Question 1

A time line is not meaningful unless all cash flows occur annually.

Accepted Answer

A) True 
 B)False

Question 2

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 decline over time. 
B)  A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
C)  The total dollar amount of principal being paid off each month gets smaller 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 decline over time. 
B)  A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
C)  The total dollar amount of principal being paid off each month gets smaller 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 3

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 can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
E)  Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 
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 can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
E)  Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

Question 4

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

Accepted Answer

A)  8.46% 
B)  8.90% 
C)  9.37% 
D)  9.86% 
E)  10.38% 
A)  8.46% 
B)  8.90% 
C)  9.37% 
D)  9.86% 
E)  10.38%

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 7

You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Accepted Answer

A)  20,701 
B)  $21,791 
C)  $22,938 
D)  $24,085 
E)  $25,289 
A)  20,701 
B)  $21,791 
C)  $22,938 
D)  $24,085 
E)  $25,289

Question 8

Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve's 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a "trust fund baby," but he also wants to ensure that Steve is provided for in his old age. Until now, the grandfather has been disappointed with Ed, hence has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed. He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?

Accepted Answer

A)  $3,726 
B)  $3,912 
C)  $4,107 
D)  $4,313 
E)  $4,528 
A)  $3,726 
B)  $3,912 
C)  $4,107 
D)  $4,313 
E)  $4,528

Question 9

Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?

Accepted Answer

A)  $225,367 
B)  $237,229 
C)  $249,090 
D)  $261,545 
E)  $274,622 
A)  $225,367 
B)  $237,229 
C)  $249,090 
D)  $261,545 
E)  $274,622

Question 10

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 11

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 12

A $50,000 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 lower if the interest rate were lower. 
D)  The last payment would have a higher proportion of interest than the first payment. 
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 lower if the interest rate were lower. 
D)  The last payment would have a higher proportion of interest than the first payment.

Question 13

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Accepted Answer

A)  A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. 
B)  The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
C)  The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
D)  The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD. 
A)  A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. 
B)  The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
C)  The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
D)  The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.

Question 14

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

Accepted Answer

A)  15.27% 
B)  16.08% 
C)  16.88% 
D)  17.72% 
E)  18.61% 
A)  15.27% 
B)  16.08% 
C)  16.88% 
D)  17.72% 
E)  18.61%

Question 15

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

Accepted Answer

A)  $16,112 
B)  $16,918 
C)  $17,763 
D)  $18,652 
E)  $19,584 
A)  $16,112 
B)  $16,918 
C)  $17,763 
D)  $18,652 
E)  $19,584

Question 16

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%

Question 17

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic interest rate is greater than 3%. 
B)  The periodic rate is less than 3%. 
C)  The present value would be greater if the lump sum were discounted back for more periods. 
D)  The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. 
E)  The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity. 
A)  The periodic interest rate is greater than 3%. 
B)  The periodic rate is less than 3%. 
C)  The present value would be greater if the lump sum were discounted back for more periods. 
D)  The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. 
E)  The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.

Question 18

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 19

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 20

Five years ago, Greenery Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

Accepted Answer

A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94% 
A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94%

Exam 4: Time Value of Money

A time line is not meaningful unless all cash flows occur annually.

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

Which of the following statements is CORRECT?

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

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

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?

You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?

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

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.

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

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%?

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

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

Five years ago, Greenery Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

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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