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# ADMS 3530 Lecture Notes - Lecture 9: Effective Interest Rate, Savings Account, Callable BondExam

Department
Course Code
Professor
Alagurajah
Study Guide
Final

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ADMS 3530 SU19 ā Midterm Exam Tutorial ā QUESTIONS
TIME VALUE OF MONEY
1. You have retired early from your successful finance career and are donating \$5,500,000 to
York University. This money will be used to pay for scholarships totaling \$300,000 each year
forever. If the first scholarships are awarded (and paid) today, what is the interest rate that is
A) 5.77%%
B) 6.64%
C) 7.11%
D) 7.66%
E) 8.11%
2. What is the true value of a stated "\$1 million prize", if the prize is paid out in 40 payments of
\$25,000 per year and the first payment is made immediately? The interest rate is 6.5%,
compounded annually.
A) \$353,638
B) \$376,625
C) \$426,991
D) \$675,274
E) \$689,100
3. Compute the present value of the following set of payments for two years: \$300 each quarter
for the first year and \$600 each quarter for the second year. The effective annual rate is 6% and
payments will begin at the end of the first quarter.
A) \$3,000.56
B) \$3,340.77
C) \$3,514.06
D) \$3,854.02
E) \$3,999.14
4. Your parents are willing to pay for your MBA degree and want to put aside funds today even
though you will not be entering MBA school for another 3 years (from today). If they can earn
4.5% annually on the funds and your MBA school will cost \$35,000 at the beginning of each
year of the two-year program, how much money do they need to set aside today?
A) \$57,435
B) \$60,020
C) \$65,653
D) \$67,243
E) \$70,186

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5. You decide to buy a house that costs \$700,000. You make a 15% down payment and finance
the rest with a 25 year mortgage. The mortgage has a five year renewal term for which the
posted mortgage rate is 5.80% (APR compounded semi-annually). What will the remaining
principal of the loan be at the end of the 5-year term?
A) \$533,006
B) \$541,128
C) \$593,006
D) \$614,888
E) \$627,066
6. You want to purchase a condo in Milton for \$400,000 cash in 6 years from today. To save for
this purchase you plan to deposit \$X in years 1 to 4 but no deposit in years 5 or 6. If the interest
rate on your deposits is 6.5% compounded annually, how much is \$X?
A) \$80,020
B) \$72,150
C) \$65,636
D) \$97,525
E) \$100,000
7. Which of the following strategies will allow real retirement spending to remain
approximately equal, assuming savings of \$1,000,000 invested at 8% annually, a 25-year time
horizon, and a 4 percent expected annual inflation rate?
A) Spend approximately \$63,000 annually.
B) Spend approximately \$78,225 annually.
C) Spend approximately \$93,680 annually.
D) Spend approximately \$127,500 annually.
8. You will retire in 25 years at which time you would like to have \$1,000,000 in savings.
matures. How much will you need to save at the end of each of the next 25 years to reach your
retirement goal? You can earn 6% per year on all of your investments.
A) \$6,666.67
B) \$7,135.20
C) \$5,625.84
D) \$8,652.33
E) \$9,458.39
9. What is the effective annual rate on a deposit of \$3,000 made eight years ago
if the deposit is worth \$4,453.52 today? The deposit pays interest semi-annually.
A) 2.50%
B) 5.00%
C) 5.06%
D) 10.12%
E) 12.50%