Question 1

The concept of compound interest is best described as:

Accepted Answer

A) interest earned on an investment. 
B) the total amount of interest earned over the life of an investment. 
C) interest earned on interest. 
D) the inverse of simple interest. 
A) interest earned on an investment. 
B) the total amount of interest earned over the life of an investment. 
C) interest earned on interest. 
D) the inverse of simple interest. C

Question 2

If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount factor?

Accepted Answer

A) 0.8333 
B) 1.20 
C) 0.20 
D) 1.00 
A) 0.8333 
B) 1.20 
C) 0.20 
D) 1.00 A

Question 3

State the net present value rule.

Accepted Answer

Invest in projects with positive net present values. Net present value is the difference between the present value of future cash flows from the project and the present value of the initial investment.

Question 4

Briefly explain the term discount rate.

Accepted Answer

The discount rate is the rate of return

Question 5

The opportunity cost of capital for a risky project is:

Accepted Answer

A) the expected rate of return on a government security having the same maturity as the project. 
B) the expected rate of return on a well-diversified portfolio of common stocks. 
C) the expected rate of return on a security of similar risk as the project. 
D) the expected rate of return on a typical bond portfolio. 
A) the expected rate of return on a government security having the same maturity as the project. 
B) the expected rate of return on a well-diversified portfolio of common stocks. 
C) the expected rate of return on a security of similar risk as the project. 
D) the expected rate of return on a typical bond portfolio.

Question 6

In the amortization of a mortgage loan with equal payments, the fraction of each payment devoted to interest steadily increases over time and the fraction devoted to reducing the loan balance decreases steadily.

Accepted Answer

A) True 
 B)False

Question 7

An investment at 12 percent APR compounded monthly is equal to an effective annual rate of:

Accepted Answer

A) 12.68 percent. 
B) 12.36 percent. 
C) 12.00 percent. 
D) 11.87 percent. 
A) 12.68 percent. 
B) 12.36 percent. 
C) 12.00 percent. 
D) 11.87 percent.

Question 8

If the one-year discount factor is 0.90, what is the present value of $120 expected one year from today?

Accepted Answer

A) $100 
B) $96 
C) $108 
D) $133 
A) $100 
B) $96 
C) $108 
D) $133

Question 9

The present value formula for a cash flow expected one period from now is:

Accepted Answer

A) PV = C1 × (1 + r). 
B) PV = C1/(1 + r). 
C) PV = C1/r. 
D) PV = (1 + r)/C1. 
A) PV = C1 × (1 + r). 
B) PV = C1/(1 + r). 
C) PV = C1/r. 
D) PV = (1 + r)/C1.

Question 10

Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6 percent per year. If the mortgage calls for equal monthly payments for 20 years, what is the amount of each payment? (Assume monthly compounding or discounting.)

Accepted Answer

A) $1,254.70 
B) $1,625.00 
C) $1,263.06 
D) $1,074.65 
A) $1,254.70 
B) $1,625.00 
C) $1,263.06 
D) $1,074.65

Question 11

You would like to have enough money saved to receive a $50,000 per year perpetuity after retirement. How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement. The annual interest rate is 8 percent.)

Accepted Answer

A) $1,000,000 
B) $675,000 
C) $625,000 
D) $500,000 
A) $1,000,000 
B) $675,000 
C) $625,000 
D) $500,000

Question 12

After retirement, you expect to live for 25 years. You would like to have $75,000 income each year. How much should you have saved in your retirement account to receive this income if the annual interest rate is 9 percent per year? (Assume that the payments start one year after your retirement.)

Accepted Answer

A) $736,693.47 
B) $83,431.17 
C) $1,875,000 
D) $1,213,487.12 
A) $736,693.47 
B) $83,431.17 
C) $1,875,000 
D) $1,213,487.12

Question 13

John House has taken a $250,000 mortgage on his house at an interest rate of 6 percent per year. If the mortgage calls for 20 equal, annual payments, what is the amount of each payment?

Accepted Answer

A) $21,796.14 
B) $10,500.00 
C) $16,882.43 
D) $24,327.18 
A) $21,796.14 
B) $10,500.00 
C) $16,882.43 
D) $24,327.18

Question 14

You would like to have enough money saved to receive an $80,000 per year perpetuity after retirement. How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement. The annual interest rate is 10 percent.)

Accepted Answer

A) $1,500,000 
B) $880,000 
C) $800,000 
D) $80,000 
A) $1,500,000 
B) $880,000 
C) $800,000 
D) $80,000

Question 15

If the present value annuity factor at 12 percent for five years is 3.6048, what is the equivalent future value annuity factor?

Accepted Answer

A) 2.0455 
B) 6.3529 
C) 1.7623 
D) 5.1237 
A) 2.0455 
B) 6.3529 
C) 1.7623 
D) 5.1237

Question 16

If you invest $100 at 12 percent for three years, how much would you have at the end of three years using compound interest?

Accepted Answer

A) $136 
B) $140.49 
C) $240.18 
D) $173.18 
A) $136 
B) $140.49 
C) $240.18 
D) $173.18

Question 17

You would like to have enough money saved to receive $80,000 per year in perpetuity after retirement for you and your heirs. How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start one year from the date of your retirement. The annual interest rate is 8 percent.)

Accepted Answer

A) $7,500,000 
B) $750,000 
C) $1,000,000 
D) $800,000 
A) $7,500,000 
B) $750,000 
C) $1,000,000 
D) $800,000

Question 18

If you are paid $1,000 at the end of each year for the next five years, what type of cash flow did you receive?

Accepted Answer

A) Uneven cash flow stream 
B) An annuity 
C) An annuity due 
D) A perpetuity 
A) Uneven cash flow stream 
B) An annuity 
C) An annuity due 
D) A perpetuity

Question 19

Mr. Williams expects to retire in 30 years and would like to accumulate $1 million in his pension fund. If the annual interest rate is 12 percent, how much should Mr. Williams put into his pension fund each month in order to achieve his goal? (Assume that Mr. Williams will deposit the same amount each month into his pension fund, using monthly compounding.)

Accepted Answer

A) $286.13 
B) $771.60 
C) $345.30 
D) $437.13 
A) $286.13 
B) $771.60 
C) $345.30 
D) $437.13

Question 20

An investment at 10 percent compounded continuously has an equivalent annual rate of:

Accepted Answer

A) 10.250 percent. 
B) 10.517 percent. 
C) 10.381 percent. 
D) none of the options. 
A) 10.250 percent. 
B) 10.517 percent. 
C) 10.381 percent. 
D) none of the options.

Exam 2: How to Calculate Present Values

The concept of compound interest is best described as:

If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount factor?

State the net present value rule.

Briefly explain the term discount rate.

The opportunity cost of capital for a risky project is:

In the amortization of a mortgage loan with equal payments, the fraction of each payment devoted to interest steadily increases over time and the fraction devoted to reducing the loan balance decreases steadily.

An investment at 12 percent APR compounded monthly is equal to an effective annual rate of:

If the one-year discount factor is 0.90, what is the present value of $120 expected one year from today?

The present value formula for a cash flow expected one period from now is:

Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6 percent per year. If the mortgage calls for equal monthly payments for 20 years, what is the amount of each payment? (Assume monthly compounding or discounting.)

You would like to have enough money saved to receive a $50,000 per year perpetuity after retirement. How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement. The annual interest rate is 8 percent.)

After retirement, you expect to live for 25 years. You would like to have $75,000 income each year. How much should you have saved in your retirement account to receive this income if the annual interest rate is 9 percent per year? (Assume that the payments start one year after your retirement.)

John House has taken a $250,000 mortgage on his house at an interest rate of 6 percent per year. If the mortgage calls for 20 equal, annual payments, what is the amount of each payment?

If the present value annuity factor at 12 percent for five years is 3.6048, what is the equivalent future value annuity factor?

If you invest $100 at 12 percent for three years, how much would you have at the end of three years using compound interest?

If you are paid $1,000 at the end of each year for the next five years, what type of cash flow did you receive?

An investment at 10 percent compounded continuously has an equivalent annual rate of:

Introduction to Corporate Finance

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters