Question 1

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 2

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 in situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. 
E)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
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 in situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. 
E)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

Question 3

Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. Merchants Bank offers to lend you the $50,000, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?

Accepted Answer

A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72% 
A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72%

Question 4

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 5

Last year Ellis Inc's earnings per share were $3.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Ellis' EPS to triple?

Accepted Answer

A)  9.29 
B)  10.33 
C)  11.47 
D)  12.75 
E)  14.02 
A)  9.29 
B)  10.33 
C)  11.47 
D)  12.75 
E)  14.02

Question 6

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 7

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 8

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 greater the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 9

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 10

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

A)  $1,781.53 
B)  $1,870.61 
C)  $1,964.14 
D)  $2,062.34 
E)  $2,165.46 
A)  $1,781.53 
B)  $1,870.61 
C)  $1,964.14 
D)  $2,062.34 
E)  $2,165.46

Question 11

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

A)  $16,806 
B)  $17,690 
C)  $18,621 
D)  $19,601 
E)  $20,633 
A)  $16,806 
B)  $17,690 
C)  $18,621 
D)  $19,601 
E)  $20,633

Question 12

Your Aunt Elsa has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. What is the maximum number of whole payments that can be withdrawn before the account is exhausted; i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)

Accepted Answer

A)  18 
B)  19 
C)  20 
D)  21 
E)  22 
A)  18 
B)  19 
C)  20 
D)  21 
E)  22

Question 13

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)  $438.03 
B)  $461.08 
C)  $485.35 
D)  $510.89 
E)  $537.78 
A)  $438.03 
B)  $461.08 
C)  $485.35 
D)  $510.89 
E)  $537.78

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. 
B)  If a loan has a nominal annual rate of 8%, then the effective rate can never be greater 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. 
A)  The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. 
B)  If a loan has a nominal annual rate of 8%, then the effective rate can never be greater 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.

Question 15

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 16

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 17

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A)  3.82% 
B)  4.25% 
C)  4.72% 
D)  5.24% 
E)  5.77% 
A)  3.82% 
B)  4.25% 
C)  4.72% 
D)  5.24% 
E)  5.77%

Question 18

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 19

How much would $100, growing at 5% per year, be worth after 75 years?

Accepted Answer

A)  $3,689.11 
B)  $3,883.27 
C)  $4,077.43 
D)  $4,281.30 
E)  $4,495.37 
A)  $3,689.11 
B)  $3,883.27 
C)  $4,077.43 
D)  $4,281.30 
E)  $4,495.37

Question 20

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%.

Exam 4: Time Value of Money

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

Which of the following statements is CORRECT?

Last year Ellis Inc's earnings per share were $3.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Ellis' EPS to triple?

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?

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

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 greater the percentage of the payment that will be a repayment of principal.

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Which of the following statements is CORRECT?

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?

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

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

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?

How much would $100, growing at 5% per year, be worth after 75 years?

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

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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