Question 1

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 2

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 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

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 5

How much would $1, growing at 3.5% per year, be worth after 75 years?

Accepted Answer

A)  $12.54 
B)  $13.20 
C)  $13.86 
D)  $14.55 
E)  $15.28 
A)  $12.54 
B)  $13.20 
C)  $13.86 
D)  $14.55 
E)  $15.28

Question 6

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)  $651.60 
B)  $684.18 
C)  $718.39 
D)  $754.31 
E)  $792.02 
A)  $651.60 
B)  $684.18 
C)  $718.39 
D)  $754.31 
E)  $792.02

Question 7

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.

Question 8

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 9

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 10

John and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 at 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 11

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 12

If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.

Accepted Answer

A) True 
 B)False

Question 16

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

Question 17

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

Question 18

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)  $438.03 
B)  $461.08 
C)  $485.35 
D)  $510.89 
E)  $537.78 
A)  $438.03 
B)  $461.08 
C)  $485.35 
D)  $510.89 
E)  $537.78

Question 19

You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?

Accepted Answer

A)  5.14 
B)  5.71 
C)  6.35 
D)  7.05 
E)  7.84 
A)  5.14 
B)  5.71 
C)  6.35 
D)  7.05 
E)  7.84

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

Exam 4: Time Value of Money

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

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?

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

How much would $1, growing at 3.5% per year, be worth after 75 years?

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

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

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?

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.

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%?

If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

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

The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.

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

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

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?

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?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements Part 2 Fixed Income Securities

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

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