Question 1

With continuous compounding, the ____.

Accepted Answer

A)  effective rate is higher than the nominal rate 
B)  effective rate is higher than the logarithmic rate 
C)  base "e" is the effective rate 
D)  All of these are correct 
A)  effective rate is higher than the nominal rate 
B)  effective rate is higher than the logarithmic rate 
C)  base "e" is the effective rate 
D)  All of these are correct A

Question 2

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 8.25%?

Accepted Answer

A)  8.60% 
B)  7.93% 
C)  8.25% 
D)  7.70% 
A)  8.60% 
B)  7.93% 
C)  8.25% 
D)  7.70% B

Question 3

What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously?

Accepted Answer

A)  $21,240 
B)  $11,080 
C)  $16,421 
D)  None of these are correct 
A)  $21,240 
B)  $11,080 
C)  $16,421 
D)  None of these are correct B

Question 4

In the continuous compounding equation, "e" is the ____.

Accepted Answer

A)  natural log to the base 10 
B)  base number in natural logarithms 
C)  natural log to the base 1 
D)  None of these are correct 
A)  natural log to the base 10 
B)  base number in natural logarithms 
C)  natural log to the base 1 
D)  None of these are correct

Question 5

With continuous compounding, why is the effective rate higher than the nominal rate?

Accepted Answer

The effective rate is higher than the no

Question 6

What is the value of $10,000 invested for 5 years at 8% compounded continuously?

Accepted Answer

A)  $14,693 
B)  $14,928 
C)  $14,918 
D)  $13,064 
A)  $14,693 
B)  $14,928 
C)  $14,918 
D)  $13,064

Question 7

You have just won a lottery that promises to pay you $1,000,000 in 5 years. What is the present value of this lottery win at the continuously discounted rate of 10%?

Accepted Answer

A)  $621,000 
B)  $606,531 
C)  $648,720 
D)  $904,837 
A)  $621,000 
B)  $606,531 
C)  $648,720 
D)  $904,837

Question 8

What is the value of $10,000 invested for 1 year at 8% compounded continuously?

Accepted Answer

A)  $10,800 
B)  $10,833 
C)  $10,824 
D)  $11,268 
A)  $10,800 
B)  $10,833 
C)  $10,824 
D)  $11,268

Question 9

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 2.25%?

Accepted Answer

A)  2.23% 
B)  3.15% 
C)  0.95% 
D)  1.28% 
A)  2.23% 
B)  3.15% 
C)  0.95% 
D)  1.28%

Question 10

Paula invested $25 into a savings account when she was 6 years old. She is now 35. Her money grew at 2% compounded continuously. How much money does she have?

Accepted Answer

A)  $106.58 
B)  $85.19 
C)  $270.82 
D)  $44.65 
A)  $106.58 
B)  $85.19 
C)  $270.82 
D)  $44.65

Question 11

The nominal interest rate and the effective interest rate are equivalent when compounding occurs ____.

Accepted Answer

A)  once a year at the end of the year 
B)  every quarter 
C)  semiannually 
D)  monthly 
A)  once a year at the end of the year 
B)  every quarter 
C)  semiannually 
D)  monthly

Question 12

Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent.

Accepted Answer

A)  $6,886 
B)  $3,631 
C)  $4,616 
D)  None of these are correct 
A)  $6,886 
B)  $3,631 
C)  $4,616 
D)  None of these are correct

Question 13

What is the effective interest rate on 12% if interest is compounded continuously?

Accepted Answer

A)  15.11% 
B)  16.25% 
C)  14.11% 
D)  12.75% 
A)  15.11% 
B)  16.25% 
C)  14.11% 
D)  12.75%

Question 14

Moneybag Bank & Trust is offering $200,000 loans at 5% compounded continuously. Before you decide to borrow using that interest rate, what amount would need to be paid back if the loan is for 10 years?

Accepted Answer

A)  $329,744.00 
B)  $275,187.36 
C)  $301,150.15 
D)  $227,198.05 
A)  $329,744.00 
B)  $275,187.36 
C)  $301,150.15 
D)  $227,198.05

Question 15

Jack invested $25,000 into an account paying 6% compounded continuously. In five years how much money will he have?

Accepted Answer

A)  $92,190.45 
B)  $215,905.42 
C)  $65,871.15 
D)  $33,746.50 
A)  $92,190.45 
B)  $215,905.42 
C)  $65,871.15 
D)  $33,746.50

Question 16

First Texas National Bank is offering a one-year CD with a nominal rate of 9.5 percent. If compounding occurs continuously, what is the effective annual rate?

Accepted Answer

A)  9.97% 
B)  16.76% 
C)  9.66% 
D)  22.06% 
A)  9.97% 
B)  16.76% 
C)  9.66% 
D)  22.06%

Question 17

What is the future value of $20,000 invested for 20 years at a nominal interest rate of 9 percent compounded continuously?

Accepted Answer

A)  $112,088 
B)  $120,993 
C)  $108,894 
D)  $147,781 
A)  $112,088 
B)  $120,993 
C)  $108,894 
D)  $147,781

Question 18

Jane deposited $1,000 into a savings account paying 12% interest compounded continuously. After 45 years, how much money did she have in the account?

Accepted Answer

A)  $25, 759.09 
B)  $157,896.32 
C)  $221,405.61 
D)  $257,895.78 
A)  $25, 759.09 
B)  $157,896.32 
C)  $221,405.61 
D)  $257,895.78

Question 19

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 6.15%?

Accepted Answer

A)  5.97% 
B)  6.32% 
C)  4.11% 
D)  8.24% 
A)  5.97% 
B)  6.32% 
C)  4.11% 
D)  8.24%

Question 20

Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly. What is the effective rate the bank is charging you?

Accepted Answer

A)  12.68% 
B)  10.00% 
C)  10.47% 
D)  10.83% 
A)  12.68% 
B)  10.00% 
C)  10.47% 
D)  10.83%

Exam 6: Continuous Compounding and Discounting

With continuous compounding, the ____.

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 8.25%?

What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously?

In the continuous compounding equation, "e" is the ____.

With continuous compounding, why is the effective rate higher than the nominal rate?

What is the value of $10,000 invested for 5 years at 8% compounded continuously?

You have just won a lottery that promises to pay you $1,000,000 in 5 years. What is the present value of this lottery win at the continuously discounted rate of 10%?

What is the value of $10,000 invested for 1 year at 8% compounded continuously?

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 2.25%?

Paula invested $25 into a savings account when she was 6 years old. She is now 35. Her money grew at 2% compounded continuously. How much money does she have?

The nominal interest rate and the effective interest rate are equivalent when compounding occurs ____.

Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent.

What is the effective interest rate on 12% if interest is compounded continuously?

Moneybag Bank & Trust is offering $200,000 loans at 5% compounded continuously. Before you decide to borrow using that interest rate, what amount would need to be paid back if the loan is for 10 years?

Jack invested $25,000 into an account paying 6% compounded continuously. In five years how much money will he have?

First Texas National Bank is offering a one-year CD with a nominal rate of 9.5 percent. If compounding occurs continuously, what is the effective annual rate?

What is the future value of $20,000 invested for 20 years at a nominal interest rate of 9 percent compounded continuously?

Jane deposited $1,000 into a savings account paying 12% interest compounded continuously. After 45 years, how much money did she have in the account?

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 6.15%?

Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly. What is the effective rate the bank is charging you?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

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