BigDaddy U | CPCU 410 Module 8 Test Bank

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1. Which of the following formulas would be used to determine the future value of a principal sum?

A. P * (1 + i)n

B. i * (1 – P)n

C. n/P * (1 + i)

D. P / (1 + i)n

2. Jack has a $30,000 lump sum to invest today. Assuming a compound annual interest rate of 6%, what is the future value of this amount in five years?

A. $22,417.

B. $38,356.

C. $40,146.

D. $40,203.

3. Andy has a $4,000 lump sum to invest today. Assuming a compound annual interest rate of 4%, what is the future value of this amount in 20 years?

A. $8,294.

B. $8,764.

C. $9,367.

D. $10,476.

4. To what amount will $3,000 grow in seven years in a savings account that earns 4% interest compounded monthly?

A. $3,831.36

B. $3,947.80

C. $3,967.54

D. $3,990.41

5. Theresa borrows $1,000 for six months. The interest rate is 12% simple interest per year. At the end of six months, the amount Theresa needs to pay off the loan plus interest is:

A. $1,000.

B. $1,010.

C. $1,060.

D. $1,120.

6. To what amount will $20,000 grow in five years in a certificate of deposit that earns 7% interest compounded quarterly?

A. $27,599.41

B. $27,863.85

C. $28,051.03

D. $28,295.56

7. Which one of the following statements is correct regarding interest rates?

A. The effective annual rate can be determined by dividing the nominal rate by the number of compounding periods.

B. The increase in the effective annual rate becomes larger with each increase in compounding frequency.

C. Simple interest will produce a higher rate of return than compound interest.

D. The nominal and effective interest rates will be identical when compounding occurs annually.

8. All other factors being equal, an increase in the frequency of compounding will result in all the following EXCEPT:

A. The future value of a stream of annuity payments received will decrease.

B. The effective annual interest rate will increase.

C. The size of a required payment needed to meet a targeted future amount will decrease.

D. The number of years needed to reach a particular future value will decrease.

9. A savings account pays a monthly stated rate of 1% of the account balance. The effective annual interest rate of this savings account is:

A. Equal to 12% less the marginal income tax rate.

B. Less than 12%.

C. Equal to 12%.

D. Greater than 12%.

10. Which of the following is the effective annual interest rate for a 4% nominal rate that is compounded semi-annually?

A. 4.0240%

B. 4.0400%

C. 4.0604%

D. 4.0808%

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11. Jack will receive a $30,000 lump sum payment at the end of five years. Assuming an interest rate of 6%, what is the present value of this lump sum?

A. $22,386.14

B. $22,417.75

C. $25,247.86

D. $40,146.12

12. A business needs to accumulate $15,000 in a savings account in five years. Assuming the account will earn a 3% compound annual interest rate, how much do they need to deposit into the account today to achieve this goal?

A. $11,859.52

B. $12,939.13

C. $12,957.56

D. $13,225.47

13. Thomas has a certificate of deposit that is currently worth $5,000. The certificate of deposit has earned a 4% compound annual rate of return for the entire six years the account has been open. How much did Thomas originally deposit into the account when he opened it?

A. $2,741.96

B. $3,685.84

C. $3,951.57

D. $4,735.13

14. What is the present value of $15,000 due in eight years hence, assuming a discount rate of 11% applied semiannually?

A. $6,368.72

B. $6,433.24

C. $6,508.90

D. $6,614.63

15. Julie deposited $12,000 into a money market account that earns a compound annual rate of return of 5%. How long will it take for Julie’s account balance to reach $24,000?

A. 12 years.

B. 14.21 years.

C. 17.67 years.

D. 19.45 years.

16. Ginger needs to accumulate $10,000 in a savings account in seven years. She plans on making an initial deposit of $6,000 today. Assuming no other deposits will be made, what is the annual compound rate of interest that must be earned on the account for Ginger to achieve her goal?

A. 7.57%.

B. 8.16%

C. 9.37%

D. 10.12%

17. What is the rate of return on an investment of $15,000 that will be worth $18,000 in five years?

A. 3.71%.

B. 4.66%

C. 5.00%

D. 6.38%

18. What is the net present value of the following series of payments based on a 4% compound annual interest rate?

Timing of Payment	Amount of Payment
End of year 1	$4,000
End of year 2	$5,000
End of year 3	$1,000
End of year 4	$0
End of year 5	$6,000

A. $13,605.15

B. $13,909.67

C. $14,289.49

D. $14,861.07

CPCU 410 Module 8 Test Bank

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