Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
B)  If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%. 
C)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
A)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
B)  If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%. 
C)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. B

Question 2

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 E

Question 3

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. D

Question 4

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

Accepted Answer

A)  $18,369 
B)  $19,287 
C)  $20,251 
D)  $21,264 
E)  $22,327 
A)  $18,369 
B)  $19,287 
C)  $20,251 
D)  $21,264 
E)  $22,327

Question 5

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). 
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).

Question 6

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

Question 7

Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay?

Accepted Answer

A)  3.72% 
B)  4.13% 
C)  4.59% 
D)  5.05% 
E)  5.56% 
A)  3.72% 
B)  4.13% 
C)  4.59% 
D)  5.05% 
E)  5.56%

Question 8

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Accepted Answer

A)  Bank 1; 6.1% with annual compounding. 
B)  Bank 2; 6.0% with monthly compounding. 
C)  Bank 3; 6.0% with annual compounding. 
D)  Bank 4; 6.0% with quarterly compounding. 
E)  Bank 5; 6.0% with daily (365-day) compounding. 
A)  Bank 1; 6.1% with annual compounding. 
B)  Bank 2; 6.0% with monthly compounding. 
C)  Bank 3; 6.0% with annual compounding. 
D)  Bank 4; 6.0% with quarterly compounding. 
E)  Bank 5; 6.0% with daily (365-day) compounding.

Question 9

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Accepted Answer

A)  $3,089 
B)  $3,251 
C)  $3,422 
D)  $3,602 
E)  $3,782 
A)  $3,089 
B)  $3,251 
C)  $3,422 
D)  $3,602 
E)  $3,782

Question 10

Which of the following investments would have the lowest present value? 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 end 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 beginning of every year for the next 10 years (a total of 10 payments). 
A)  Investment A pays $250 at the end 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 beginning of every year for the next 10 years (a total of 10 payments).

Question 11

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 12

On January 1, 2009, 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 2009?

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 13

Jose now has $500. it invested at 5.5% How much would he have after 6 years if he leaves with annual compounding?

Accepted Answer

A)  $591.09 
B)  $622.20 
C)  $654.95 
D)  $689.42 
E)  $723.89 
A)  $591.09 
B)  $622.20 
C)  $654.95 
D)  $689.42 
E)  $723.89

Question 14

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)  $651.60 
B)  $684.18 
C)  $718.39 
D)  $754.31 
E)  $792.02 
A)  $651.60 
B)  $684.18 
C)  $718.39 
D)  $754.31 
E)  $792.02

Question 15

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

Accepted Answer

A)  $28,532 
B)  $29,959 
C)  $31,457 
D)  $33,030 
E)  $34,681 
A)  $28,532 
B)  $29,959 
C)  $31,457 
D)  $33,030 
E)  $34,681

Question 16

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 17

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%

Question 18

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)  $969 
B)  $1,020 
C)  $1,074 
D)  $1,131 
E)  $1,187 
A)  $969 
B)  $1,020 
C)  $1,074 
D)  $1,131 
E)  $1,187

Question 19

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Accepted Answer

A)  7.62% 
B)  8.00% 
C)  8.40% 
D)  8.82% 
E)  9.26% 
A)  7.62% 
B)  8.00% 
C)  8.40% 
D)  8.82% 
E)  9.26%

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 4: Time Value of Money

Which of the following statements is CORRECT?

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?

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

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

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.

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

Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay?

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

On January 1, 2009, 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 2009?

Jose now has $500. it invested at 5.5% How much would he have after 6 years if he leaves with annual compounding?

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

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

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?

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.

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

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

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

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

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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