Question 1

Which of the following statements is CORRECT?

Accepted Answer

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

Question 2

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 3

Your bank offers a savings account that pays 3.5% interest, compounded annually.How much will $500 invested today be worth at the end of 25 years?

Accepted Answer

A)  $1,122.54 
B)  $1,181.62 
C)  $1,240.70 
D)  $1,302.74 
E)  $1,367.88 
A)  $1,122.54 
B)  $1,181.62 
C)  $1,240.70 
D)  $1,302.74 
E)  $1,367.88

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
B)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
C)  If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%. 
D)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
E)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
A)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
B)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
C)  If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%. 
D)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
E)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

Question 5

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Accepted Answer

A)  $1,200.33 
B)  $1,263.50 
C)  $1,330.00 
D)  $1,400.00 
E)  $1,470.00 
A)  $1,200.33 
B)  $1,263.50 
C)  $1,330.00 
D)  $1,400.00 
E)  $1,470.00

Question 6

A $150,000 loan is to be amortized over 6 years, with annual end-of-year payments.Which of these statements is CORRECT?

Accepted Answer

A)  The proportion of interest versus principal repayment would be the same for each of the 7 payments. 
B)  The annual payments would be larger if the interest rate were lower. 
C)  If the loan were amortized over 10 years rather than 6 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 6-year amortization plan. 
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower. 
E)  The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher. 
A)  The proportion of interest versus principal repayment would be the same for each of the 7 payments. 
B)  The annual payments would be larger if the interest rate were lower. 
C)  If the loan were amortized over 10 years rather than 6 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 6-year amortization plan. 
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower. 
E)  The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

Question 7

Ten years ago, Kronan Corporation earned $0.50 per share.Its earnings this year were $2.20.What was the growth rate in earnings per share (EPS) over the 10-year period?

Accepted Answer

A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49% 
A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49%

Question 8

Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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

Accepted Answer

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

Question 11

Your aunt wants to retire and has $375,000.She expects to live for another 25 years, and she also expects to earn 7.5% on her invested funds.How much could she 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 12

You have purchased a U.S.Treasury bond for $3,000.No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000.What interest rate will you earn on this bond?

Accepted Answer

A)  3.82% 
B)  4.25% 
C)  4.72% 
D)  5.24% 
E)  5.77% 
A)  3.82% 
B)  4.25% 
C)  4.72% 
D)  5.24% 
E)  5.77%

Question 13

After receiving a reward for information leading to the arrest of a notorious criminal, you are considering investing it in an annuity that pays $5,000 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Accepted Answer

A)  $50,753 
B)  $53,424 
C)  $56,236 
D)  $59,195 
E)  $62,311 
A)  $50,753 
B)  $53,424 
C)  $56,236 
D)  $59,195 
E)  $62,311

Question 14

Suppose Sally Smith plans to invest $1,000.She 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 more than twice the compounded value of Security A.(Ignore risk, and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 15

You plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

Accepted Answer

A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59 
A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59

Question 16

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 17

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Accepted Answer

A)  $16,576 
B)  $17,449 
C)  $18,367 
D)  $19,334 
E)  $20,352 
A)  $16,576 
B)  $17,449 
C)  $18,367 
D)  $19,334 
E)  $20,352

Question 18

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 19

Your cousin will sell you his coffee 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 20

Suppose you are buying your first home for $145,000, and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month.What will your monthly payments be?

Accepted Answer

A)  $741.57 
B)  $780.60 
C)  $821.69 
D)  $862.77 
E)  $905.91 
A)  $741.57 
B)  $780.60 
C)  $821.69 
D)  $862.77 
E)  $905.91

Exam 4: Time Value of Money

Which of the following statements is CORRECT?

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

Your bank offers a savings account that pays 3.5% interest, compounded annually.How much will $500 invested today be worth at the end of 25 years?

Which of the following statements is CORRECT?

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

A $150,000 loan is to be amortized over 6 years, with annual end-of-year payments.Which of these statements is CORRECT?

Ten years ago, Kronan Corporation earned $0.50 per share.Its earnings this year were $2.20.What was the growth rate in earnings per share (EPS) over the 10-year period?

Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

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

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

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

You have purchased a U.S.Treasury bond for $3,000.No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000.What interest rate will you earn on this bond?

You plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

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

Suppose you are buying your first home for $145,000, and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month.What will your monthly payments be?

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

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