Question 1

If I invest $1,000 in a financial instrument that pays 10% simple interest payable at the end of each year, I will

Accepted Answer

A) not receive any interest for the first year. 
B) receive the same amount of interest each year. 
C) receive interest only for the first year. 
D) receive less interest in year ten than in year two. 
E) receive interest on both the principal and first year's interest in year two. 
A) not receive any interest for the first year. 
B) receive the same amount of interest each year. 
C) receive interest only for the first year. 
D) receive less interest in year ten than in year two. 
E) receive interest on both the principal and first year's interest in year two.

Question 2

Your credit card has a quoted rate of 18.5% compounded daily.What is the effective annual rate? (Assume 360 days a year.)

Accepted Answer

A) 66.60% 
B) 20.32% 
C) 51.39% 
D) 18.50% 
A) 66.60% 
B) 20.32% 
C) 51.39% 
D) 18.50%

Question 3

Explain the difference between simple interest and compound interest.

Accepted Answer

Simple interest is interest that is paid

Question 4

The R&M Bank has offered you the choice between two loans:
$\bullet$#1 charges interest at a rate of 9% compounded quarterly.
$\bullet$#2 charges interest at a rate of 9.50% compounded semi-annually.
Which loan do you prefer and why?

Accepted Answer

A) #1, lower effective rate 
B) #2, lower effective rate 
C) #1, higher effective rate 
D) #2, higher effective rate 
A) #1, lower effective rate 
B) #2, lower effective rate 
C) #1, higher effective rate 
D) #2, higher effective rate

Question 5

As interest rates fall, present values

Accepted Answer

A) increase. 
B) decrease. 
C) stay the same. 
D) cannot be determined; need compounding frequency. 
A) increase. 
B) decrease. 
C) stay the same. 
D) cannot be determined; need compounding frequency.

Question 6

For a given effective annual rate, the quoted 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 7

Your investment account pays interest at a rate of 8% compounded semi-annually.If you deposit $1,000 today, how much will you have in two years?

Accepted Answer

A) $1,081.60 
B) $1,166.40 
C) $1,169.86 
D) $1,360.49 
A) $1,081.60 
B) $1,166.40 
C) $1,169.86 
D) $1,360.49

Question 8

Which one of the following is/are an example(s)of opportunity cost?

Accepted Answer

A) quitting your job to go to university 
B) using a piece of land that you owned to build a house 
C) spending time caring for an elder in your family instead of working 
D) All of the above are examples of opportunity costs. 
A) quitting your job to go to university 
B) using a piece of land that you owned to build a house 
C) spending time caring for an elder in your family instead of working 
D) All of the above are examples of opportunity costs.

Question 9

Montreal Financial Services Company offers a perpetuity of $5,000 per year with the first payment occurring immediately.If your opportunity cost is 8% compounded annually, the present value of the perpetuity today is

Accepted Answer

A) $57,500. 
B) $62,500. 
C) $67,500. 
D) $125,000. 
A) $57,500. 
B) $62,500. 
C) $67,500. 
D) $125,000.

Question 10

Charles has $12,000 to invest.Charles' bank offers him the following investment accounts:
 
Assuming that all the accounts have the same risk as the investment, Charles' opportunity cost is closest to

Accepted Answer

A) 1%. 
B) 3%. 
C) 5%. 
D) 8%. 
A) 1%. 
B) 3%. 
C) 5%. 
D) 8%.

Question 11

Rosie wants to retire in 30 years.At retirement she wants to be able to withdraw $100,000 at the end of each year forever (she plans on establishing a scholarship fund at her local university after her death).Assuming that her investments can earn 10% compounded semi-annually prior to her retirement and only 5% compounded annually after her retirement (retired people and universities are very conservative investors), how much must Rosie invest each year for the next 30 years? Assume her first deposit will occur in one year.

Accepted Answer

Value required at retirement = PV of per

Question 12

Ellie is considering an investment that will require her to deposit $500 per month for 6 years with the first payment occurring today.This is an example of

Accepted Answer

A) an ordinary annuity. 
B) an annuity due. 
C) a reverse ordinary annuity. 
D) a reverse annuity due. 
A) an ordinary annuity. 
B) an annuity due. 
C) a reverse ordinary annuity. 
D) a reverse annuity due.

Question 13

How much should a weekly compounded account with an EAR of 10% earn semi-annually?

Accepted Answer

A) 4.88% 
B) 5.00% 
C) 5.36% 
D) 5.12% 
A) 4.88% 
B) 5.00% 
C) 5.36% 
D) 5.12%

Question 14

Elvira is considering buying a 20-year annuity due to provide her retirement income.The annuity will make annual payments of $25,000.If her opportunity cost is 7%, what is the present value of the annuity?

Accepted Answer

A) $1,096,629 
B) $1,024,887 
C) $283,390 
D) $264,850 
A) $1,096,629 
B) $1,024,887 
C) $283,390 
D) $264,850

Question 15

A pension fund pays out $50,000 a year in perpetuity, based on a cost of capital of 5%, to retiring employees.Alternatively, the employee can take out a lump sum of $1 million payable immediately.The employee should choose

Accepted Answer

A) the lump sum, because its future value is $25 million. 
B) the pension fund, because its present value is $1.25 million. 
C) the pension fund, because it offers steady payments in perpetuity. 
D) either option gives the same value over time. 
A) the lump sum, because its future value is $25 million. 
B) the pension fund, because its present value is $1.25 million. 
C) the pension fund, because it offers steady payments in perpetuity. 
D) either option gives the same value over time.

Question 16

Xiang invests $25,000 per year, starting in one year, for 20 years at an interest rate of 7%.What is the value of the investment at the end of the 20 years?

Accepted Answer

A) $1,096,629 
B) $1,024,887 
C) $283,390 
D) $264,850 
A) $1,096,629 
B) $1,024,887 
C) $283,390 
D) $264,850

Question 17

Eduardo bought a house for $320,000 five years ago.He has just sold it for $480,000.What annual rate of return did he earn on this investment?

Accepted Answer

A) 10% 
B) 8.45% 
C) 1.08% 
D) 3.13% 
A) 10% 
B) 8.45% 
C) 1.08% 
D) 3.13%

Question 18

An annuity due pays out

Accepted Answer

A) equal payments at the beginning of each time period and continues forever. 
B) unequal payments at the beginning of each time period for a fixed number of periods. 
C) equal payments at the beginning of each time period for a fixed number of periods. 
D) unequal payments at the end of each time period for a fixed number of periods. 
E) equal payments at the end of each time period and continues forever. 
A) equal payments at the beginning of each time period and continues forever. 
B) unequal payments at the beginning of each time period for a fixed number of periods. 
C) equal payments at the beginning of each time period for a fixed number of periods. 
D) unequal payments at the end of each time period for a fixed number of periods. 
E) equal payments at the end of each time period and continues forever.

Question 19

Montreal Financial Services Company offers a 50-year annuity of $50,000 per year with the first payment on January 1 next year.If your opportunity costs are constant over time, the price you are willing to pay for this annuity ______ over time.

Accepted Answer

A) increases 
B) decreases 
C) stays the same 
D) can't determine without the opportunity cost 
A) increases 
B) decreases 
C) stays the same 
D) can't determine without the opportunity cost

Question 20

Your investment account has an interest rate of 10% compounded semi-annually.This is the equivalent of an effective annual interest rate of

Accepted Answer

A) 1.1025%. 
B) 5%. 
C) 10%. 
D) 10.25%. 
A) 1.1025%. 
B) 5%. 
C) 10%. 
D) 10.25%.

Exam 5: Time Value of Money

If I invest $1,000 in a financial instrument that pays 10% simple interest payable at the end of each year, I will

Your credit card has a quoted rate of 18.5% compounded daily.What is the effective annual rate? (Assume 360 days a year.)

Explain the difference between simple interest and compound interest.

The R&M Bank has offered you the choice between two loans: ∙\bullet∙ #1 charges interest at a rate of 9% compounded quarterly. ∙\bullet∙ #2 charges interest at a rate of 9.50% compounded semi-annually. Which loan do you prefer and why?

As interest rates fall, present values

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

Your investment account pays interest at a rate of 8% compounded semi-annually.If you deposit $1,000 today, how much will you have in two years?

Which one of the following is/are an example(s)of opportunity cost?

Montreal Financial Services Company offers a perpetuity of $5,000 per year with the first payment occurring immediately.If your opportunity cost is 8% compounded annually, the present value of the perpetuity today is

Charles has $12,000 to invest.Charles' bank offers him the following investment accounts: Assuming that all the accounts have the same risk as the investment, Charles' opportunity cost is closest to

Ellie is considering an investment that will require her to deposit $500 per month for 6 years with the first payment occurring today.This is an example of

How much should a weekly compounded account with an EAR of 10% earn semi-annually?

Elvira is considering buying a 20-year annuity due to provide her retirement income.The annuity will make annual payments of $25,000.If her opportunity cost is 7%, what is the present value of the annuity?

A pension fund pays out $50,000 a year in perpetuity, based on a cost of capital of 5%, to retiring employees.Alternatively, the employee can take out a lump sum of $1 million payable immediately.The employee should choose

Xiang invests $25,000 per year, starting in one year, for 20 years at an interest rate of 7%.What is the value of the investment at the end of the 20 years?

Eduardo bought a house for $320,000 five years ago.He has just sold it for $480,000.What annual rate of return did he earn on this investment?

An annuity due pays out

Montreal Financial Services Company offers a 50-year annuity of $50,000 per year with the first payment on January 1 next year.If your opportunity costs are constant over time, the price you are willing to pay for this annuity ______ over time.

Your investment account has an interest rate of 10% compounded semi-annually.This is the equivalent of an effective annual interest rate of

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 R&M Bank has offered you the choice between two loans: $\bullet$ #1 charges interest at a rate of 9% compounded quarterly. $\bullet$ #2 charges interest at a rate of 9.50% compounded semi-annually. Which loan do you prefer and why?