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

Question 2

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 3

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 4

Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate.

Accepted Answer

A) True 
 B)False

Question 5

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 6

Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?

Accepted Answer

A)  $ 825,835 
B)  $ 869,300 
C)  $ 915,052 
D)  $ 963,213 
E)  $1,011,374 
A)  $ 825,835 
B)  $ 869,300 
C)  $ 915,052 
D)  $ 963,213 
E)  $1,011,374

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

Question 8

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 9

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?

Accepted Answer

A)  $15,234.08 
B)  $16,035.87 
C)  $16,837.67 
D)  $17,679.55 
E)  $18,563.53 
A)  $15,234.08 
B)  $16,035.87 
C)  $16,837.67 
D)  $17,679.55 
E)  $18,563.53

Question 10

Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

Accepted Answer

A)  $591.09 
B)  $622.20 
C)  $654.95 
D)  $689.42 
E)  $723.89 
A)  $591.09 
B)  $622.20 
C)  $654.95 
D)  $689.42 
E)  $723.89

Question 11

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 12

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

Accepted Answer

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

Question 13

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Accepted Answer

A)  $3,089 
B)  $3,251 
C)  $3,422 
D)  $3,602 
E)  $3,782 
A)  $3,089 
B)  $3,251 
C)  $3,422 
D)  $3,602 
E)  $3,782

Question 14

John and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 (at t = 0)So far, John and Daphne have accumulated $15,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Ellen's anticipated college costs?

Accepted Answer

A)  $1,965.21 
B)  $2,068.64 
C)  $2,177.51 
D)  $2,292.12 
E)  $2,412.76 
A)  $1,965.21 
B)  $2,068.64 
C)  $2,177.51 
D)  $2,292.12 
E)  $2,412.76

Question 15

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 16

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 can 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 cannot 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 can 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 cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

Question 19

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 20

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 decline over time. 
B)  A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
C)  The total dollar amount of principal being paid off each month gets smaller 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 decline over time. 
B)  A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
C)  The total dollar amount of principal being paid off each month gets smaller 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.

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

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

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?

Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate.

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?

Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?

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

Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

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

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

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?

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.

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?

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?

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

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters

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?

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

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?

Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate.

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?

Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?

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

Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

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

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

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?

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.

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?

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?

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

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters