Question 1

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

Accepted Answer

A) 5.00 percent 
B) 5.66 percent 
C) 6.00 percent 
D) 9.46 percent 1 + real rate = 1.12/1.06 
A) 5.00 percent 
B) 5.66 percent 
C) 6.00 percent 
D) 9.46 percent 1 + real rate = 1.12/1.06

Question 2

If you were a bank which would you quote, the nominal interest rate or the effective annual interest rate? Why?

Accepted Answer

Banks would prefer to quote no

Question 3

What is the annually compounded rate of interest on an account with an APR of 10 percent and monthly compounding?

Accepted Answer

A) 10.00 percent 
B) 10.47 percent 
C) 10.52 percent 
D) 11.05 percent 
A) 10.00 percent 
B) 10.47 percent 
C) 10.52 percent 
D) 11.05 percent

Question 4

What is the discount factor for $1 to be received in 5 years at a discount rate of 8 percent?

Accepted Answer

A) .4693 
B) .5500 
C) .6000 
D) .6806 Discount factor = 1/ (1.08)5
= 1/1.4693 
A) .4693 
B) .5500 
C) .6000 
D) .6806 Discount factor = 1/ (1.08)5
= 1/1.4693

Question 5

How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8 percent compounded annually?

Accepted Answer

A) 9 
B) 14 
C) 22 
D) 25 $3,000 = 1,000(1.08)n
3 = (1.08)n
14)27, or approx.14 yrs.= N 
A) 9 
B) 14 
C) 22 
D) 25 $3,000 = 1,000(1.08)n
3 = (1.08)n
14)27, or approx.14 yrs.= N

Question 6

Explain the difference between a regular annuity and an annuity due.

Accepted Answer

The regular annuity assumes al

Question 7

You make a $10,000 initial deposit and make semi-annual contributions of $950.If your investment earns you 2.6% compounded annually, how long will it take before you have $60,000?

Accepted Answer

A) 20 years 
B) 19 years 
C) 18 years 
D) 17 years Data entry using the BAII Plus Calculator: 
A) 20 years 
B) 19 years 
C) 18 years 
D) 17 years Data entry using the BAII Plus Calculator:

Question 8

Explain the difference between a very long annuity and a perpetuity.

Accepted Answer

There is very little

Question 9

How much interest can be accumulated during one year on a $1,000 deposit paying continuously compounded interest at an APR of 10 percent?

Accepted Answer

A) $100.00 
B) $105.17 
C) $110.50 
D) $115.70 Interest = $1,000 x e.1 - $1,000
= $1,000 x 1.1052 - $1,000
= $1,105.17 - $1,000 
A) $100.00 
B) $105.17 
C) $110.50 
D) $115.70 Interest = $1,000 x e.1 - $1,000
= $1,000 x 1.1052 - $1,000
= $1,105.17 - $1,000

Question 10

The concept of compound interest refers to:

Accepted Answer

A) Earning interest on the original investment 
B) Payment of interest on previously earned interest 
C) Investing for a multi-year period of time 
D) Determining the APR of the investment 
A) Earning interest on the original investment 
B) Payment of interest on previously earned interest 
C) Investing for a multi-year period of time 
D) Determining the APR of the investment

Question 11

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 12

What is the present value of $100 to be deposited today into an account paying 8.0 percent, compounded semi-annually for two 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 13

What is the present value of a four-period annuity of $100 per year that begins two years from today if the discount rate is 9 percent?

Accepted Answer

A) $297.21 
B) $323.86 
C) $356.85 
D) $388.97 PV1 = 100 
A) $297.21 
B) $323.86 
C) $356.85 
D) $388.97 PV1 = 100

Question 14

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

Accepted Answer

A) 6 percent 
B) 9 percent 
C) 11 percent 
D) 12 percent 21,000 = 522.59 
A) 6 percent 
B) 9 percent 
C) 11 percent 
D) 12 percent 21,000 = 522.59

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

If four years of college is expected to cost $150,000 18 years from now, how much must be deposited now into an account that will average 8 percent annually in order to save the $150,000? By how much would your answer change if you expected 11 percent annually?

Accepted Answer

FV = PV (1 + i)ⁿ $150,000 = PV

Question 17

The Rule of 72 states that the time it will take for an investment to double in value equals approximately 72/r, where r is expressed as a percentage.

Accepted Answer

A) True 
 B)False

Question 18

An amortizing loan is one in which:

Accepted Answer

A) Payments are made monthly 
B) Accrued interest is paid regularly 
C) The maturity of the loan is known 
D) The principal balance is reduced with each payment 
A) Payments are made monthly 
B) Accrued interest is paid regularly 
C) The maturity of the loan is known 
D) The principal balance is reduced with each payment

Question 19

Marjorie is investing $5,000 in an eight-year certificate of deposit (GIC) that pays 6 percent annual interest with annual compounding.How much will she have when the CD matures?

Accepted Answer

FV = $5,000 x 1.068

Question 20

What is the minimum nominal rate of return should you accept, if you require a 4 percent real rate of return and the rate of inflation is expected to average 3.5 percent during the investment period?

Accepted Answer

A) 7.36 percent 
B) 7.50 percent 
C) 7.64 percent 
D) 8.01 percent 1.04 = 
A) 7.36 percent 
B) 7.50 percent 
C) 7.64 percent 
D) 8.01 percent 1.04 =

Exam 5: The Time Value of Money

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

If you were a bank which would you quote, the nominal interest rate or the effective annual interest rate? Why?

What is the annually compounded rate of interest on an account with an APR of 10 percent and monthly compounding?

What is the discount factor for $1 to be received in 5 years at a discount rate of 8 percent?

How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8 percent compounded annually?

Explain the difference between a regular annuity and an annuity due.

You make a $10,000 initial deposit and make semi-annual contributions of $950.If your investment earns you 2.6% compounded annually, how long will it take before you have $60,000?

Explain the difference between a very long annuity and a perpetuity.

How much interest can be accumulated during one year on a $1,000 deposit paying continuously compounded interest at an APR of 10 percent?

The concept of compound interest refers to:

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 present value of $100 to be deposited today into an account paying 8.0 percent, compounded semi-annually for two years?

What is the present value of a four-period annuity of $100 per year that begins two years from today if the discount rate is 9 percent?

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

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

If four years of college is expected to cost $150,000 18 years from now, how much must be deposited now into an account that will average 8 percent annually in order to save the $150,000? By how much would your answer change if you expected 11 percent annually?

The Rule of 72 states that the time it will take for an investment to double in value equals approximately 72/r, where r is expressed as a percentage.

An amortizing loan is one in which:

Marjorie is investing $5,000 in an eight-year certificate of deposit (GIC) that pays 6 percent annual interest with annual compounding.How much will she have when the CD matures?

What is the minimum nominal rate of return should you accept, if you require a 4 percent real rate of return and the rate of inflation is expected to average 3.5 percent during the investment period?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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