. Bond investors calculate yield to call rather than yield to maturity for bonds at high risk of being called.
a. True
b. False

21. The current yield understates the return of premium bonds and overstates that of discount bonds.
a. True
b. False

22. The current yield equals the yield to maturity if the face value of the bond is the same as the market price of the bond.
a. True
b. False

23. A $1000 IBM bond carries a coupon rate of 8%, has 9 years until maturity, and sells at a yield to maturity of 7%. What interest payments do bondholders receive each year?
a. $70
b. 80
c. 90
d. 100

24. A $1000 IBM bond carries a coupon rate of 8%, has 9 years until maturity, and sells at a yield to maturity of 7%. The bond sells at a discount.
a. True
b. False

25. A $1000 IBM bond carries a coupon rate of 8%, has 9 years until maturity, and sells at a yield to maturity of 7%. The bond price will go down if yield to maturity also goes down.
a. True
b. False