Question 1

A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of cash flow pattern is 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 C

Question 2

Which of the following types of annuities best describes a mortgage payment or payment of rent that normally must be paid at the beginning of each month?

Accepted Answer

A) Annuity due 
B) Ordinary annuity 
C) Deferred annuity 
D) Annuity in arrears 
E) Immediate annuity 
A) Annuity due 
B) Ordinary annuity 
C) Deferred annuity 
D) Annuity in arrears 
E) Immediate annuity A

Question 3

Robert plans to invest $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 at the end of seven years?

Accepted Answer

A) $5,048 
B) $5,292 
C) $5,557 
D) $6,058 
E) $6,656 
A) $5,048 
B) $5,292 
C) $5,557 
D) $6,058 
E) $6,656 C

Question 4

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

Accepted Answer

A) 4.3% 
B) 5.7% 
C) 6.5% 
D) 7.3% 
E) 8.8% 
A) 4.3% 
B) 5.7% 
C) 6.5% 
D) 7.3% 
E) 8.8%

Question 5

Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments for three years (i.e., when two years of payments remain)?

Accepted Answer

A) $10,089.56 
B) $10,602.44 
C) $10,857.28 
D) $11,345.77 
E) $11,568.25 
A) $10,089.56 
B) $10,602.44 
C) $10,857.28 
D) $11,345.77 
E) $11,568.25

Question 6

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. (Round your intermediate calculation and your answer to two decimal places.)

Accepted Answer

A) $65,459.98 
B) $70,856.65 
C) $76,136.95 
D) $80,425.21 
E) $85,024.66 
A) $65,459.98 
B) $70,856.65 
C) $76,136.95 
D) $80,425.21 
E) $85,024.66

Question 7

If the opportunity cost rate is 8 percent, compounded annually, what is the present value of $8,200 due to be received in 12 years?

Accepted Answer

A) $3,068 
B) $3,256 
C) $3,552 
D) $3,688 
E) $3,854 
A) $3,068 
B) $3,256 
C) $3,552 
D) $3,688 
E) $3,854

Question 8

Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. What is the value of the investment today?

Accepted Answer

A) $36,667.76 
B) $38,250.26 
C) $40,527.37 
D) $44,260.91 
E) $46,458.63 
A) $36,667.76 
B) $38,250.26 
C) $40,527.37 
D) $44,260.91 
E) $46,458.63

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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?

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 11

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?

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 12

Identify the correct equation for calculating the present value of an investment. (Assume 'r' stands for rate of return and 'n' stands for number of periods interest is earned.)

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 13

The future value of an uneven cash flow stream is also referred to as its _____.

Accepted Answer

A) discounted value 
B) amortized value 
C) consolidated value 
D) terminal value 
E) periodic value 
A) discounted value 
B) amortized value 
C) consolidated value 
D) terminal value 
E) periodic value

Question 14

A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)?

Accepted Answer

A) 8.16% 
B) 8.36% 
C) 8.56% 
D) 8.76% 
E) 8.96% 
A) 8.16% 
B) 8.36% 
C) 8.56% 
D) 8.76% 
E) 8.96%

Question 15

The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not consider the effect of compounding.

Accepted Answer

A) True 
 B)False

Question 16

Andrea's opportunity cost rate is 12 percent compounded annually. How much must she deposit in an account today if she wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.

Accepted Answer

A) $10,734 
B) $11,625 
C) $10,998 
D) $11,887 
E) $9,584 
A) $10,734 
B) $11,625 
C) $10,998 
D) $11,887 
E) $9,584

Question 17

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 (future) value of this uneven cash flow stream at the end of Year 4 is _____.

Accepted Answer

A) $2,314 
B) $1,833 
C) $2,097 
D) $2,355 
E) $1,784 
A) $2,314 
B) $1,833 
C) $2,097 
D) $2,355 
E) $1,784

Question 18

David borrowed $120,000 for his business to be repaid in six equal annual installment. The lender charges 6.5 percent interest on the amount of the loan balance that is outstanding at the beginning of each year. The interest component in the amount of the annual installment will be the smallest at the end of:

Accepted Answer

A) sixth year. 
B) first year. 
C) third year. 
D) fourth year. 
E) fifth year. 
A) sixth year. 
B) first year. 
C) third year. 
D) fourth year. 
E) fifth year.

Question 19

Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years?

Accepted Answer

A) $32,625 
B) $34,852 
C) $36,234 
D) $38,996 
E) $40,252 
A) $32,625 
B) $34,852 
C) $36,234 
D) $38,996 
E) $40,252

Question 20

When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.

Accepted Answer

A) ordinary annuity 
B) annuity due 
C) immediate annuity 
D) terminal annuity 
E) discounted annuity 
A) ordinary annuity 
B) annuity due 
C) immediate annuity 
D) terminal annuity 
E) discounted annuity

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

Which of the following types of annuities best describes a mortgage payment or payment of rent that normally must be paid at the beginning of each month?

Robert plans to invest $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 at the end of seven years?

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

Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments for three years (i.e., when two years of payments remain)?

If the opportunity cost rate is 8 percent, compounded annually, what is the present value of $8,200 due to be received in 12 years?

Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. What is the value of the investment today?

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

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?

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?

Identify the correct equation for calculating the present value of an investment. (Assume 'r' stands for rate of return and 'n' stands for number of periods interest is earned.)

The future value of an uneven cash flow stream is also referred to as its _____.

A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)?

The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not consider the effect of compounding.

Andrea's opportunity cost rate is 12 percent compounded annually. How much must she deposit in an account today if she wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.

Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years?

When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

The Cost of Money Interest Rates

Bonds Debt Characteristics 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

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

Which of the following types of annuities best describes a mortgage payment or payment of rent that normally must be paid at the beginning of each month?

Robert plans to invest $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 at the end of seven years?

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

Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments for three years (i.e., when two years of payments remain)?

If the opportunity cost rate is 8 percent, compounded annually, what is the present value of $8,200 due to be received in 12 years?

Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. What is the value of the investment today?

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

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?

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?

Identify the correct equation for calculating the present value of an investment. (Assume 'r' stands for rate of return and 'n' stands for number of periods interest is earned.)

The future value of an uneven cash flow stream is also referred to as its _____.

A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)?

The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not consider the effect of compounding.

Andrea's opportunity cost rate is 12 percent compounded annually. How much must she deposit in an account today if she wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.

Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years?

When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

The Cost of Money Interest Rates

Bonds Debt Characteristics 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