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 A

Question 2

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Accepted Answer

A)  The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. 
B)  The discount rate increases. 
C)  The riskiness of the investment's cash flows decreases. 
D)  The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. 
E)  The discount rate decreases. 
A)  The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. 
B)  The discount rate increases. 
C)  The riskiness of the investment's cash flows decreases. 
D)  The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. 
E)  The discount rate decreases. B

Question 3

What is the present value of the following cash flow stream at a rate of 8.0%?

Accepted Answer

A)  $7,917 
B)  $8,333 
C)  $8,772 
D)  $9,233 
E)  $9,695 
A)  $7,917 
B)  $8,333 
C)  $8,772 
D)  $9,233 
E)  $9,695 D

Question 4

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 it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. 
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 slower 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 it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. 
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 slower rate in the later years of the loan's life.

Question 5

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 6

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 7

Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)  $585.43 
B)  $614.70 
C)  $645.44 
D)  $677.71 
E)  $711.59 
A)  $585.43 
B)  $614.70 
C)  $645.44 
D)  $677.71 
E)  $711.59

Question 8

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

Accepted Answer

A)  15.27% 
B)  16.08% 
C)  16.88% 
D)  17.72% 
E)  18.61% 
A)  15.27% 
B)  16.08% 
C)  16.88% 
D)  17.72% 
E)  18.61%

Question 9

Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?

Accepted Answer

A)  $225,367 
B)  $237,229 
C)  $249,090 
D)  $261,545 
E)  $274,622 
A)  $225,367 
B)  $237,229 
C)  $249,090 
D)  $261,545 
E)  $274,622

Question 10

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 11

Suppose an Exxon Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

Accepted Answer

A)  $2,819.52 
B)  $2,967.92 
C)  $3,116.31 
D)  $3,272.13 
E)  $3,435.74 
A)  $2,819.52 
B)  $2,967.92 
C)  $3,116.31 
D)  $3,272.13 
E)  $3,435.74

Question 12

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 13

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

Accepted Answer

A)  8.46% 
B)  8.90% 
C)  9.37% 
D)  9.86% 
E)  10.38% 
A)  8.46% 
B)  8.90% 
C)  9.37% 
D)  9.86% 
E)  10.38%

Question 14

Your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for Year 1?

Accepted Answer

A)  $17,419.55 
B)  $17,593.75 
C)  $17,769.68 
D)  $17,947.38 
E)  $18,126.85 
A)  $17,419.55 
B)  $17,593.75 
C)  $17,769.68 
D)  $17,947.38 
E)  $18,126.85

Question 15

Five years ago, Weed Go Inc. earned $1.50 per share. 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 16

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

Accepted Answer

A) True 
 B)False

Question 17

Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve's 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a "trust fund baby," but he also wants to ensure that Steve is provided for in his old age.
Until now, the grandfather has been disappointed with Ed, hence has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed. He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?

Accepted Answer

A)  $3,726 
B)  $3,912 
C)  $4,107 
D)  $4,313 
E)  $4,528 
A)  $3,726 
B)  $3,912 
C)  $4,107 
D)  $4,313 
E)  $4,528

Question 18

Sue 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 19

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 20

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.

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

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

What is the present value of the following cash flow stream at a rate of 8.0%?

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

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?

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

Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?

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

Suppose an Exxon Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

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

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

Your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for Year 1?

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

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

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

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.

Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

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Exam 5: The Value of Money

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

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

What is the present value of the following cash flow stream at a rate of 8.0%?

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

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?

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

Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?

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

Suppose an Exxon Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

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

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

Your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for Year 1?

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

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

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

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.

Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Financial and Operating Leverage: Analysis and Calculation

Filters