Chapter 3

© Captus Press Inc., 2012© Captus Press Inc., 2012

Chapter 3

Multiple-Choice Questionsand

Answers


1. Which of the following is not a goal, as defined in this chapter?

(a) Dave wants to have $500,000 on June 30th, 2014.(b) Jill wants to save and invest 10% of her annual

income every year, from now until she retires at 65.(c) Jeff wants to buy his son a car when he graduates

at the end of the year.(d) Chris wants to cut his expenses by 10% per month.(e) All of the above are goals.

The answer is (c).


2. Jason inherited $80,000 when his father passed away recently. He wants to invest the money so that he can buy a house in 5 years, and the expected down-payment required is $100,000. What is the rate of return that he must earn to reach his goal?

(a) 10%(b) 4.56%(c) 13.25%(d) 15.78%(e) None of the above

The answer is (b).


Why?

PV -80,000

FV 100,000

N 5

CPT I/Y 4.56%


3. David Siu, 50, wants to have $550,000 in 15 years. He plans to save and invest an equal amount of money at the end of every year for the next 15 years in order to reach his goal. If the rate of interest is 10%, what is the amount he must save every year?

(a) $79,542(b) $19,042(c) $17,311(d) $72,311(e) None of the above

The answer is (c).


Why?

FV 550,000

I/Y 10

N 15

CPT PMT -17,311


4. Barbara Bowens, 65, is planning to retire soon, but she wonders if she has enough money to support her retirement. Since her parents and her siblings all died before they reached age 80, she does not expect to live beyond the age of 85. With the help of a personal financial planner, she estimates that her post-retirement life style will cost $30,000, in today’s dollars, per year, payable at the start of each year.


(a) $459,714

(b) $358,138

(c) $446,342

(d) $830,295

(e) None of the above

The answer is (a).

4. (continued) If the real rate of interest is 3%, what is the minimum amount of money that she needs today in order to support her retirement?


Why?

• Set the calculator to annuity due

PMT -30,000

I/Y 3

N 20

PV 459,714Alternatively, you could leave the calculator in

ordinary annuity mode, and multiply the PV by 1.03, to get the same answer.


5. Sho-Lan, 35, plans to invest 10% of her income every year until her retirement at age 65. Her current annual income is $30,000, and this is expected to increase at the rate of 3% per year. If the rate of interest that she can earn on her investment is 8%, how much money will she have at retirement? Assume that she invests her money at the end of every year.

(a) $905,639(b) $458,132(c) $494,774(d) $339,850(e) None of the above

The answer is (b).


Why?

124,458

7078884.152000,3

)05(.

635394419.7000,3

)05(.

427262471.206265689.10000,3

)03.08(.

)03.1(08.1000,3FVCGA

3030

Chapter 3

Documents

Transcript of Chapter 3