Question 1

Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Accepted Answer

A)  $205.83 
B)  $216.67 
C)  $228.07 
D)  $240.08 
E)  $252.08 
A)  $205.83 
B)  $216.67 
C)  $228.07 
D)  $240.08 
E)  $252.08 D

Question 2

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)  $7,531 
B)  $7,927 
C)  $8,323 
D)  $8,740 
E)  $9,177 
A)  $7,531 
B)  $7,927 
C)  $8,323 
D)  $8,740 
E)  $9,177 B

Question 3

S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic interest rate is greater than 3%. 
B)  The periodic rate is less than 3%. 
C)  The present value would be greater if the lump sum were discounted back for more periods. 
D)  The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually. 
E)  The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity. 
A)  The periodic interest rate is greater than 3%. 
B)  The periodic rate is less than 3%. 
C)  The present value would be greater if the lump sum were discounted back for more periods. 
D)  The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually. 
E)  The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity. E

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
B)  If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. 
C)  To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator. 
D)  If you solve for I and get a negative number, then you must have made a mistake. 
E)  If CF0 is positive and all the other CFs are negative, then you can still solve for I. 
A)  If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
B)  If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. 
C)  To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator. 
D)  If you solve for I and get a negative number, then you must have made a mistake. 
E)  If CF0 is positive and all the other CFs are negative, then you can still solve for I.

Question 5

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Accepted Answer

A)  $1,819 
B)  $1,915 
C)  $2,016 
D)  $2,117 
E)  $2,223 
A)  $1,819 
B)  $1,915 
C)  $2,016 
D)  $2,117 
E)  $2,223

Question 6

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 7

Your subscription to Investing Wisely Weekly is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33 
A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33

Question 8

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 9

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
B)  If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
C)  The cash flows for an annuity due must all occur at the ends of the periods. 
D)  The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. 
E)  If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. 
A)  The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
B)  If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
C)  The cash flows for an annuity due must all occur at the ends of the periods. 
D)  The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. 
E)  If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

Question 11

Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Accepted Answer

A)  14.39 
B)  15.15 
C)  15.95 
D)  16.79 
E)  17.67 
A)  14.39 
B)  15.15 
C)  15.95 
D)  16.79 
E)  17.67

Question 12

Your Aunt Ruth has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero?

Accepted Answer

A)  18.62 
B)  19.60 
C)  20.63 
D)  21.71 
E)  22.86 
A)  18.62 
B)  19.60 
C)  20.63 
D)  21.71 
E)  22.86

Question 13

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A)  7.12% 
B)  7.49% 
C)  7.87% 
D)  8.26% 
E)  8.67% 
A)  7.12% 
B)  7.49% 
C)  7.87% 
D)  8.26% 
E)  8.67%

Question 14

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)  $28,843.38 
B)  $30,361.46 
C)  $31,959.43 
D)  $33,641.50 
E)  $35,323.58 
A)  $28,843.38 
B)  $30,361.46 
C)  $31,959.43 
D)  $33,641.50 
E)  $35,323.58

Question 15

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A)  $ 8,509 
B)  $ 8,957 
C)  $ 9,428 
D)  $ 9,924 
E)  $10,446 
A)  $ 8,509 
B)  $ 8,957 
C)  $ 9,428 
D)  $ 9,924 
E)  $10,446

Question 16

You want to go to Europe 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 17

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59 
A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59

Question 18

Last year Dania Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Accepted Answer

A)  $ 845.03 
B)  $ 889.51 
C)  $ 936.33 
D)  $ 983.14 
E)  $1,032.30 
A)  $ 845.03 
B)  $ 889.51 
C)  $ 936.33 
D)  $ 983.14 
E)  $1,032.30

Question 19

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

Accepted Answer

A)  $1,928.78 
B)  $2,030.30 
C)  $2,131.81 
D)  $2,238.40 
E)  $2,350.32 
A)  $1,928.78 
B)  $2,030.30 
C)  $2,131.81 
D)  $2,238.40 
E)  $2,350.32

Question 20

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Accepted Answer

A)  8.24% 
B)  8.45% 
C)  8.66% 
D)  8.88% 
E)  9.10% 
A)  8.24% 
B)  8.45% 
C)  8.66% 
D)  8.88% 
E)  9.10%

Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

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

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Which of the following statements is CORRECT?

Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Your Aunt Ruth has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero?

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

You want to go to Europe 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?

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Last year Dania Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Overview

Financial Markets

Financial Statements

Statement Analysis

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

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Exam 5: Time Value of Money

Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

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

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Which of the following statements is CORRECT?

Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Your Aunt Ruth has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero?

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

You want to go to Europe 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?

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Last year Dania Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Overview

Financial Markets

Financial Statements

Statement Analysis

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

Mergers

Filters