Question 1

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 2

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 3

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Accepted Answer

A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96 
A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96

Question 4

A time line is meaningful even if all cash flows do not occur annually.

Accepted Answer

A) True 
 B)False

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

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 easy with a computer or financial calculator but quite difficult otherwise. 
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 easy with a computer or financial calculator but quite difficult otherwise. 
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 7

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)  Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). 
B)  Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C)  Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D)  Investment D pays $2,500 at the end of 10 years (just one payment). 
E)  Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). 
A)  Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). 
B)  Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C)  Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D)  Investment D pays $2,500 at the end of 10 years (just one payment). 
E)  Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Question 8

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 9

Starting to invest early for retirement reduces the benefits of compound interest.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 12

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 13

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 14

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 cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can be constructed for annuities where the payments occur at either the beginning or the end 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 not 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 can be constructed for annuities where the payments occur at either the beginning or the end 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.

Question 15

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

A)  $1,781.53 
B)  $1,870.61 
C)  $1,964.14 
D)  $2,062.34 
E)  $2,165.46 
A)  $1,781.53 
B)  $1,870.61 
C)  $1,964.14 
D)  $2,062.34 
E)  $2,165.46

Question 16

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 17

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 18

Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?

Accepted Answer

A)  $574,924 
B)  $605,183 
C)  $635,442 
D)  $667,214 
E)  $700,575 
A)  $574,924 
B)  $605,183 
C)  $635,442 
D)  $667,214 
E)  $700,575

Question 19

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

Accepted Answer

A)  $28,243.21 
B)  $29,729.70 
C)  $31,294.42 
D)  $32,859.14 
E)  $34,502.10 
A)  $28,243.21 
B)  $29,729.70 
C)  $31,294.42 
D)  $32,859.14 
E)  $34,502.10

Question 20

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)  $ 969 
B)  $1,020 
C)  $1,074 
D)  $1,131 
E)  $1,187 
A)  $ 969 
B)  $1,020 
C)  $1,074 
D)  $1,131 
E)  $1,187

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%?

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?

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

A time line is meaningful even if all cash flows do not occur annually.

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.

Which of the following statements is CORRECT?

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

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?

Starting to invest early for retirement reduces the benefits of compound interest.

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.

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

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?

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?

Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?

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

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

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

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%?

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?

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

A time line is meaningful even if all cash flows do not occur annually.

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.

Which of the following statements is CORRECT?

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

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?

Starting to invest early for retirement reduces the benefits of compound interest.

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.

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

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?

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?

Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?

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

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

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