Chapter 3 Multiple-Choice Questions and Answers Captus

Chapter 3 Multiple-Choice Questions and Answers © Captus Press Inc. , 2012

1. Which of the following is not a goal, as defined in this chapter? (a) (b) (c) (d) (e) Dave wants to have $500, 000 on June 30 th, 2014. Jill wants to save and invest 10% of her annual income every year, from now until she retires at 65. Jeff wants to buy his son a car when he graduates at the end of the year. Chris wants to cut his expenses by 10% per month. All of the above are goals. The answer is (c). © Captus Press Inc. , 2012

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 downpayment required is $100, 000. What is the rate of return that he must earn to reach his goal? (a) (b) (c) (d) (e) 10% 4. 56% 13. 25% 15. 78% None of the above The answer is (b). © Captus Press Inc. , 2012

Why? PV FV N CPT I/Y -80, 000 100, 000 5 4. 56% © Captus Press Inc. , 2012

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) (b) (c) (d) (e) $79, 542 $19, 042 $17, 311 $72, 311 None of the above The answer is (c). © Captus Press Inc. , 2012

Why? FV I/Y N CPT 550, 000 10 15 PMT -17, 311 © Captus Press Inc. , 2012

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. © Captus Press Inc. , 2012

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? (a) (b) (c) (d) (e) $459, 714 $358, 138 $446, 342 $830, 295 None of the above The answer is (a). © Captus Press Inc. , 2012

Why? • Set the calculator to annuity due PMT -30, 000 I/Y 3 N 20 PV 459, 714 Alternatively, you could leave the calculator in ordinary annuity mode, and multiply the PV by 1. 03, to get the same answer. © Captus Press Inc. , 2012

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) (b) (c) (d) (e) $905, 639 $458, 132 $494, 774 $339, 850 None of the above The answer is (b). © Captus Press Inc. , 2012

Why? © Captus Press Inc. , 2012