Question 1

Your bank account pays a 6% 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 1.5% and the effective rate of interest is 3%. 
B)  The periodic rate of interest is 6% and the effective rate of interest is greater than 6%. 
C)  The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. 
D)  The periodic rate of interest is 3% and the effective rate of interest is 6%. 
E)  The periodic rate of interest is 6% and the effective rate of interest is also 6%. 
A)  The periodic rate of interest is 1.5% and the effective rate of interest is 3%. 
B)  The periodic rate of interest is 6% and the effective rate of interest is greater than 6%. 
C)  The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. 
D)  The periodic rate of interest is 3% and the effective rate of interest is 6%. 
E)  The periodic rate of interest is 6% and the effective rate of interest is also 6%. C

Question 2

Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?

Accepted Answer

A)  $825,835 
B)  $869,300 
C)  $915,052 
D)  $963,213 
E)  $1,011,374 
A)  $825,835 
B)  $869,300 
C)  $915,052 
D)  $963,213 
E)  $1,011,374 D

Question 3

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A)  7.12% 
B)  7.49% 
C)  7.87% 
D)  8.26% 
E)  8.67% 
A)  7.12% 
B)  7.49% 
C)  7.87% 
D)  8.26% 
E)  8.67% B

Question 4

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 5

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

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%

Question 6

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 7

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly.	If you invest
$5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000?	Round fractional months up.

Accepted Answer

A) 	23 
B) 	27 
C) 	32 
D) 	38 
E) 	44 
A) 	23 
B) 	27 
C) 	32 
D) 	38 
E) 	44

Question 8

You borrowed $50,000 which you must repay in 10 years. You plan to make an initial deposit today, then make 9 more deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate. You expect to earn 5% on your funds, and you expect a 3% inflation rate. To the nearest dollar, how large must your initial deposit be to enable you to reach your $50,000 target?

Accepted Answer

A)  $3,008 
B)  $3,342 
C)  $3,676 
D)  $4,044 
E)  $4,448 
A)  $3,008 
B)  $3,342 
C)  $3,676 
D)  $4,044 
E)  $4,448

Question 9

You want to buy a new ski boat 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 10

Your subscription to Investing Wisely Weekly 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 11

You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?

Accepted Answer

A)  5.14 
B)  5.71 
C)  6.35 
D)  7.05 
E)  7.84 
A)  5.14 
B)  5.71 
C)  6.35 
D)  7.05 
E)  7.84

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Accepted Answer

A) True 
 B)False

Question 14

Riverside 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. Midwest 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 Midwest versus the rate charged by Riverside?

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 15

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 16

A "growing annuity" is any cash flow stream that grows over time.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Chuck has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Accepted Answer

A)  14.39 
B)  15.15 
C)  15.95 
D)  16.79 
E)  17.67 
A)  14.39 
B)  15.15 
C)  15.95 
D)  16.79 
E)  17.67

Question 19

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?

Accepted Answer

A)  $5,178.09 
B)  $5,436.99 
C)  $5,708.84 
D)  $5,994.28 
E)  $6,294.00 
A)  $5,178.09 
B)  $5,436.99 
C)  $5,708.84 
D)  $5,994.28 
E)  $6,294.00

Question 20

You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?

Accepted Answer

A)  12.37 
B)  13.74 
C)  15.27 
D)  16.97 
E)  18.85 
A)  12.37 
B)  13.74 
C)  15.27 
D)  16.97 
E)  18.85

Exam 4: Time Value of Money

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

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.

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

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.

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

You want to buy a new ski boat 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?

You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?

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

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

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

A "growing annuity" is any cash flow stream that grows over time.

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

Chuck has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?

You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?

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

Risks and Rates of Return

Stocks and Their Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management, and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

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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