Question 1

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 2

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

Accepted Answer

A) True 
 B)False

Question 3

Ellen now has $125.How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Accepted Answer

A)  $205.83 
B)  $216.67 
C)  $228.07 
D)  $240.08 
E)  $252.08 
A)  $205.83 
B)  $216.67 
C)  $228.07 
D)  $240.08 
E)  $252.08

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
B)  A time line is not meaningful unless all cash flows occur annually. 
C)  Time lines are useful for visualizing complex problems prior to doing actual calculations. 
D)  Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
E)  Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. 
A)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
B)  A time line is not meaningful unless all cash flows occur annually. 
C)  Time lines are useful for visualizing complex problems prior to doing actual calculations. 
D)  Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
E)  Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.

Question 6

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 7

Wildwoods, Inc.earned $1.50 per share five years ago.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS) over the 5-year period?

Accepted Answer

A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94% 
A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94%

Question 8

How much would $100, growing at 5% per year, be worth after 75 years?

Accepted Answer

A)  $3,689.11 
B)  $3,883.27 
C)  $4,077.43 
D)  $4,281.30 
E)  $4,495.37 
A)  $3,689.11 
B)  $3,883.27 
C)  $4,077.43 
D)  $4,281.30 
E)  $4,495.37

Question 9

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

A)  $16,806 
B)  $17,690 
C)  $18,621 
D)  $19,601 
E)  $20,633 
A)  $16,806 
B)  $17,690 
C)  $18,621 
D)  $19,601 
E)  $20,633

Question 10

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 to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
E)  Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 
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 to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
E)  Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

Question 11

Southwestern 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.Woodburn 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 Woodburn versus the rate charged by Southwestern?

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

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 13

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

A)  Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually.Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
B)  The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
C)  A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D)  A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
E)  If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. 
A)  Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually.Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
B)  The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
C)  A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D)  A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
E)  If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

Question 15

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 16

Suppose a State of New Mexico 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 17

A $250,000 loan is to be amortized over 8 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 8 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 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan. 
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
E)  The last payment would have a higher proportion of interest than the first payment. 
A)  The proportion of interest versus principal repayment would be the same for each of the 8 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 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan. 
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
E)  The last payment would have a higher proportion of interest than the first payment.

Question 18

Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly.An offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, simple interest, with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?

Accepted Answer

A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72% 
A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72%

Question 19

You want to buy new kitchen appliances 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

Question 20

Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

Accepted Answer

A)  73.67% 
B)  77.55% 
C)  81.63% 
D)  85.93% 
E)  90.45% 
A)  73.67% 
B)  77.55% 
C)  81.63% 
D)  85.93% 
E)  90.45%

Exam 4: Time Value of Money

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

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

Ellen now has $125.How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

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

Which of the following statements is CORRECT?

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

Wildwoods, Inc.earned $1.50 per share five years ago.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS) over the 5-year period?

How much would $100, growing at 5% per year, be worth after 75 years?

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Which of the following statements is CORRECT?

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?

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

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?

Suppose a State of New Mexico 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?

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments.Which of these statements is CORRECT?

You want to buy new kitchen appliances 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?

Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

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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