Question 1

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Accepted Answer

A)  $4,750 
B)  $5,000 
C)  $5,250 
D)  $5,513 
E)  $5,788 
A)  $4,750 
B)  $5,000 
C)  $5,250 
D)  $5,513 
E)  $5,788

Question 2

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 3

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 4

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

Accepted Answer

A)  $28,532 
B)  $29,959 
C)  $31,457 
D)  $33,030 
E)  $34,681 
A)  $28,532 
B)  $29,959 
C)  $31,457 
D)  $33,030 
E)  $34,681

Question 5

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)  The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. 
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 DUE exceeds the present value of ORD, and the future value of DUE also 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)  The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. 
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 DUE exceeds the present value of ORD, and the future value of DUE also 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 6

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

A)  The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
B)  A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
C)  A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
D)  If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. 
E)  Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
A)  The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
B)  A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
C)  A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
D)  If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. 
E)  Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

Question 7

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Accepted Answer

A)  $77.19 
B)  $81.25 
C)  $85.31 
D)  $89.58 
E)  $94.06 
A)  $77.19 
B)  $81.25 
C)  $85.31 
D)  $89.58 
E)  $94.06

Question 8

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 9

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 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

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 12

You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

Accepted Answer

A)  $20,993 
B)  $22,098 
C)  $23,261 
D)  $24,424 
E)  $25,645 
A)  $20,993 
B)  $22,098 
C)  $23,261 
D)  $24,424 
E)  $25,645

Question 13

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 14

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 15

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 16

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

A)  $3,754.27 
B)  $3,941.99 
C)  $4,139.09 
D)  $4,346.04 
E)  $4,563.34 
A)  $3,754.27 
B)  $3,941.99 
C)  $4,139.09 
D)  $4,346.04 
E)  $4,563.34

Question 17

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 18

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

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 19

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 20

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 useful for visualizing complex problems prior to doing actual calculations. 
C)  Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. 
E)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
A)  A time line is not meaningful unless all cash flows occur annually. 
B)  Time lines are useful for visualizing complex problems prior to doing actual calculations. 
C)  Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. 
E)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

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

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

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end 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?

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

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

Which of the following statements is CORRECT?

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?

You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from 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?

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.

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

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.

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

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?

Which of the following statements is CORRECT?

Overview

Financial Markets

Financial Statements

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Interest Rates

Bonds

Risk and Return

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Cost of Capital

Capital Budgeting

Cash Flow and Risk

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Stock Equilibrium and Project Evaluation

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Exam 5: Time Value of Money

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

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

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

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end 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?

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

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

Which of the following statements is CORRECT?

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?

You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from 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?

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.

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

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.

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

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?

Which of the following statements is CORRECT?

Overview

Financial Markets

Financial Statements

Statement Analysis

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Capital Structure

Dividends

Working Capital

Forecasting

Multinational

Stock Equilibrium and Project Evaluation

Filters