Question 1

Of the following investments, which 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). D

Question 2

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  False

Question 3

American Express 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% B

Question 4

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 5

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 6

Suppose you earned a $275,000 bonus this year 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

How much would Roderick have after 6 years if he has $500 now and 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 8

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

Accepted Answer

A) True 
 B)False

Question 9

A salt mine you inherited 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 mine 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 10

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

Question 11

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 12

Your uncle has $300,000 invested at 7.5%, and he now wants to retire.He wants to withdraw $35,000 at the end of each year, beginning at the end of this year.He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account.What is the maximum number of $35,000 withdrawals that he can make and still have at least $25,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

Accepted Answer

A)  12 
B)  13 
C)  14 
D)  15 
E)  16 
A)  12 
B)  13 
C)  14 
D)  15 
E)  16

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

What is the present value of the following cash flow stream at a rate of 6.25%?

Accepted Answer

A)  $411.57 
B)  $433.23 
C)  $456.03 
D)  $480.03 
E)  $505.30 
A)  $411.57 
B)  $433.23 
C)  $456.03 
D)  $480.03 
E)  $505.30

Question 15

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 16

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Accepted Answer

A)  6.77% 
B)  7.13% 
C)  7.50% 
D)  7.88% 
E)  8.27% 
A)  6.77% 
B)  7.13% 
C)  7.50% 
D)  7.88% 
E)  8.27%

Question 17

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 18

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic rate of interest is 5% and the effective rate of interest is also 5%. 
B)  The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. 
C)  The periodic rate of interest is 5% and the effective rate of interest is greater than 5%. 
D)  The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. 
E)  The periodic rate of interest is 2.5% and the effective rate of interest is 5%. 
A)  The periodic rate of interest is 5% and the effective rate of interest is also 5%. 
B)  The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. 
C)  The periodic rate of interest is 5% and the effective rate of interest is greater than 5%. 
D)  The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. 
E)  The periodic rate of interest is 2.5% and the effective rate of interest is 5%.

Question 19

Your Green Investment Tips subscription is about to expire.You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33 
A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33

Question 20

A perpetuity pays $85 per year and costs $950.What is the rate of return?

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%

Exam 4: Time Value of Money

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

American Express 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%?

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.

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?

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

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

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

A salt mine you inherited 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 mine is 7.5%, how much should you ask for it if you decide to sell it?

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?

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.

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

What is the present value of the following cash flow stream at a rate of 6.25%?

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

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

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

A perpetuity pays $85 per year and costs $950.What is the rate of return?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

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

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

Filters

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24^th month, you will have $13,000 in your account.If the bank compounds interest monthly, what nominal annual interest rate will you be earning?