Self Test Quiz Chapter 6
Estimated Time To Complete: 90 minutes
1. An annuity is a level stream of cash flows for a fixed period of time.
A. True
B. False
2. A perpetuity is the same thing as an annuity due.
A. True
B. False
3. The stated interest rate is the same thing as the effective annual rate.
A. True
B. False
4. An interest rate quoted as 6 percent compounded monthly means interest is paid at a rate of 6 percent each
month.
A. True
B. False
5. Which of the following can be computed?
I. present value of a perpetuity
II. future value of a perpetuity
III. present value of an annuity due
IV. future value of an annuity due
A. I and III only
B. II and III only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
6. You have won a prize which will pay you or your heirs $25,000 a year for 50 years. The first payment is due
immediately. What is the present value of this prize given an 8 percent discount rate?
A. $300,000
B. $305,837
C. $309,650
D. $312,500
E. $330,304
7. Which of the following statements are true?
I. There is an inverse relationship between present values and interest rates.
II. The effective annual rate will be higher than the annual percentage rate for a loan that
compounds interest monthly.
III. There is an inverse relationship between future values and periods of time.
IV. All else equal, the more frequently interest is compounded on a loan, the more interest you
will have to pay.
A. I and II only
B. III and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV

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*Sign up*8. Suppose you invest $10 for one year, and at the end of the year you receive back $12. Which of the following
statements must be true concerning your investment?
I. The quoted rate must have been greater than 20 percent.
II. To figure the quoted rate, you would need to know how often the investment was compounded.
III. The effective annual rate was 20 percent.
IV. The continuously compounded effective annual rate has to be 20 percent.
A. I and III only.
B. II and III only
C. I and IV only
D. II, III, and IV only
E. I, II, and III only
9. Bernie just won a contest with a grand prize of $250,000. The contest stipulates that the winner will receive
$100,000 immediately plus $15,000 at the end of each of the next 10 years. If Bernie can earn 5 percent on his
money, how much is this prize worth to him today?
A. $114,285.71
B. $166,175.62
C. $189,345.45
D. $215,826.02
E. $250,000.00
10. You obtain a $100,000, 30-year fixed-rate mortgage at 8.25 percent compounded monthly. Although you get a
30-year mortgage, you plan to prepay the loan by making an additional payment each month along with your
regular payment. How much extra must you pay each month if you wish to pay off the loan in 20 years?
A. $24.56

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