Annuities Annuity Quiz

Click the box below each question to see the correct answer. Keep track of how many you answer correctly and compare the total to the grading scale found at the bottom of the page.

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1. A 5-year ordinary annuity has a present value of \$1,000.  If the interest rate is 8 percent,  the amount of each annuity payment is closest to which of the following?
A.  \$250.44
B.  \$231.91
C.  \$181.62
D.  \$184.08
E.  \$170.44
 Answer to question #1A.  \$250.44 \$1,000 = (R)(PVIFA at 8% for 5 periods) = (R)(3.993)R = (\$1,000)/(3.993) = \$250.44
2. An 8-year annuity due has a present value of \$1,000.  If the interest rate is 5 percent,  the amount of each annuity payment is closest to which of the following?
A.  \$154.73
B.  \$147.36
C.  \$109.39
D.  \$104.72
E.   \$  99.74
 Answer to question #2B.  \$147.36\$1,000 = (R)(PVIFA at 5% for 7 periods) + R =  (R)(5.786) + R = (R)(6.786)R = (\$1,000)/(6.786) = \$147.36
3. A 5-year ordinary annuity has a future value of \$1,000.  If the interest rate is 8 percent,  the amount of each annuity payment is closest to which of the following?
A.  \$250.44
B.  \$231.91
C.  \$184.08
D.  \$181.62
E.  \$170.44
 Answer to question #3E.  \$170.44 \$1,000 = (R)(FVIFA at 8% for 5 periods) = (R)(5.867) R = (\$1,000)/(5.867) = \$170.44
4. An 8-year annuity due has a future value of \$1,000.  If the interest rate is 5 percent,  the amount of each annuity payment is closest to which of the following?
A.  \$104.72
B.  \$109.39
C.  \$147.36
D.  \$154.73
E.   \$  99.74
 Answer to question #4E.  \$ 99.74 \$1,000 = (R)(FVIFA at 5% for 8 periods)(1.05) = (R)(9.549)(1.05) = (R)(10.026) R = (\$1,000)/(10.026) = \$ 99.74
5.  Which of the following statements is TRUE?  (Assume that the yearly cash flows are identical for both annuities and that the common interest rate is greater than zero.)
A.  The present value of an annuity due is greater than the present value of an ordinary
annuity.
B.  The present value of an ordinary annuity is greater than the present value of an annuity
due.
C.  The future value of an ordinary annuity is greater than the future value of an annuity
due.
D.  Both B and C are correct.
 Answer to question #5A.  The present value of an annuity due is greater than the present value of an ordinary annuity.
6. A 5-year ordinary annuity has periodic cash flows of \$100 each year.  If the interest rate is 8 percent,  the present value of this annuity is closest to which of the following?
A.  \$331.20
B.  \$399.30
C.  \$431.24
D.  \$486.65
E.  \$586.70
 Answer to question #6B.  \$399.30 PVA for 5 periods = (\$100)(PVIFA at 8% for 5 periods)PVA for 5 periods = (\$100)(3.993) = \$399.30
7.  A 5-year annuity due has periodic cash flows of \$100 each year.  If the interest rate is 8 percent,  the future value of this annuity is closest to which of the following equations?
A.  (\$100)(FVIFA at 8% for 5 periods)
B.  (\$100)(FVIFA at 8% for 4 periods)(1.08)
C.  (\$100)(FVIFA at 8% for 5 periods)(1.08)
D.  (\$100)(FVIFA at 8% for 5 periods) + \$100
E.  (\$100)(FVIFA at 8% for 4 periods) + \$100
 Answer to question #7 C.  (\$100)(FVIFA at 8% for 5 periods)(1.08) Remember, you can treat an annuity due initially as an ordinary annuity,find the FVA, and simply multiply that answer by (1 + i%), which effectively shifts the earlier answer one period to the right.
8.  A 5-year annuity due has periodic cash flows of \$100 each year.  If the interest rate is 8 percent,  the present value of this annuity is closest to which of the following equations?
A.  (\$100)(PVIFA at 8% for 4 periods) + \$100
B.  (\$100)(PVIFA at 8% for 4 periods)(1.08)
C.  (\$100)(PVIFA at 8% for 5 periods)(1.08)
D.  (\$100)(PVIFA at 8% for 6 periods) - \$100
E.  Both A and C
 Answer to question #8 E.  Both A and C
9. Study the time line and accompanying 5-period cash-flow pattern below.

0        1        2        3        4        5        6  Time line
|--------|--------|--------|--------|--------|--------|
\$10      \$10      \$10      \$10      \$10          Cash flows
¦                                   ¦
B
The present value of the 5-period annuity shown above as of Point A is the present value of a 5-period ______________ , whereas the future value of the same annuity as of Point B is the future value of a 5-period ______________ .
A.  ordinary annuity; ordinary annuity.
B.  ordinary annuity; annuity due.
C.  annuity due; annuity due.
D.  annuity due; ordinary annuity.

 Answer to question #9 D.  annuity due; ordinary annuity.
10.Study the time line and accompanying 5-period cash-flow pattern below.

0        1        2        3        4        5        6  Time line
|--------|--------|--------|--------|--------|--------|
\$10      \$10      \$10      \$10      \$10       ¦           Cash flows
¦                                            ¦
A                                            B
The present value of the 5-period annuity shown above as of Point A is the present value of a 5-period ______________ , whereas the future value of the same annuity as of Point B is the future value of a 5-period ______________ .
A.  ordinary annuity; ordinary annuity.
B.  ordinary annuity; annuity due.
C.  annuity due; annuity due.
D.  annuity due; ordinary annuity.

 Answer to question #10 C.  annuity due; annuity due.

## How did you do?

• All 10 correct = You are an annuity GURU!  Congratulations!
• 8 or 9 correct = Approaching zero defects -- just review what you missed.
• 6 or 7 correct = You need a little more work. Review page 2; then take the quiz again.
• 5 or fewer correct = You have some work to do: (a) review page 2; (b) try your hand at the practice time-value-of-money annuity problems (with answers and detailed solutions) found at: http://web.utk.edu/~jwachowi/annuity_prob.pdf ; and (c) then take the quiz again.
I hope you enjoyed and learned from this quiz (and tutorial). If you have comments or want to take exception to one of my answers please send me a note. And, if you have been bitten by the annuity bug, you might enjoy learning about Growing Annuities.

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