Question 1

The present value is always ______ the future value if the opportunity cost is ______ zero.

Accepted Answer

A) less than; greater than 
B) equal to; equal to 
C) greater than; less than 
D) All of the above are true. 
A) less than; greater than 
B) equal to; equal to 
C) greater than; less than 
D) All of the above are true. D

Question 2

Consols are British bonds that were issued during the 18th century that paid a constant coupon and were not redeemable.What type of payment is this?

Accepted Answer

A) an ordinary annuity 
B) an annuity due 
C) a perpetuity 
D) a growing perpetuity 
A) an ordinary annuity 
B) an annuity due 
C) a perpetuity 
D) a growing perpetuity C

Question 3

Explain what the effective (or equivalent)annual interest rate is and why we use it.

Accepted Answer

The effective annual interest rate is used when comparing interest rates of different compounding periods.It is basically the nominal rate expressed as an annual rate, taking into account the effect of compounding.If you invested $1 for one year at 10% compounded quarterly, at the end of the year you would have $1.1038.Therefore, the effective annual rate is 10.38%.

Question 4

Gianni invested $10,000 at a rate of 6% compounded annually.How long will it take for the investment to grow to $40,000?

Accepted Answer

A) 1.33 years 
B) 4.00 years 
C) 23.79 years 
D) 50.00 years 
A) 1.33 years 
B) 4.00 years 
C) 23.79 years 
D) 50.00 years

Question 5

Kangaroo Motors has a used car for sale at $4,300, which you want to buy for driving to school.Your parents are willing to lend you the money and charge only 3.60 % APR compounded monthly.They want the loan repaid in equal payment over 48 months, with the first payment due at the end of the month in which you buy the car.You estimate that the monthly cost of operating the car, including gas, insurance, maintenance, and licence fees, will be $160 and payable at the start of each month.The cost of a monthly bus pass is $95.You expect that the car will be totally worn out in four years, with zero resale value, when you are finished school.Your discount rate is 5% EAR, compounded annually.
a)What is the monthly interest rate on the parents' car loan?
b)What is the monthly car repayment?
c)What is the monthly opportunity cost of funds?
d)What is the present value of the car costs?
e)If you have three roommates who also need transportation to and from school, how much do you and your roommates each need to pay a month in order to cover all your costs?

Accepted Answer

a)Monthly interest rate = (3.60%)/12 = 0

Question 6

An investment pays $1,000 per year for the first four years and $2,000 per year for six years following.If the required rate of return is 8% compounded annually, how much will this investment have returned to the investor?

Accepted Answer

A) $12,557.89 
B) $10,108.04 
C) $9,604.64 
D) $9,138.52 
A) $12,557.89 
B) $10,108.04 
C) $9,604.64 
D) $9,138.52

Question 7

The R&M Bank has offered you the choice between two investment accounts:
$\bullet$#1 pays interest at a rate of 12% compounded semi-annually.
$\bullet$#2 pays interest at a rate of 11% compounded monthly.
Which investment account do you prefer and why?

Accepted Answer

A) #1, 12% is greater than 11% 
B) #2, greater compounding frequency 
C) #1, higher effective rate 
D) #2, higher effective rate 
A) #1, 12% is greater than 11% 
B) #2, greater compounding frequency 
C) #1, higher effective rate 
D) #2, higher effective rate

Question 8

Amir has obtained a $250,000 mortgage.The mortgage is amortized over 25 years and the term of the mortgage is 25 years.The mortgage interest rate is 9% compounded annually.Amir will begin making annual payments of $25,451.56 at the end of the year.How much of Amir's third payment is interest?

Accepted Answer

A) $22,500.00 
B) $21,944.81 
C) $18,470.51 
D) $2,290.64 
A) $22,500.00 
B) $21,944.81 
C) $18,470.51 
D) $2,290.64

Question 9

You borrow $50,000 on a line of credit to finance your start-up company, to be repaid in three equal, annual payments.Interest on the line of credit is 10% interest.Approximately how much of the principal is paid off on the first payment?

Accepted Answer

A) $5000.00 
B) $16,666.67 
C) $15,105.74 
D) $20,105.74 
A) $5000.00 
B) $16,666.67 
C) $15,105.74 
D) $20,105.74

Question 10

How much should a monthly compounded account with an EAR of 18% earn semi-annually?

Accepted Answer

A) 2.80% 
B) 3.00% 
C) 2.77% 
D) 8.63% 
A) 2.80% 
B) 3.00% 
C) 2.77% 
D) 8.63%

Question 11

On January 1, 2016 your bank approved your mortgage and you bought your first home.The mortgage value is $180,000, with interest compounded annually at a rate of 10%.In Excel, generate two mortgage amortization schedules for the 25-year mortgage: one showing the monthly payments for the first 12 months and the other showing the annual amounts from the second year until the mortgage matures.Note that for the second amortization schedule the monthly payment amount will not change.

Accepted Answer

Mortgage Amortization (using A

Question 12

Eloise has deposited $2,000 in an investment account that pays 5% compounded continuously.How much will she have in her account in two years?

Accepted Answer

A) $2,205.00 
B) $2,210.34 
C) $2,105.54 
D) $1,809.67 
A) $2,205.00 
B) $2,210.34 
C) $2,105.54 
D) $1,809.67

Question 13

Your bank offers two options: Account A compounds semi-annually while account B compounds monthly.If both accounts have the same effective annual rate of interest, you should choose

Accepted Answer

A) account A as it offers a higher APR. 
B) account B as it offers a higher APR. 
C) account B because it is compounded more often. 
D) account A because it is compounded less often. 
E) either since you would be indifferent between the two. 
A) account A as it offers a higher APR. 
B) account B as it offers a higher APR. 
C) account B because it is compounded more often. 
D) account A because it is compounded less often. 
E) either since you would be indifferent between the two.

Question 14

A lakefront cottage is selling for $200,000, with a $125,000 down payment, and the remainder mortgaged at 12% APR, to be amortized over 30 years.What is the monthly mortgage payment?

Accepted Answer

A) $771.46 
B) $792.90 
C) $931.77 
D) $1,906.11 
A) $771.46 
B) $792.90 
C) $931.77 
D) $1,906.11

Question 15

Carmen's grandfather died five years ago and left Carmen a perpetuity paying $50,000 a year.Carmen's cost of capital is 4%.After receiving the fifth payment, Carmen received an offer of $1.4 million from The Bizet Hedge Fund for the remainder of the perpetuity.Should Carmen accept the offer?

Accepted Answer

The present value of the remai

Question 16

Wilma borrows $10,000 from "Jaw Breaker Joe" and promises to repay Joe a total of $10,500 in one month.What is the effective annual interest rate charged by Joe?

Accepted Answer

A) 5.00% 
B) 60.00% 
C) 79.59% 
D) 179.59% 
A) 5.00% 
B) 60.00% 
C) 79.59% 
D) 179.59%

Question 17

For a given quoted rate, the effective annual rate ______ as the compounding frequency increases.

Accepted Answer

A) does not change 
B) increases 
C) decreases 
D) There is no connection between the effective annual rate and the quoted rate. 
A) does not change 
B) increases 
C) decreases 
D) There is no connection between the effective annual rate and the quoted rate.

Question 18

Earl has invested $12,000 in a security that pays 2% annual simple interest.How much interest does he earn in the 3rd year?

Accepted Answer

A) $160 
B) $240 
C) $720 
D) $12,735 
A) $160 
B) $240 
C) $720 
D) $12,735

Question 19

Josh Ackerman, having saved up a nest egg of $1.5 million, retires this year and looks forward to a 30-year retirement.If his nest egg is expected to earn 9% APR and is compounded monthly, what will be his monthly income during retirement?

Accepted Answer

A) $50,000.00 
B) $17,205.12 
C) $14,600.45 
D) $12,069.34 
A) $50,000.00 
B) $17,205.12 
C) $14,600.45 
D) $12,069.34

Question 20

If Frank is indifferent between receiving $1,000 today and $1,100 in one year, his opportunity cost is approximately

Accepted Answer

A) 1.10%. 
B) 10%. 
C) 110%. 
D) 100%. 
A) 1.10%. 
B) 10%. 
C) 110%. 
D) 100%.

Exam 5: Time Value of Money

The present value is always ______ the future value if the opportunity cost is ______ zero.

Consols are British bonds that were issued during the 18th century that paid a constant coupon and were not redeemable.What type of payment is this?

Explain what the effective (or equivalent)annual interest rate is and why we use it.

Gianni invested $10,000 at a rate of 6% compounded annually.How long will it take for the investment to grow to $40,000?

An investment pays $1,000 per year for the first four years and $2,000 per year for six years following.If the required rate of return is 8% compounded annually, how much will this investment have returned to the investor?

The R&M Bank has offered you the choice between two investment accounts: ∙\bullet∙ #1 pays interest at a rate of 12% compounded semi-annually. ∙\bullet∙ #2 pays interest at a rate of 11% compounded monthly. Which investment account do you prefer and why?

Amir has obtained a $250,000 mortgage.The mortgage is amortized over 25 years and the term of the mortgage is 25 years.The mortgage interest rate is 9% compounded annually.Amir will begin making annual payments of $25,451.56 at the end of the year.How much of Amir's third payment is interest?

You borrow $50,000 on a line of credit to finance your start-up company, to be repaid in three equal, annual payments.Interest on the line of credit is 10% interest.Approximately how much of the principal is paid off on the first payment?

How much should a monthly compounded account with an EAR of 18% earn semi-annually?

Eloise has deposited $2,000 in an investment account that pays 5% compounded continuously.How much will she have in her account in two years?

Your bank offers two options: Account A compounds semi-annually while account B compounds monthly.If both accounts have the same effective annual rate of interest, you should choose

A lakefront cottage is selling for $200,000, with a $125,000 down payment, and the remainder mortgaged at 12% APR, to be amortized over 30 years.What is the monthly mortgage payment?

Carmen's grandfather died five years ago and left Carmen a perpetuity paying $50,000 a year.Carmen's cost of capital is 4%.After receiving the fifth payment, Carmen received an offer of $1.4 million from The Bizet Hedge Fund for the remainder of the perpetuity.Should Carmen accept the offer?

Wilma borrows $10,000 from "Jaw Breaker Joe" and promises to repay Joe a total of $10,500 in one month.What is the effective annual interest rate charged by Joe?

For a given quoted rate, the effective annual rate ______ as the compounding frequency increases.

Earl has invested $12,000 in a security that pays 2% annual simple interest.How much interest does he earn in the 3rd year?

Josh Ackerman, having saved up a nest egg of $1.5 million, retires this year and looks forward to a 30-year retirement.If his nest egg is expected to earn 9% APR and is compounded monthly, what will be his monthly income during retirement?

If Frank is indifferent between receiving $1,000 today and $1,100 in one year, his opportunity cost is approximately

An Introduction to Finance

Business Corporate Finance

Financial Statements

Financial Statement Analysis and Forecasting

Bond Valuation and Interest Rates

Equity Valuation

Risk, Return, and Portfolio Theory

The Capital Asset Pricing Model Capm

Market Efficiency

Forwards, Futures, and Swaps

Options

Capital Budgeting, Risk Considerations, and Other Special Issues

Cash Flow Estimation and Capital Budgeting Decisions

Mergers and Acquisitions

Leasing

Investment Banking and Securities Law

Debt Instruments

Equity and Hybrid Instruments

Cost of Capital

Capital Structure Decisions

Dividend Policy

Working Capital Management: General Issues

Working Capital Management: Current Assets and Current Liabilities

Filters

The present value is always the future value if the opportunity cost is zero.

Consols are British bonds that were issued during the 18^th century that paid a constant coupon and were not redeemable.What type of payment is this?

The R&M Bank has offered you the choice between two investment accounts: $\bullet$ #1 pays interest at a rate of 12% compounded semi-annually. $\bullet$ #2 pays interest at a rate of 11% compounded monthly. Which investment account do you prefer and why?

Earl has invested $12,000 in a security that pays 2% annual simple interest.How much interest does he earn in the 3^rd year?