Question 1

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 2

Your grandmother just died and left you $100,000 in a trust fund that 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 3

Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?

Accepted Answer

A)  15.54 
B)  16.36 
C)  17.22 
D)  18.08 
E)  18.99 
A)  15.54 
B)  16.36 
C)  17.22 
D)  18.08 
E)  18.99

Question 4

Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

Accepted Answer

A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94% 
A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94%

Question 5

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Accepted Answer

A)  Bank 1; 6.1% with annual compounding. 
B)  Bank 2; 6.0% with monthly compounding. 
C)  Bank 3; 6.0% with annual compounding. 
D)  Bank 4; 6.0% with quarterly compounding. 
E)  Bank 5; 6.0% with daily (365-day) compounding. 
A)  Bank 1; 6.1% with annual compounding. 
B)  Bank 2; 6.0% with monthly compounding. 
C)  Bank 3; 6.0% with annual compounding. 
D)  Bank 4; 6.0% with quarterly compounding. 
E)  Bank 5; 6.0% with daily (365-day) compounding.

Question 6

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

Accepted Answer

A)  The annual payments would be larger if the interest rate were lower. 
B)  If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. 
C)  The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
D)  The last payment would have a higher proportion of interest than the first payment. 
E)  The proportion of interest versus principal repayment would be the same for each of the 7 payments. 
A)  The annual payments would be larger if the interest rate were lower. 
B)  If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. 
C)  The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
D)  The last payment would have a higher proportion of interest than the first payment. 
E)  The proportion of interest versus principal repayment would be the same for each of the 7 payments.

Question 7

You deposit $500 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)  $1,122.54 
B)  $1,181.62 
C)  $1,240.70 
D)  $1,302.74 
E)  $1,367.88 
A)  $1,122.54 
B)  $1,181.62 
C)  $1,240.70 
D)  $1,302.74 
E)  $1,367.88

Question 8

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

Accepted Answer

A) True 
 B)False

Question 9

Your uncle will sell you his bicycle shop for $250,000, with "seller financing," at a 6.0% nominal annual rate. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years, and then make an additional final (balloon) payment of $50,000 at the end of the last month. What would your equal monthly payments be?

Accepted Answer

A)  $4,029.37 
B)  $4,241.44 
C)  $4,464.67 
D)  $4,699.66 
E)  $4,947.01 
A)  $4,029.37 
B)  $4,241.44 
C)  $4,464.67 
D)  $4,699.66 
E)  $4,947.01

Question 10

You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Accepted Answer

A)  $5,493.71 
B)  $5,782.85 
C)  $6,087.21 
D)  $6,407.59 
E)  $6,744.83 
A)  $5,493.71 
B)  $5,782.85 
C)  $6,087.21 
D)  $6,407.59 
E)  $6,744.83

Question 11

At a rate of 6.5%, what is the future value of the following cash flow stream?

Accepted Answer

A)  $526.01 
B)  $553.69 
C)  $582.83 
D)  $613.51 
E)  $645.80 
A)  $526.01 
B)  $553.69 
C)  $582.83 
D)  $613.51 
E)  $645.80

Question 12

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?

Accepted Answer

A)  73.67% 
B)  77.55% 
C)  81.63% 
D)  85.93% 
E)  90.45% 
A)  73.67% 
B)  77.55% 
C)  81.63% 
D)  85.93% 
E)  90.45%

Question 13

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much would you still owe at the end of the first year, after you have made the first payment?

Accepted Answer

A)  $10,155.68 
B)  $10,690.19 
C)  $11,252.83 
D)  $11,845.09 
E)  $12,468.51 
A)  $10,155.68 
B)  $10,690.19 
C)  $11,252.83 
D)  $11,845.09 
E)  $12,468.51

Question 14

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

Accepted Answer

A)  4.93% 
B)  5.19% 
C)  5.46% 
D)  5.75% 
E)  6.05% 
A)  4.93% 
B)  5.19% 
C)  5.46% 
D)  5.75% 
E)  6.05%

Question 15

You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Accepted Answer

A)  $20,701 
B)  $21,791 
C)  $22,938 
D)  $24,085 
E)  $25,289 
A)  $20,701 
B)  $21,791 
C)  $22,938 
D)  $24,085 
E)  $25,289

Question 16

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 PV of the negative CFs. This is, essentially, a trial-and-error procedure that is 
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 cannot 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 PV of the negative CFs. This is, essentially, a trial-and-error procedure that is 
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 cannot solve for I.

Question 17

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Accepted Answer

A)  The monthly payments will increase over time. 
B)  A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment. 
C)  The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. 
D)  The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. 
E)  Exactly 10% of the first monthly payment represents interest. 
A)  The monthly payments will increase over time. 
B)  A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment. 
C)  The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. 
D)  The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. 
E)  Exactly 10% of the first monthly payment represents interest.

Question 18

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Accepted Answer

A)  The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. 
B)  The discount rate increases. 
C)  The riskiness of the investment's cash flows decreases. 
D)  The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. 
E)  The discount rate decreases. 
A)  The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. 
B)  The discount rate increases. 
C)  The riskiness of the investment's cash flows decreases. 
D)  The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. 
E)  The discount rate decreases.

Question 19

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic rate of interest is 1.5% and the effective rate of interest is 3%. 
B)  The periodic rate of interest is 6% and the effective rate of interest is greater than 6%. 
C)  The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. 
D)  The periodic rate of interest is 3% and the effective rate of interest is 6%. 
E)  The periodic rate of interest is 6% and the effective rate of interest is also 6%. 
A)  The periodic rate of interest is 1.5% and the effective rate of interest is 3%. 
B)  The periodic rate of interest is 6% and the effective rate of interest is greater than 6%. 
C)  The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. 
D)  The periodic rate of interest is 3% and the effective rate of interest is 6%. 
E)  The periodic rate of interest is 6% and the effective rate of interest is also 6%.

Question 20

Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.

Accepted Answer

A) True 
 B)False

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

Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

You deposit $500 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?

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

At a rate of 6.5%, what is the future value of the following cash flow stream?

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much would you still owe at the end of the first year, after you have made the first payment?

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Which of the following statements is CORRECT?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.

Overview

Financial Markets

Financial Statements

Statement Analysis

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

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Exam 5: Time Value of Money

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

Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

You deposit $500 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?

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

At a rate of 6.5%, what is the future value of the following cash flow stream?

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much would you still owe at the end of the first year, after you have made the first payment?

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Which of the following statements is CORRECT?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.

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