Question 1

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 2

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 3

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?

Accepted Answer

A)  $15,234.08 
B)  $16,035.88 
C)  $16,837.67 
D)  $17,679.55 
E)  $18,563.53 
A)  $15,234.08 
B)  $16,035.88 
C)  $16,837.67 
D)  $17,679.55 
E)  $18,563.53

Question 4

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 5

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  Portfolio P has a standard deviation of 25% and a beta of 1.0. 
B)  Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium. 
C)  Portfolio P has more market risk than Stock A but less market risk than B. 
D)  Stock A should have a higher expected return than Stock B as viewed by the marginal investor. 
A)  Portfolio P has a standard deviation of 25% and a beta of 1.0. 
B)  Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium. 
C)  Portfolio P has more market risk than Stock A but less market risk than B. 
D)  Stock A should have a higher expected return than Stock B as viewed by the marginal investor.

Question 7

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 8

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of
Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

Accepted Answer

A)  4.93% 
B)  5.19% 
C)  5.46% 
D)  5.75% 
E)  6.05% 
A)  4.93% 
B)  5.19% 
C)  5.46% 
D)  5.75% 
E)  6.05%

Question 9

Suppose you are buying your first condo for $145,000, and you will make a $15,000 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

Question 10

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 increase 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 10 years rather than 5 years, hence that each payment is for $10,000 rather than for
$20,000. 
B) 	The discount rate decreases. 
C) 	The riskiness of the investment’s cash flows increases. 
D) 	The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. 
E) 	The discount rate increases. 
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 10 years rather than 5 years, hence that each payment is for $10,000 rather than for
$20,000. 
B) 	The discount rate decreases. 
C) 	The riskiness of the investment’s cash flows increases. 
D) 	The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. 
E) 	The discount rate increases.

Question 14

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?

Accepted Answer

A)  $22,598.63 
B)  $23,788.03 
C)  $25,040.03 
D)  $26,357.92 
E)  $27,675.82 
A)  $22,598.63 
B)  $23,788.03 
C)  $25,040.03 
D)  $26,357.92 
E)  $27,675.82

Question 15

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 16

Your uncle will sell you his bicycle 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 17

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

Accepted Answer

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

Question 18

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Accepted Answer

A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96 
A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96

Question 19

Your bank account pays an 8% 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 2% and the effective rate of interest is 4%. 
B)  The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. 
C)  The periodic rate of interest is 4% and the effective rate of interest is less than 8%. 
D)  The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. 
E)  The periodic rate of interest is 8% and the effective rate of interest is also 8%. 
A)  The periodic rate of interest is 2% and the effective rate of interest is 4%. 
B)  The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. 
C)  The periodic rate of interest is 4% and the effective rate of interest is less than 8%. 
D)  The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. 
E)  The periodic rate of interest is 8% and the effective rate of interest is also 8%.

Question 20

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

Exam 4: Time Value of Money

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

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

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Which of the following statements is CORRECT?

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.

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

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

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 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 increase the calculated value of the investment?

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.

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

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

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?

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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