Question 1

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A) 	Investment A pays $250 at the beginning of every year for the next
10 years (a total of 10 payments). 
B) 	Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C) 	Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D) 	Investment D pays $2,500 at the end of 10 years (just one payment). 
E) 	Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments). 
A) 	Investment A pays $250 at the beginning of every year for the next
10 years (a total of 10 payments). 
B) 	Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C) 	Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D) 	Investment D pays $2,500 at the end of 10 years (just one payment). 
E) 	Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).

Question 3

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 4

A $150,000 loan is to be amortized over 7 years, with annual end-of- year payments. Which of these statements is CORRECT?

Accepted Answer

A)  The annual payments would be larger if the interest rate were lower. 
B)  If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. 
C)  The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower. 
D)  The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher. 
E)  The proportion of interest versus principal repayment would be the same for each of the 7 payments. 
A)  The annual payments would be larger if the interest rate were lower. 
B)  If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. 
C)  The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower. 
D)  The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher. 
E)  The proportion of interest versus principal repayment would be the same for each of the 7 payments.

Question 5

Pasco Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pasco have to pay in a 30-day month?

Accepted Answer

A)  $120.83 
B)  $126.88 
C)  $133.22 
D)  $139.88 
E)  $146.87 
A)  $120.83 
B)  $126.88 
C)  $133.22 
D)  $139.88 
E)  $146.87

Question 6

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)  $28,843.38 
B)  $30,361.46 
C)  $31,959.43 
D)  $33,641.50 
E)  $35,323.58 
A)  $28,843.38 
B)  $30,361.46 
C)  $31,959.43 
D)  $33,641.50 
E)  $35,323.58

Question 7

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Accepted Answer

A) True 
 B)False

Question 8

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Accepted Answer

A)  8.24% 
B)  8.45% 
C)  8.66% 
D)  8.88% 
E)  9.10% 
A)  8.24% 
B)  8.45% 
C)  8.66% 
D)  8.88% 
E)  9.10%

Question 9

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 10

Your child's orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?

Accepted Answer

A)  12.31% 
B)  12.96% 
C)  13.64% 
D)  14.36% 
E)  15.08% 
A)  12.31% 
B)  12.96% 
C)  13.64% 
D)  14.36% 
E)  15.08%

Question 11

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

Accepted Answer

A)  $3,704.02 
B)  $3,889.23 
C)  $4,083.69 
D)  $4,287.87 
E)  $4,502.26 
A)  $3,704.02 
B)  $3,889.23 
C)  $4,083.69 
D)  $4,287.87 
E)  $4,502.26

Question 12

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Accepted Answer

A)  $1,200.33 
B)  $1,263.50 
C)  $1,330.00 
D)  $1,400.00 
E)  $1,470.00 
A)  $1,200.33 
B)  $1,263.50 
C)  $1,330.00 
D)  $1,400.00 
E)  $1,470.00

Question 13

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

Accepted Answer

A)  The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
B)  A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
C)  A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
D)  If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. 
E)  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. 
A)  The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
B)  A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
C)  A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
D)  If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. 
E)  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.

Question 14

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.

Question 15

Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 16

Wendy has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

Accepted Answer

A)  23.99 
B)  25.26 
C)  26.58 
D)  27.98 
E)  29.46 
A)  23.99 
B)  25.26 
C)  26.58 
D)  27.98 
E)  29.46

Question 17

Your grandmother just died and left you $100,000 in a trust fund that pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

Accepted Answer

A)  $24,736 
B)  $26,038 
C)  $27,409 
D)  $28,779 
E)  $30,218 
A)  $24,736 
B)  $26,038 
C)  $27,409 
D)  $28,779 
E)  $30,218

Question 18

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Accepted Answer

A)  The monthly payments will increase over time. 
B)  A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment. 
C)  The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. 
D)  The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. 
E)  Exactly 10% of the first monthly payment represents interest. 
A)  The monthly payments will increase over time. 
B)  A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment. 
C)  The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. 
D)  The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. 
E)  Exactly 10% of the first monthly payment represents interest.

Question 19

At a rate of 6.5%, what is the future value of the following cash flow stream?

Accepted Answer

A)  $526.01 
B)  $553.69 
C)  $582.83 
D)  $613.51 
E)  $645.80 
A)  $526.01 
B)  $553.69 
C)  $582.83 
D)  $613.51 
E)  $645.80

Question 20

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?

Accepted Answer

A)  18.58% 
B)  19.56% 
C)  20.54% 
D)  21.57% 
E)  22.65% 
A)  18.58% 
B)  19.56% 
C)  20.54% 
D)  21.57% 
E)  22.65%

Exam 4: Time Value of Money

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

A $150,000 loan is to be amortized over 7 years, with annual end-of- year payments. Which of these statements is CORRECT?

Pasco Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pasco have to pay in a 30-day month?

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

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.

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

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

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?

Wendy has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

At a rate of 6.5%, what is the future value of the following cash flow stream?

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?

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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