Question 1

Identify the correct expression for the effective annual rate (EAR).

Accepted Answer

A)  (1 + Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
B)  (1 / Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
C)  (1 - Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
D)  (1 + Periodic rate of interest)number of borrowing (interest) periods in one year + 1 
E)  (1 - Periodic rate of interest)number of borrowing (interest) periods in one year + 1 
A)  (1 + Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
B)  (1 / Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
C)  (1 - Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
D)  (1 + Periodic rate of interest)number of borrowing (interest) periods in one year + 1 
E)  (1 - Periodic rate of interest)number of borrowing (interest) periods in one year + 1 A

Question 2

Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. How long would it take her to have enough money to start college?

Accepted Answer

A)  21.25 months 
B)  27.78 months 
C)  25.10 months 
D)  22.56 months 
E)  30.25 months 
A)  21.25 months 
B)  27.78 months 
C)  25.10 months 
D)  22.56 months 
E)  30.25 months C

Question 3

If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.

Accepted Answer

A) True 
 B)False  True

Question 4

Ibiza Corporation has been investing $20,000 for the last four years in an investment scheme that is maturing at the end of the current year. It will be receiving $120,000 at the time of maturity. The $120,000 received at maturity is referred to as _____.

Accepted Answer

A)  uneven cash flow 
B)  annuity due 
C)  ordinary annuity 
D)  deferred annuity 
E)  lump-sum amount 
A)  uneven cash flow 
B)  annuity due 
C)  ordinary annuity 
D)  deferred annuity 
E)  lump-sum amount

Question 5

Robert invests $650 in a savings account at the beginning of each of the next seven years. If his opportunity cost rate is 5 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.

Accepted Answer

A)  $5,048 
B)  $5,325 
C)  $5,557 
D)  $6,058 
E)  $6,656 
A)  $5,048 
B)  $5,325 
C)  $5,557 
D)  $6,058 
E)  $6,656

Question 6

Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today? Use a financial calculator to determine the amount.

Accepted Answer

A)  $23,089 
B)  $25,526 
C)  $26,888 
D)  $28,685 
E)  $30,534 
A)  $23,089 
B)  $25,526 
C)  $26,888 
D)  $28,685 
E)  $30,534

Question 7

Identify the correct expression for calculating the present value of an investment.

Accepted Answer

A)  Present value = Future value × (1 + r)n 
B)  Present value = Future value + (1 + r)n 
C)  Present value = Future value - (1 + r)n 
D)  Present value = Future value / (1 + r)n 
E)  Present value = Future value / ((1 + r) × n) 
A)  Present value = Future value × (1 + r)n 
B)  Present value = Future value + (1 + r)n 
C)  Present value = Future value - (1 + r)n 
D)  Present value = Future value / (1 + r)n 
E)  Present value = Future value / ((1 + r) × n)

Question 8

Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in 8 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?

Accepted Answer

A)  4.29% 
B)  5.66% 
C)  6.52% 
D)  7.06% 
E)  8.78% 
A)  4.29% 
B)  5.66% 
C)  6.52% 
D)  7.06% 
E)  8.78%

Question 9

Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.

Accepted Answer

A)  $5,055 
B)  $5,642 
C)  $5,868 
D)  $6,026 
E)  $6,222 
A)  $5,055 
B)  $5,642 
C)  $5,868 
D)  $6,026 
E)  $6,222

Question 10

Frank purchased his house 16 years ago by taking out a 25-year mortgage for $150,000. The mortgage has a fixed interest rate of 5 percent compounded monthly. If he wants to pay off his mortgage today, how much money does he need? He made his most recent mortgage payment earlier today.

Accepted Answer

A)  $65,459.98 
B)  $70,856.65 
C)  $76,132.52 
D)  $80,425.21 
E)  $85,024.66 
A)  $65,459.98 
B)  $70,856.65 
C)  $76,132.52 
D)  $80,425.21 
E)  $85,024.66

Question 11

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)

Accepted Answer

A)  Future value = Present value × (1 + r)n 
B)  Future value = Present value + (1 + r)n 
C)  Future value = Present value - (1 + r)n 
D)  Future value = Present value / (1 + r)n 
E)  Future value = Present value / ((1 + r) × n) 
A)  Future value = Present value × (1 + r)n 
B)  Future value = Present value + (1 + r)n 
C)  Future value = Present value - (1 + r)n 
D)  Future value = Present value / (1 + r)n 
E)  Future value = Present value / ((1 + r) × n)

Question 12

Risk-adjusted required rate of return is the rate of return on the best available alternative investment of equal risk.

Accepted Answer

A) True 
 B)False

Question 13

The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.

Accepted Answer

A)  compounding 
B)  discounting 
C)  consolidation 
D)  amortization 
E)  annualizing 
A)  compounding 
B)  discounting 
C)  consolidation 
D)  amortization 
E)  annualizing

Question 14

If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account? Use a financial calculator to determine the amount.

Accepted Answer

A)  23.02 years 
B)  18.50 years 
C)  20.52 years 
D)  16.89 years 
E)  25.65 years 
A)  23.02 years 
B)  18.50 years 
C)  20.52 years 
D)  16.89 years 
E)  25.65 years

Question 15

Kim has just graduated from law school. She had taken an education loan of $45,000, which now needs to be repaid in equal monthly installments over the next 6 years. What is the amount of the monthly loan payment, if the loan carries a simple annual interest of 5%? Use a calculator to make the calculation and round your answer to two decimal places.

Accepted Answer

A)  $689.76 
B)  $663.85 
C)  $702.46 
D)  $658.92 
E)  $725.55 
A)  $689.76 
B)  $663.85 
C)  $702.46 
D)  $658.92 
E)  $725.55

Question 16

A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of payment represents a(n) _____.

Accepted Answer

A)  ordinary annuity 
B)  annuity due 
C)  uneven cash flow stream 
D)  lump-sum payment 
E)  compounded cash flow 
A)  ordinary annuity 
B)  annuity due 
C)  uneven cash flow stream 
D)  lump-sum payment 
E)  compounded cash flow

Question 17

Dwayne invests $4,700 in a savings account at the beginning of each of the next twelve years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. (Round your answer to two decimal places.)

Accepted Answer

A)  $87,542.29 
B)  $89,817.00 
C)  $91,250.52 
D)  $93,668.00 
E)  $95,157.85 
A)  $87,542.29 
B)  $89,817.00 
C)  $91,250.52 
D)  $93,668.00 
E)  $95,157.85

Question 18

Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? Use a financial calculator to make the calculation.

Accepted Answer

A)  12.36 years 
B)  16.25 years 
C)  15.19 years 
D)  13.52 years 
E)  14.12 years 
A)  12.36 years 
B)  16.25 years 
C)  15.19 years 
D)  13.52 years 
E)  14.12 years

Question 19

William buys 20 shares of Zync Corporation at $18.5 per share. Zync pays dividend at the end of each year on the basis of profits made during the year. In its 25 years history, Zync has paid dividends every year without fail. The initial investment by William and the receipt of dividend at the end of every year is referred to as _____ and _____ respectively.

Accepted Answer

A)  uneven cash flows; annuity due 
B)  uneven cash flows; ordinary annuity 
C)  lump-sum payment; annuity due 
D)  lump-sum payment; uneven cash flows 
E)  lump-sum payment; ordinary annuity 
A)  uneven cash flows; annuity due 
B)  uneven cash flows; ordinary annuity 
C)  lump-sum payment; annuity due 
D)  lump-sum payment; uneven cash flows 
E)  lump-sum payment; ordinary annuity

Question 20

Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is _____.

Accepted Answer

A)  $1,918 
B)  $1,855 
C)  $2,097 
D)  $2,355 
E)  $1,784 
A)  $1,918 
B)  $1,855 
C)  $2,097 
D)  $2,355 
E)  $1,784

Identify the correct expression for the effective annual rate (EAR).

Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. How long would it take her to have enough money to start college?

If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.

Ibiza Corporation has been investing $20,000 for the last four years in an investment scheme that is maturing at the end of the current year. It will be receiving $120,000 at the time of maturity. The $120,000 received at maturity is referred to as _____.

Robert invests $650 in a savings account at the beginning of each of the next seven years. If his opportunity cost rate is 5 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.

Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today? Use a financial calculator to determine the amount.

Identify the correct expression for calculating the present value of an investment.

Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in 8 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?

Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.

Frank purchased his house 16 years ago by taking out a 25-year mortgage for $150,000. The mortgage has a fixed interest rate of 5 percent compounded monthly. If he wants to pay off his mortgage today, how much money does he need? He made his most recent mortgage payment earlier today.

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)

Risk-adjusted required rate of return is the rate of return on the best available alternative investment of equal risk.

The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.

If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account? Use a financial calculator to determine the amount.

A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of payment represents a(n) _____.

Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? Use a financial calculator to make the calculation.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 4: Time Value of Money

Identify the correct expression for the effective annual rate (EAR).

Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. How long would it take her to have enough money to start college?

If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.

Ibiza Corporation has been investing $20,000 for the last four years in an investment scheme that is maturing at the end of the current year. It will be receiving $120,000 at the time of maturity. The $120,000 received at maturity is referred to as _____.

Robert invests $650 in a savings account at the beginning of each of the next seven years. If his opportunity cost rate is 5 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.

Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today? Use a financial calculator to determine the amount.

Identify the correct expression for calculating the present value of an investment.

Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in 8 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?

Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.

Frank purchased his house 16 years ago by taking out a 25-year mortgage for $150,000. The mortgage has a fixed interest rate of 5 percent compounded monthly. If he wants to pay off his mortgage today, how much money does he need? He made his most recent mortgage payment earlier today.

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)

Risk-adjusted required rate of return is the rate of return on the best available alternative investment of equal risk.

The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.

If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account? Use a financial calculator to determine the amount.

A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of payment represents a(n) _____.

Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? Use a financial calculator to make the calculation.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters