Question 1

The nominal interest rate and the effective interest rate are equivalent when compounding occurs:

Accepted Answer

A)  once a year at the end of the year. 
B)  every quarter. 
C)  semiannually. 
D)  monthly. 
A)  once a year at the end of the year. 
B)  every quarter. 
C)  semiannually. 
D)  monthly. A

Question 2

You have just won a lottery that promises to pay you $1,000,000 in 5 years. What is the present value of this lottery win at the continuously discounted rate of 10%?

Accepted Answer

A)  $621,000 
B)  $606,531 
C)  $648,720 
D)  $904,837 
A)  $621,000 
B)  $606,531 
C)  $648,720 
D)  $904,837 B

Question 3

With continuous compounding

Accepted Answer

A)  the effective rate is higher than the nominal rate 
B)  the effective rate is higher than the logarithmic rate 
C)  the base "e" is the effective rate 
D)  all the above are correct 
A)  the effective rate is higher than the nominal rate 
B)  the effective rate is higher than the logarithmic rate 
C)  the base "e" is the effective rate 
D)  all the above are correct A

Question 4

In the continuous compounding equation, "e" is the

Accepted Answer

A)  natural log to the base 10. 
B)  base number in natural logarithms 
C)  natural log to the base 1. 
D)  none of the above are correct 
A)  natural log to the base 10. 
B)  base number in natural logarithms 
C)  natural log to the base 1. 
D)  none of the above are correct

Question 5

Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent.

Accepted Answer

A)  $6,886 
B)  $3,631 
C)  $4,616 
D)  None of the above 
A)  $6,886 
B)  $3,631 
C)  $4,616 
D)  None of the above

Question 6

Brad deposited $5,250 into an account that earns 7% interest compounded continuously. How much money will he have in 15 years?

Accepted Answer

A)  $15,002.67 
B)  $12,175.90 
C)  $13,957.14 
D)  $14,964.25 
A)  $15,002.67 
B)  $12,175.90 
C)  $13,957.14 
D)  $14,964.25

Question 7

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 8.25%?

Accepted Answer

A)  8.60% 
B)  7.93% 
C)  8.25% 
D)  7.70% 
A)  8.60% 
B)  7.93% 
C)  8.25% 
D)  7.70%

Question 8

Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly. What is the effective rate the bank is charging you?

Accepted Answer

A)  12.68% 
B)  10.00% 
C)  10.47% 
D)  10.83% 
A)  12.68% 
B)  10.00% 
C)  10.47% 
D)  10.83%

Question 9

What is the future value of $20,000 invested for 20 years at a nominal interest rate of 9 percent compounded continuously?

Accepted Answer

A)  $112,088 
B)  $120,993 
C)  $108,894 
D)  $147,781 
A)  $112,088 
B)  $120,993 
C)  $108,894 
D)  $147,781

Question 10

With continuous compounding, why is the effective rate higher than the nominal rate?

Accepted Answer

The effective rate is higher than the no

Question 11

Calculate the effective annual rate if the nominal annual rate is 9 percent compounded continuously.

Accepted Answer

A)  9.74% 
B)  9.29% 
C)  9.42% 
D)  9.54% 
A)  9.74% 
B)  9.29% 
C)  9.42% 
D)  9.54%

Question 12

Paula invested $25 into a savings account when she was 6 years old. She is now 35. Her money grew at 2% compounded continuously. How much money does she have?

Accepted Answer

A)  $106.58 
B)  $85.19 
C)  $270.82 
D)  $44.65 
A)  $106.58 
B)  $85.19 
C)  $270.82 
D)  $44.65

Question 13

What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously?

Accepted Answer

A)  $21,240 
B)  $11,080 
C)  $16,421 
D)  none of the above 
A)  $21,240 
B)  $11,080 
C)  $16,421 
D)  none of the above

Question 14

Vida has just won a jackpot that will pay her $10,000 now, $10,000 in one year, and $10,000 in 2 years. What is the present value of this jackpot at the continuously discounted rate of 9%?

Accepted Answer

A)  $27,515 
B)  $28,345 
C)  $24,516 
D)  $27,492 
A)  $27,515 
B)  $28,345 
C)  $24,516 
D)  $27,492

Question 15

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 2.25%?

Accepted Answer

A)  2.23% 
B)  3.15% 
C)  .95% 
D)  1.28% 
A)  2.23% 
B)  3.15% 
C)  .95% 
D)  1.28%

Question 16

City Bank offers a 7 year CD with a nominal rate of interest of 7.0%. If compounding occurs continuously, what is the effective annual rate?

Accepted Answer

A)  7.25% 
B)  6.77% 
C)  7.32% 
D)  7.00% 
A)  7.25% 
B)  6.77% 
C)  7.32% 
D)  7.00%

Question 17

Fred deposited $5,000 in an account that promised a nominal interest rate of 8% compounded continuously for his daughter who will be going to college in 18 years. How much will she have in the account in 18 years?

Accepted Answer

A)  $19,980 
B)  $20,054 
C)  $21,103 
D)  $21,694 
A)  $19,980 
B)  $20,054 
C)  $21,103 
D)  $21,694

Question 18

First Texas National Bank is offering a one-year CD with a nominal rate of 9.5 percent. If compounding occurs continuously, what is the effective annual rate?

Accepted Answer

A)  9.97% 
B)  16.76% 
C)  9.66% 
D)  22.06% 
A)  9.97% 
B)  16.76% 
C)  9.66% 
D)  22.06%

Question 19

What is the value of $10,000 invested for 5 years at 8% compounded continuously?

Accepted Answer

A)  $14,693 
B)  $14,928 
C)  $14,918 
D)  $13,064 
A)  $14,693 
B)  $14,928 
C)  $14,918 
D)  $13,064

Question 20

What is the effective interest rate on 12% if interest is compounded continuously?

Accepted Answer

A)  15.11% 
B)  16.25% 
C)  14.11% 
D)  12.75% 
A)  15.11% 
B)  16.25% 
C)  14.11% 
D)  12.75%

Exam 24: Continuous Compounding and Discounting

The nominal interest rate and the effective interest rate are equivalent when compounding occurs:

You have just won a lottery that promises to pay you $1,000,000 in 5 years. What is the present value of this lottery win at the continuously discounted rate of 10%?

With continuous compounding

In the continuous compounding equation, "e" is the

Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent.

Brad deposited $5,250 into an account that earns 7% interest compounded continuously. How much money will he have in 15 years?

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 8.25%?

Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly. What is the effective rate the bank is charging you?

What is the future value of $20,000 invested for 20 years at a nominal interest rate of 9 percent compounded continuously?

With continuous compounding, why is the effective rate higher than the nominal rate?

Calculate the effective annual rate if the nominal annual rate is 9 percent compounded continuously.

Paula invested $25 into a savings account when she was 6 years old. She is now 35. Her money grew at 2% compounded continuously. How much money does she have?

What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously?

Vida has just won a jackpot that will pay her $10,000 now, $10,000 in one year, and $10,000 in 2 years. What is the present value of this jackpot at the continuously discounted rate of 9%?

What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 2.25%?

City Bank offers a 7 year CD with a nominal rate of interest of 7.0%. If compounding occurs continuously, what is the effective annual rate?

Fred deposited $5,000 in an account that promised a nominal interest rate of 8% compounded continuously for his daughter who will be going to college in 18 years. How much will she have in the account in 18 years?

First Texas National Bank is offering a one-year CD with a nominal rate of 9.5 percent. If compounding occurs continuously, what is the effective annual rate?

What is the value of $10,000 invested for 5 years at 8% compounded continuously?

What is the effective interest rate on 12% if interest is compounded continuously?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Financing With Derivatives

Risk Management

International Financial Management

Corporate Restructuring

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

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