Question 1

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 2

You have a chance to buy an annuity that pays $550 at the beginning 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)  $1,412.84 
B)  $1,487.20 
C)  $1,565.48 
D)  $1,643.75 
E)  $1,725.94 
A)  $1,412.84 
B)  $1,487.20 
C)  $1,565.48 
D)  $1,643.75 
E)  $1,725.94

Question 3

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 4

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 5

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Accepted Answer

A)  The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. 
B)  Because the outstanding balance declines over time, the monthly payments will also decline over time. 
C)  Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. 
D)  The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. 
E)  The outstanding balance declines at a faster rate in the later years of the loan's life. 
A)  The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. 
B)  Because the outstanding balance declines over time, the monthly payments will also decline over time. 
C)  Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. 
D)  The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. 
E)  The outstanding balance declines at a faster rate in the later years of the loan's life.

Question 6

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 7

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 8

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. By how much would you reduce the amount you owe in the first year?

Accepted Answer

A)  $2,404.91 
B)  $2,531.49 
C)  $2,658.06 
D)  $2,790.96 
E)  $2,930.51 
A)  $2,404.91 
B)  $2,531.49 
C)  $2,658.06 
D)  $2,790.96 
E)  $2,930.51

Question 9

S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic interest rate is greater than 3%. 
B)  The periodic rate is less than 3%. 
C)  The present value would be greater if the lump sum were discounted back for more periods. 
D)  The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. 
E)  The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity. 
A)  The periodic interest rate is greater than 3%. 
B)  The periodic rate is less than 3%. 
C)  The present value would be greater if the lump sum were discounted back for more periods. 
D)  The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. 
E)  The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
B)  If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%. 
C)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
A)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
B)  If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%. 
C)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

Question 11

Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?

Accepted Answer

A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24% 
A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24%

Question 12

Chuck has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Accepted Answer

A)  14.39 
B)  15.15 
C)  15.95 
D)  16.79 
E)  17.67 
A)  14.39 
B)  15.15 
C)  15.95 
D)  16.79 
E)  17.67

Question 13

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 14

Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 15

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 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 greater the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Accepted Answer

A)  $11,262.88 
B)  $11,826.02 
C)  $12,417.32 
D)  $13,038.19 
E)  $13,690.10 
A)  $11,262.88 
B)  $11,826.02 
C)  $12,417.32 
D)  $13,038.19 
E)  $13,690.10

Question 20

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)  $7,531 
B)  $7,927 
C)  $8,323 
D)  $8,740 
E)  $9,177 
A)  $7,531 
B)  $7,927 
C)  $8,323 
D)  $8,740 
E)  $9,177

Exam 4: Time Value of Money

Which of the following statements is CORRECT?

You have a chance to buy an annuity that pays $550 at the beginning 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?

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?

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

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?

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 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. By how much would you reduce the amount you owe in the first year?

S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Chuck has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

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?

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 greater the percentage of the payment that will be a repayment of principal.

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.

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

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

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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