Question 1

What is the present value of the following cash flow stream at a rate of 6.25%?

Accepted Answer

A)  $411.57 
B)  $433.23 
C)  $456.03 
D)  $480.03 
E)  $505.30 
A)  $411.57 
B)  $433.23 
C)  $456.03 
D)  $480.03 
E)  $505.30

Question 2

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 beginning of the periods. 
D)  The cash flows for an annuity may vary from period to period, but 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 beginning of the periods. 
D)  The cash flows for an annuity may vary from period to period, but 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 3

Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to start a new business, and your uncle offers to give you $120,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment?

Accepted Answer

A)  6.85% 
B)  7.21% 
C)  7.59% 
D)  7.99% 
E)  8.41% 
A)  6.85% 
B)  7.21% 
C)  7.59% 
D)  7.99% 
E)  8.41%

Question 4

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?

Accepted Answer

A)  18.58% 
B)  19.56% 
C)  20.54% 
D)  21.57% 
E)  22.65% 
A)  18.58% 
B)  19.56% 
C)  20.54% 
D)  21.57% 
E)  22.65%

Question 5

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Accepted Answer

A)  23 
B)  27 
C)  32 
D)  38 
E)  44 
A)  23 
B)  27 
C)  32 
D)  38 
E)  44

Question 6

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 7

You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

Accepted Answer

A)  $2,245.08 
B)  $2,363.24 
C)  $2,481.41 
D)  $2,605.48 
E)  $2,735.75 
A)  $2,245.08 
B)  $2,363.24 
C)  $2,481.41 
D)  $2,605.48 
E)  $2,735.75

Question 8

You want to quit your job and go back to school for a law degree 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 9

Which of the following statements is CORRECT?

Accepted Answer

A)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
B)  If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%. 
C)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
A)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
B)  If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%. 
C)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

Question 10

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Accepted Answer

A)  $284,595 
B)  $299,574 
C)  $314,553 
D)  $330,281 
E)  $346,795 
A)  $284,595 
B)  $299,574 
C)  $314,553 
D)  $330,281 
E)  $346,795

Question 11

Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?

Accepted Answer

A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24% 
A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24%

Question 12

Your sister turned 35 today, and she is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's expected to provide a return of 7.5% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year.

Accepted Answer

A)  $58,601 
B)  $61,686 
C)  $64,932 
D)  $68,179 
E)  $71,588 
A)  $58,601 
B)  $61,686 
C)  $64,932 
D)  $68,179 
E)  $71,588

Question 13

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?

Accepted Answer

A)  $22,598.63 
B)  $23,788.03 
C)  $25,040.03 
D)  $26,357.92 
E)  $27,675.82 
A)  $22,598.63 
B)  $23,788.03 
C)  $25,040.03 
D)  $26,357.92 
E)  $27,675.82

Question 14

Suppose you are buying your first condo for $145,000, and you will make a $15,000 down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?

Accepted Answer

A)  $741.57 
B)  $780.60 
C)  $821.69 
D)  $862.77 
E)  $905.91 
A)  $741.57 
B)  $780.60 
C)  $821.69 
D)  $862.77 
E)  $905.91

Question 15

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Accepted Answer

A)  A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. 
B)  The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
C)  The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
D)  The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD. 
E)  If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant. 
A)  A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. 
B)  The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
C)  The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
D)  The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD. 
E)  If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

Question 16

How much would $100, growing at 5% per year, be worth after 75 years?

Accepted Answer

A)  $3,689.11 
B)  $3,883.27 
C)  $4,077.43 
D)  $4,281.30 
E)  $4,495.37 
A)  $3,689.11 
B)  $3,883.27 
C)  $4,077.43 
D)  $4,281.30 
E)  $4,495.37

Question 17

All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.

Accepted Answer

A) True 
 B)False

Question 18

If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

Accepted Answer

A) True 
 B)False

Question 19

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 20

You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

Accepted Answer

A)  $15,260 
B)  $16,063 
C)  $16,908 
D)  $17,754 
E)  $18,642 
A)  $15,260 
B)  $16,063 
C)  $16,908 
D)  $17,754 
E)  $18,642

What is the present value of the following cash flow stream at a rate of 6.25%?

Which of the following statements is CORRECT?

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

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

You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

You want to quit your job and go back to school for a law degree 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?

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?

Suppose you are buying your first condo for $145,000, and you will make a $15,000 down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

How much would $100, growing at 5% per year, be worth after 75 years?

All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.

If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

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

Exam 5: Time Value of Money

What is the present value of the following cash flow stream at a rate of 6.25%?

Which of the following statements is CORRECT?

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

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

You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

You want to quit your job and go back to school for a law degree 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?

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

How much would $100, growing at 5% per year, be worth after 75 years?

All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.

If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

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