Differential Equations in Finance

Description: This quiz is designed to assess your understanding of differential equations in finance. It covers concepts such as continuous compounding, annuities, and loans.
Number of Questions: 14
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Tags: differential equations finance continuous compounding annuities loans
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What is the differential equation that describes the growth of a continuously compounded investment?

  1. $$\frac{dy}{dt} = ry$$

  2. $$\frac{dy}{dt} = y$$

  3. $$\frac{dy}{dt} = y^2$$

  4. $$\frac{dy}{dt} = e^y$$


Correct Option: A
Explanation:

The differential equation that describes the growth of a continuously compounded investment is $$\frac{dy}{dt} = ry$$, where $y$ is the amount of the investment, $r$ is the annual interest rate, and $t$ is the time in years.

What is the solution to the differential equation $$\frac{dy}{dt} = ry$$?

  1. $$y = Ce^{rt}$$

  2. $$y = C + rt$$

  3. $$y = C - rt$$

  4. $$y = C/rt$$


Correct Option: A
Explanation:

The solution to the differential equation $$\frac{dy}{dt} = ry$$ is $$y = Ce^{rt}$$, where $C$ is a constant.

What is the present value of an annuity that pays $1000 per year for 10 years at an annual interest rate of 5%? (Assume continuous compounding.)

  1. $$\frac{1000}{0.05}$$

  2. $$\frac{1000}{0.05} \left( 1 - e^{-0.05 \cdot 10} \right)$$

  3. $$\frac{1000}{0.05} \left( e^{0.05 \cdot 10} - 1 \right)$$

  4. $$\frac{1000}{0.05} \left( e^{-0.05 \cdot 10} - 1 \right)$$


Correct Option: B
Explanation:

The present value of an annuity that pays $1000 per year for 10 years at an annual interest rate of 5% (assuming continuous compounding) is $$\frac{1000}{0.05} \left( 1 - e^{-0.05 \cdot 10} \right)$$.

What is the monthly payment on a loan of $100,000 that is to be repaid over 30 years at an annual interest rate of 4%? (Assume continuous compounding.)

  1. $$\frac{100,000}{30 \cdot 12}$$

  2. $$\frac{100,000}{30 \cdot 12} \left( 1 - e^{-0.04 \cdot 30} \right)$$

  3. $$\frac{100,000}{30 \cdot 12} \left( e^{0.04 \cdot 30} - 1 \right)$$

  4. $$\frac{100,000}{30 \cdot 12} \left( e^{-0.04 \cdot 30} - 1 \right)$$


Correct Option: B
Explanation:

The monthly payment on a loan of $100,000 that is to be repaid over 30 years at an annual interest rate of 4% (assuming continuous compounding) is $$\frac{100,000}{30 \cdot 12} \left( 1 - e^{-0.04 \cdot 30} \right)$$.

What is the effective annual interest rate on a loan that has a nominal annual interest rate of 12% and is compounded monthly?

  1. $$12\%$$

  2. $$12.68\%$$

  3. $$13.38\%$$

  4. $$14.10\%$$


Correct Option: C
Explanation:

The effective annual interest rate on a loan that has a nominal annual interest rate of 12% and is compounded monthly is $$13.38\%$$.

What is the doubling time of an investment that is continuously compounded at an annual interest rate of 7%? (Assume that the initial investment is $1.)

  1. $$10\text{ years}$$

  2. $$11\text{ years}$$

  3. $$12\text{ years}$$

  4. $$13\text{ years}$$


Correct Option: A
Explanation:

The doubling time of an investment that is continuously compounded at an annual interest rate of 7% is $$10\text{ years}$$. This means that it will take 10 years for the investment to double in value.

What is the future value of an investment of $1000 that is continuously compounded at an annual interest rate of 5% for 10 years?

  1. $$\$1628.89$$

  2. $$\$1643.85$$

  3. $$\$1659.05$$

  4. $$\$1674.49$$


Correct Option: B
Explanation:

The future value of an investment of $1000 that is continuously compounded at an annual interest rate of 5% for 10 years is $$\$1643.85$$. This means that the investment will be worth $1643.85 at the end of 10 years.

What is the present value of an investment that will be worth $1000 in 10 years if the annual interest rate is 5% and the interest is compounded continuously?

  1. $$\$783.53$$

  2. $$\$789.34$$

  3. $$\$795.27$$

  4. $$\$801.33$$


Correct Option: A
Explanation:

The present value of an investment that will be worth $1000 in 10 years if the annual interest rate is 5% and the interest is compounded continuously is $$\$783.53$$. This means that you would need to invest $783.53 today in order to have $1000 in 10 years.

What is the annual interest rate on a loan that has a monthly payment of $1000, a loan term of 30 years, and a total amount borrowed of $100,000?

  1. $$4\%$$

  2. $$4.5\%$$

  3. $$5\%$$

  4. $$5.5\%$$


Correct Option: B
Explanation:

The annual interest rate on a loan that has a monthly payment of $1000, a loan term of 30 years, and a total amount borrowed of $100,000 is $$4.5\%$$. This means that the borrower will pay a total of $135,000 in interest over the life of the loan.

What is the total amount of interest paid on a loan of $100,000 that is repaid over 30 years at an annual interest rate of 5%? (Assume continuous compounding.)

  1. $$\$100,000$$

  2. $$\$135,000$$

  3. $$\$170,000$$

  4. $$\$205,000$$


Correct Option: B
Explanation:

The total amount of interest paid on a loan of $100,000 that is repaid over 30 years at an annual interest rate of 5% (assuming continuous compounding) is $$\$135,000$$. This means that the borrower will pay a total of $235,000 over the life of the loan.

What is the present value of an annuity that pays $1000 per year for 10 years at an annual interest rate of 4%? (Assume continuous compounding.)

  1. $$\$8110.90$$

  2. $$\$8203.46$$

  3. $$\$8298.17$$

  4. $$\$8395.13$$


Correct Option: B
Explanation:

The present value of an annuity that pays $1000 per year for 10 years at an annual interest rate of 4% (assuming continuous compounding) is $$\$8203.46$$. This means that the present value of the annuity is $8203.46.

What is the future value of an annuity that pays $1000 per year for 10 years at an annual interest rate of 6%? (Assume continuous compounding.)

  1. $$\$12155.06$$

  2. $$\$12387.65$$

  3. $$\$12624.80$$

  4. $$\$12866.51$$


Correct Option: B
Explanation:

The future value of an annuity that pays $1000 per year for 10 years at an annual interest rate of 6% (assuming continuous compounding) is $$\$12387.65$$. This means that the future value of the annuity is $12387.65.

What is the present value of a perpetuity that pays $1000 per year at an annual interest rate of 5%? (Assume continuous compounding.)

  1. $$\$20,000$$

  2. $$\$25,000$$

  3. $$\$30,000$$

  4. $$\$35,000$$


Correct Option: A
Explanation:

The present value of a perpetuity that pays $1000 per year at an annual interest rate of 5% (assuming continuous compounding) is $$\$20,000$$. This means that the present value of the perpetuity is $20,000.

What is the future value of a perpetuity that pays $1000 per year at an annual interest rate of 4%? (Assume continuous compounding.)

  1. $$\$25,000$$

  2. $$\$30,000$$

  3. $$\$35,000$$

  4. $$\$40,000$$


Correct Option: A
Explanation:

The future value of a perpetuity that pays $1000 per year at an annual interest rate of 4% (assuming continuous compounding) is $$\$25,000$$. This means that the future value of the perpetuity is $25,000.

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