Basic Finance W3 (MIT)

You have the choice between two investments that have the same maturity and the same nominal return. Investment A pays simple interest. Investment B pays compounded interest. Which one should you pick?

• A, because it has a higher effective annual return

• Either, because they offer the same return

• B, because it has higher effective annual return

• There is not enough information to decide.

The Springfield Crusaders just signed their star player to a 10-year, $50 million contract. Is this contract really worth $50 million? (Assume r > 0.)

• Yes; the payments over time add up to $50 million.

• No; it is worth more because he can invest the money.

• No; it would only be worth $50 million if it were all paid out today.

• Yes; the player's agent told him so.

For a positive r:

• future value will always exceed present value

• future and present will always be the same

• present value will always exceed future value

• present value will be two times lower than future value

Which of the following cannot be calculated?

• Present value of an annuity

• Future value of an annuity

• Present value of a perpetuity

• Future value of a perpetuity

You are offered a security that will pay you $3500 at the end of each year forever. If your discount rate is 10%, what is the most you are willing to pay for this security?

• $26 686

• $62 500

• $35 000

• $31 250

What is the effective annual rate of 14% compounded monthly?

• 14%

• 14.45%

• 14.68%

• 14.93%

What is the present value of the following cash flows if the discount rate is 8% annually?

• $18 380.00

• $12 620.90

• $22 358.69

• $12 070.72

Which of the following statements is true?

• In an annuity due, payments occur at the end of the period.

• In an ordinary annuity, payments occur at the end of the period.

• A perpetuity will mature at some point in the future.

• One cannot calculate the present value of a perpetuity.

If you invested $5000 in an account that pays 10% interest, compounded continuously, how much would be in the account in six years?

• $9524.68

• $9644.24

• $9581.70

• $9110.59

Last National Bank offers a term deposit paying 8% interest (compounded annually). If you invest $5000, how much will you have at the end of year 6?

• $712.99

• $1 402.55

• $7 934.27

• $1000