Question 1

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

Accepted Answer

A) True 
 B)False

Question 2

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

Question 3

An interest rate that has been annualized using compound interest is termed the:

Accepted Answer

A)  simple interest rate. 
B)  annual percentage rate. 
C)  discounted interest rate. 
D)  effective annual interest rate. 
A)  simple interest rate. 
B)  annual percentage rate. 
C)  discounted interest rate. 
D)  effective annual interest rate.

Question 4

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years,during which time the fund will earn 6% interest with monthly compounding?

Accepted Answer

A)  $361,526.14 
B)  $388,017.16 
C)  $402,766.67 
D)  $414,008.24 
A)  $361,526.14 
B)  $388,017.16 
C)  $402,766.67 
D)  $414,008.24

Question 5

The APR on a loan must be equal to the effective annual rate when:

Accepted Answer

A)  compounding occurs monthly. 
B)  compounding occurs annually. 
C)  the loan is for less than one year. 
D)  the loan is for more than one year. 
A)  compounding occurs monthly. 
B)  compounding occurs annually. 
C)  the loan is for less than one year. 
D)  the loan is for more than one year.

Question 6

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 7

As long as the interest rate is positive,the future value will always be larger than the present value given any period of time.

Accepted Answer

A) True 
 B)False

Question 8

What is the present value of the following payment stream,discounted at 8% annually: $1,000 at the end of year 1,$2,000 at the end of year 2,and $3,000 at the end of year 3?

Accepted Answer

A)  $5,022.10 
B)  $5,144.03 
C)  $5,423.87 
D)  $5,520.00 
A)  $5,022.10 
B)  $5,144.03 
C)  $5,423.87 
D)  $5,520.00

Question 9

An amortizing loan is one in which:

Accepted Answer

A)  the principal remains unchanged with each payment. 
B)  accrued interest is paid regularly. 
C)  the maturity of the loan is variable. 
D)  the principal balance is reduced with each payment. 
A)  the principal remains unchanged with each payment. 
B)  accrued interest is paid regularly. 
C)  the maturity of the loan is variable. 
D)  the principal balance is reduced with each payment.

Question 10

The Excel function for present value is PV (rate,nper,pmt,FV).

Accepted Answer

A) True 
 B)False

Question 11

Accrued interest declines with each payment on an amortizing loan.

Accepted Answer

A) True 
 B)False

Question 12

On the day you retire you have $1,000,000 saved.You expect to live another 25 years during which time you expect to earn 6.19% on your savings while inflation averages 2.5% annually.Assume you want to spend the same amount each year in real terms and die on the day you spend your last dime.What real amount will you be able to spend each year?

Accepted Answer

A)  $61,334.36 
B)  $79,644.58 
C)  $79,211.09 
D)  $61,931.78 
A)  $61,334.36 
B)  $79,644.58 
C)  $79,211.09 
D)  $61,931.78

Question 13

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 14

What is the present value of $100 to be deposited today into an account paying 8%,compounded semiannually for 2 years?

Accepted Answer

A)  $85.48 
B)  $100.00 
C)  $116.00 
D)  $116.99 
A)  $85.48 
B)  $100.00 
C)  $116.00 
D)  $116.99

Question 15

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 16

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate?

Accepted Answer

A)  $130.00 
B)  $138.83 
C)  $169.00 
D)  $353.34 
A)  $130.00 
B)  $138.83 
C)  $169.00 
D)  $353.34

Question 17

For a given amount,the lower the discount rate,the less the present value.

Accepted Answer

A) True 
 B)False

Question 18

If interest is paid m times per year,then the per-period interest rate equals the:

Accepted Answer

A)  effective annual rate divided by m. 
B)  compound interest rate times m. 
C)  effective annual rate. 
D)  annual percentage rate divided by m. 
A)  effective annual rate divided by m. 
B)  compound interest rate times m. 
C)  effective annual rate. 
D)  annual percentage rate divided by m.

Question 19

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an interest rate of 10% and cash flows at the end of each period.

Accepted Answer

A)  $297.29 
B)  $1,486.44 
C)  $1,635.08 
D)  $2,000.00 
A)  $297.29 
B)  $1,486.44 
C)  $1,635.08 
D)  $2,000.00

Question 20

You will be receiving cash flows of: $1,000 today,$2,000 at end of year 1,$4,000 at end of year 3,and $6,000 at end of year 5.What is the present value of these cash flows at an interest rate of 7%?

Accepted Answer

A)  $9,731.13 
B)  $10,412.27 
C)  $10,524.08 
D)  $11,524.91 
A)  $9,731.13 
B)  $10,412.27 
C)  $10,524.08 
D)  $11,524.91

Exam 5: The Time Value of Money

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

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.

An interest rate that has been annualized using compound interest is termed the:

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years,during which time the fund will earn 6% interest with monthly compounding?

The APR on a loan must be equal to the effective annual rate when:

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?

As long as the interest rate is positive,the future value will always be larger than the present value given any period of time.

What is the present value of the following payment stream,discounted at 8% annually: $1,000 at the end of year 1,$2,000 at the end of year 2,and $3,000 at the end of year 3?

An amortizing loan is one in which:

The Excel function for present value is PV (rate,nper,pmt,FV).

Accrued interest declines with each payment on an amortizing loan.

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?

What is the present value of $100 to be deposited today into an account paying 8%,compounded semiannually for 2 years?

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

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate?

For a given amount,the lower the discount rate,the less the present value.

If interest is paid m times per year,then the per-period interest rate equals the:

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an interest rate of 10% and cash flows at the end of each period.

You will be receiving cash flows of: $1,000 today,$2,000 at end of year 1,$4,000 at end of year 3,and $6,000 at end of year 5.What is the present value of these cash flows at an interest rate of 7%?

Goals and Governance of the Firm

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Measuring Corporate Performance

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

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 and Payout Policy

Leasing

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Long-Term Financial Planning

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