Question 1

What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually?

Accepted Answer

A) 5.00% 
B) 5.66% 
C) 6.00% 
D) 9.46% 
A) 5.00% 
B) 5.66% 
C) 6.00% 
D) 9.46%

Question 2

The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.

Accepted Answer

A) True 
 B)False

Question 3

A corporation has promised to pay $1,000 20 years from today for each bond sold now.No interest will be paid on the bonds during the 20 years, and the bonds are discounted at an interest rate of 7%, compounded semiannually.Approximately how much should an investor pay for each bond?

Accepted Answer

A) $70.00 
B) $252.57 
C) $629.56 
D) $857.43 
A) $70.00 
B) $252.57 
C) $629.56 
D) $857.43

Question 4

How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just credited to the account for interest?

Accepted Answer

A) $88 
B) $100 
C) $112 
D) $200 
A) $88 
B) $100 
C) $112 
D) $200

Question 5

You are considering the purchase of a home that would require a mortgage of $150,000.How much more in total interest will you pay if you select a 30-year mortgage at 5.65% rather than a 15-year mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places.Both interest rates are compounded monthly.)

Accepted Answer

A) $86,311.18 
B) $78,487.92 
C) $99,595.80 
D) $102,486.68 
A) $86,311.18 
B) $78,487.92 
C) $99,595.80 
D) $102,486.68

Question 6

The salesperson offers, "Buy this new car for $25,000 cash or, with an appropriate down payment, pay $500 per month for 48 months at 8% interest, compounded monthly." Calculate the "appropriate" down payment.

Accepted Answer

A) $1,000.00 
B) $4,519.04 
C) $5,127.24 
D) $8,000.00 
A) $1,000.00 
B) $4,519.04 
C) $5,127.24 
D) $8,000.00

Question 7

The present value of an annuity due equals the present value of an ordinary annuity times the discount rate.

Accepted Answer

A) True 
 B)False

Question 8

If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with monthly payments of $965.55, how much interest is paid over the life of the loan?

Accepted Answer

A) $120,000 
B) $162,000 
C) $181,458 
D) $227,598 
A) $120,000 
B) $162,000 
C) $181,458 
D) $227,598

Question 9

A stream of equal cash payments lasting forever is termed as:

Accepted Answer

A) an annuity. 
B) an annuity due. 
C) an installment plan. 
D) a perpetuity. 
A) an annuity. 
B) an annuity due. 
C) an installment plan. 
D) a perpetuity.

Question 10

Assume the total expense for your current year in college equals $20,000.How much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

Accepted Answer

A) $952.46 
B) $1,600.00 
C) $1,728.08 
D) $3,973.11 
A) $952.46 
B) $1,600.00 
C) $1,728.08 
D) $3,973.11

Question 11

What APR is being earned on a deposit of $5,000 made 10 years ago today if the deposit is worth $9,848.21 today? The deposit pays interest semiannually.

Accepted Answer

A) 3.56% 
B) 6.76% 
C) 6.89% 
D) 7.12% 
A) 3.56% 
B) 6.76% 
C) 6.89% 
D) 7.12%

Question 12

After reading the fine print in your credit card agreement, you find that the "low" interest rate is actually an 18% APR, or 1.5% per month.What is the effective annual rate?

Accepted Answer

A) 18.47% 
B) 19.56% 
C) 18.82% 
D) 19.41% 
A) 18.47% 
B) 19.56% 
C) 18.82% 
D) 19.41%

Question 13

Accrued interest declines with each payment on an amortizing loan.

Accepted Answer

A) True 
 B)False

Question 14

Any sequence of equally spaced, level cash flows is called an annuity.An annuity is also known as a perpetuity.

Accepted Answer

A) True 
 B)False

Question 15

Given a set future value, which of the following will contribute to a lower present value?

Accepted Answer

A) higher discount rate 
B) fewer time periods 
C) less frequent discounting 
D) lower discount factor 
A) higher discount rate 
B) fewer time periods 
C) less frequent discounting 
D) lower discount factor

Question 16

What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence?

Accepted Answer

A) the real cost is constant. 
B) the real cost is increasing. 
C) the real cost is decreasing. 
D) the price index must be known to answer this question. 
A) the real cost is constant. 
B) the real cost is increasing. 
C) the real cost is decreasing. 
D) the price index must be known to answer this question.

Question 17

What is the future value of $10,000 on deposit for 5 years at 6% simple interest?

Accepted Answer

A) $7,472.58 
B) $10,303.62 
C) $13,000.00 
D) $13,382.26 
A) $7,472.58 
B) $10,303.62 
C) $13,000.00 
D) $13,382.26

Question 18

Converting an annuity to an annuity due decreases the present value.

Accepted Answer

A) True 
 B)False

Question 19

A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment.What is the loan's APR?

Accepted Answer

A) 6% 
B) 9% 
C) 11% 
D) 12% 
A) 6% 
B) 9% 
C) 11% 
D) 12%

Question 20

How much must be saved at the end of each year for the next 10 years in order to accumulate $50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings every year.

Accepted Answer

A) $3,291.00 
B) $3,587.87 
C) $4,500.33 
D) $4,587.79 
A) $3,291.00 
B) $3,587.87 
C) $4,500.33 
D) $4,587.79

Exam 5: The Time Value of Money

What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually?

The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.

A corporation has promised to pay $1,000 20 years from today for each bond sold now.No interest will be paid on the bonds during the 20 years, and the bonds are discounted at an interest rate of 7%, compounded semiannually.Approximately how much should an investor pay for each bond?

How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just credited to the account for interest?

The salesperson offers, "Buy this new car for $25,000 cash or, with an appropriate down payment, pay $500 per month for 48 months at 8% interest, compounded monthly." Calculate the "appropriate" down payment.

The present value of an annuity due equals the present value of an ordinary annuity times the discount rate.

If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with monthly payments of $965.55, how much interest is paid over the life of the loan?

A stream of equal cash payments lasting forever is termed as:

Assume the total expense for your current year in college equals $20,000.How much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

What APR is being earned on a deposit of $5,000 made 10 years ago today if the deposit is worth $9,848.21 today? The deposit pays interest semiannually.

After reading the fine print in your credit card agreement, you find that the "low" interest rate is actually an 18% APR, or 1.5% per month.What is the effective annual rate?

Accrued interest declines with each payment on an amortizing loan.

Any sequence of equally spaced, level cash flows is called an annuity.An annuity is also known as a perpetuity.

Given a set future value, which of the following will contribute to a lower present value?

What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence?

What is the future value of $10,000 on deposit for 5 years at 6% simple interest?

Converting an annuity to an annuity due decreases the present value.

A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment.What is the loan's APR?

How much must be saved at the end of each year for the next 10 years in order to accumulate $50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings every year.

Goals and Governance of the Firm

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Measuring Corporate Performance

Valuing Bonds

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Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

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Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

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