Example questions for
Principles of Finance, Exam 2
1. $7,000 dollars 10 years from now at 7% is worth how much today?
2. $10,000 dollars 7 years from now at 10% is worth how much today?
3. How much would you have to put in the bank today at 5% to accumulate $1,000 by next year?
4. If you double your money in 5 years, what interest rate did you earn?
5. If you triple your money in 10 years, what interest rate did you earn?
6. If you put $100 in the market at the end of every year for 20 years at 10%, how much would you end up with? What if you put the $100 in at the beginning of every year?
7. If you put $100 in the market today at 10%, how much would you end up with in 20 years?
8. If you borrow $10,000 for a car loan at a 6% simple annual interest rate, what would be your monthly payment on a 5 year loan?
9. If you borrow $150,000 for a house at a 8% simple annual interest rate for 30 years, what is your monthly payment?
10. A simple annual interest rate of 12% compounded monthly has an effective yield of?
11. A simple annual interest rate of 12% compounded quarterly has an effective yield of?
12. A simple annual interest rate of 12% compounded semi-annually is an effective yield of?
13. If you want a $1,000,000 for retirement in 30 years, how much would you have to save by the end of each year if you could make 12% per year? How much would you have to set aside each year if you could put money away starting now?
14. If you put $5000 in the stock market, how many years would it take you to triple your money if the market is making 12% a year?
15. If the effective annual interest rate is 8.5% per year, what is the nominal annual interest rate under monthly compounding?
16. If you put $10 away at the end of each month for the next 40 years at a 12% simple annual interest rate, how much money would you end up with? What if you started at the beginning of each month?
17. If you borrow $150,000 for a house at 8% simple annual interest rate for 15 years, what is your monthly payment?
18. Referring to question 17, how much interest did you pay over the 15 years?
19. What is the value of a $10,000,000 lottery ticket paid out over 20 years if interest rates are at 6%, the average tax rate is 35%, and the odds of winning are 1/7,000,000?
20. How long would it take to accumulate $50,000 if you started putting $5 in the bank every day starting at the end of today at simple annual interest rate of 7.3%?
21. How long would it take to accumulate $50,000 if you started putting $5 in the bank every month starting now at a simple annual interest rate of 7.3%? What if you started at the end of each month?
22. You really only have the following formulas to deal with. Learn which goes where.
FVF = PVF (1 + r)n. Know how to solve for all 4 variables.
FVA = AMT [{(1+r)n -1}/r]. Know how to solve for FVA, AMT, and n.
FVAD = AMT [{(1+r)n -1}/r] * (1+r). Know how to solve for FVA, AMT, and n.
PVA = AMT [{1- (1+r)-n }/r]. Know how to solve for PVA, AMT, and n..
PVAD = AMT [{1 - (1+r)-n }/r] * (1+r). Know how to solve for PVAD, AMT, and n.
Answers:
1. 3,558
2. 5,131
3. 952
4. 14.87
5. 11.6
6. 5,727, 6,300
7. 673
8. 193
9. 1,100
10. 12.68
11. 12.55
12. 12.36
13. 4,144, 3,699
14. 9.7
15. 8.19
16. 117,647, 118,824
17. 1,433
18. 108,026
19. Value of winning is 6,079,058. After tax is 0.65 * 6,079,058 = 3,951,387. Expected value is then 1/7,000,000 * 3,951,387 = $.56. Thus, the expected value of the $1 ticket is only 56 cents. That’s how the state makes money! Plus most states only pay out 50% of all receipts so they are already up 10,000,000 to start with.
20. 5,493 days
21. 679 months, 680 months
22. --------