Question 1

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Accepted Answer

A)  8.95% 
B)  9.39% 
C)  9.86% 
D)  10.36% 
E)  10.88% 
A)  8.95% 
B)  9.39% 
C)  9.86% 
D)  10.36% 
E)  10.88%

Question 2

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

A)  $16,806 
B)  $17,690 
C)  $18,621 
D)  $19,601 
E)  $20,633 
A)  $16,806 
B)  $17,690 
C)  $18,621 
D)  $19,601 
E)  $20,633

Question 3

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Accepted Answer

A) True 
 B)False

Question 4

You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year from today.You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

Accepted Answer

A)  $18,369 
B)  $19,287 
C)  $20,251 
D)  $21,264 
E)  $22,327 
A)  $18,369 
B)  $19,287 
C)  $20,251 
D)  $21,264 
E)  $22,327

Question 5

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24th month, you will have $13,000 in your account.If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Accepted Answer

A)  7.62% 
B)  8.00% 
C)  8.40% 
D)  8.82% 
E)  9.26% 
A)  7.62% 
B)  8.00% 
C)  8.40% 
D)  8.82% 
E)  9.26%

Question 6

You were left $100,000 in a trust fund set up by your grandfather.The fund pays 6.5% interest.You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately.How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

Accepted Answer

A)  $24,736 
B)  $26,038 
C)  $27,409 
D)  $28,779 
E)  $30,218 
A)  $24,736 
B)  $26,038 
C)  $27,409 
D)  $28,779 
E)  $30,218

Question 7

Which of the following bank accounts has the highest effective annual return?

Accepted Answer

A)  An account that pays 8% nominal interest with daily (365-day) compounding. 
B)  An account that pays 8% nominal interest with monthly compounding. 
C)  An account that pays 8% nominal interest with annual compounding. 
D)  An account that pays 7% nominal interest with daily (365-day) compounding. 
E)  An account that pays 7% nominal interest with monthly compounding. 
A)  An account that pays 8% nominal interest with daily (365-day) compounding. 
B)  An account that pays 8% nominal interest with monthly compounding. 
C)  An account that pays 8% nominal interest with annual compounding. 
D)  An account that pays 7% nominal interest with daily (365-day) compounding. 
E)  An account that pays 7% nominal interest with monthly compounding.

Question 8

Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)  $585.43 
B)  $614.70 
C)  $645.44 
D)  $677.71 
E)  $711.59 
A)  $585.43 
B)  $614.70 
C)  $645.44 
D)  $677.71 
E)  $711.59

Question 9

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)  $1,537.69 
B)  $1,618.62 
C)  $1,699.55 
D)  $1,784.53 
E)  $1,873.76 
A)  $1,537.69 
B)  $1,618.62 
C)  $1,699.55 
D)  $1,784.53 
E)  $1,873.76

Question 10

Your girlfriend just won the Florida lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today.What rate of return is built into the annuity?

Accepted Answer

A)  3.44% 
B)  3.79% 
C)  4.17% 
D)  4.58% 
E)  5.04% 
A)  3.44% 
B)  3.79% 
C)  4.17% 
D)  4.58% 
E)  5.04%

Question 11

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments.Which of these statements is CORRECT?

Accepted Answer

A)  The proportion of interest versus principal repayment would be the same for each of the 8 payments. 
B)  The annual payments would be larger if the interest rate were lower. 
C)  If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan. 
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
E)  The last payment would have a higher proportion of interest than the first payment. 
A)  The proportion of interest versus principal repayment would be the same for each of the 8 payments. 
B)  The annual payments would be larger if the interest rate were lower. 
C)  If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan. 
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
E)  The last payment would have a higher proportion of interest than the first payment.

Question 12

You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions, how much will you have 4 years from today?

Accepted Answer

A)  $16,112 
B)  $16,918 
C)  $17,763 
D)  $18,652 
E)  $19,584 
A)  $16,112 
B)  $16,918 
C)  $17,763 
D)  $18,652 
E)  $19,584

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  A time line is not meaningful unless all cash flows occur annually. 
B)  Time lines are not useful for visualizing complex problems prior to doing actual calculations. 
C)  Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
E)  Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 
A)  A time line is not meaningful unless all cash flows occur annually. 
B)  Time lines are not useful for visualizing complex problems prior to doing actual calculations. 
C)  Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
E)  Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

Question 14

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 15

What is the present value of the following cash flow stream at a rate of 12.0%? ​

Accepted Answer

A)  $9,699 
B)  $10,210 
C)  $10,747 
D)  $11,284 
E)  $11,849 
A)  $9,699 
B)  $10,210 
C)  $10,747 
D)  $11,284 
E)  $11,849

Question 16

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly.If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?

Accepted Answer

A)  39.60 
B)  44.00 
C)  48.40 
D)  53.24 
E)  58.57 
A)  39.60 
B)  44.00 
C)  48.40 
D)  53.24 
E)  58.57

Question 17

Suppose a Google.com bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

Accepted Answer

A)  $2,819.52 
B)  $2,967.92 
C)  $3,116.31 
D)  $3,272.13 
E)  $3,435.74 
A)  $2,819.52 
B)  $2,967.92 
C)  $3,116.31 
D)  $3,272.13 
E)  $3,435.74

Question 18

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding.What is the effective annual rate?

Accepted Answer

A)  15.27% 
B)  16.08% 
C)  16.88% 
D)  17.72% 
E)  18.61% 
A)  15.27% 
B)  16.08% 
C)  16.88% 
D)  17.72% 
E)  18.61%

Question 19

Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly.An offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, simple interest, with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?

Accepted Answer

A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72% 
A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72%

Question 20

A time line is meaningful even if all cash flows do not occur annually.

Accepted Answer

A) True 
 B)False

A perpetuity pays $85 per year and costs $950.What is the rate of return?

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24^th month, you will have $13,000 in your account.If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Which of the following bank accounts has the highest effective annual return?

Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Your girlfriend just won the Florida lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today.What rate of return is built into the annuity?

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments.Which of these statements is CORRECT?

You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions, how much will you have 4 years from today?

Which of the following statements is CORRECT?

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

What is the present value of the following cash flow stream at a rate of 12.0%?

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly.If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?

Suppose a Google.com bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding.What is the effective annual rate?

A time line is meaningful even if all cash flows do not occur annually.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Bond Refunding

Supply Chains and Working Capital Management

Multinational Financial Management

Filters

Exam 4: Time Value of Money

A perpetuity pays $85 per year and costs $950.What is the rate of return?

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24th month, you will have $13,000 in your account.If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Which of the following bank accounts has the highest effective annual return?

Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Your girlfriend just won the Florida lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today.What rate of return is built into the annuity?

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments.Which of these statements is CORRECT?

You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions, how much will you have 4 years from today?

Which of the following statements is CORRECT?

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

What is the present value of the following cash flow stream at a rate of 12.0%? ​

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly.If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?

Suppose a Google.com bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding.What is the effective annual rate?

A time line is meaningful even if all cash flows do not occur annually.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Bond Refunding

Supply Chains and Working Capital Management

Multinational Financial Management

Filters

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24^th month, you will have $13,000 in your account.If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

What is the present value of the following cash flow stream at a rate of 12.0%?