Question 1

The term "constant dollars" refers to equal payments for amortizing a loan.

Accepted Answer

A) True 
 B)False

Question 2

With $1.5 million in an account expected to earn 8 percent annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today?

Accepted Answer

A) $112,150 
B) $120,000 
C) $123,371 
D) $133,241 $1,500,000 = pmt 
A) $112,150 
B) $120,000 
C) $123,371 
D) $133,241 $1,500,000 = pmt

Question 3

How much must be saved annually, beginning one year from now, in order to accumulate $50,000 over the next 10 years, earning 9 percent annually?

Accepted Answer

A) $3,291 
B) $3,587 
C) $4,500 
D) $4,587 $50,000 = pmt
= pmt
= pmt [15.1929] 
A) $3,291 
B) $3,587 
C) $4,500 
D) $4,587 $50,000 = pmt
= pmt
= pmt [15.1929]

Question 4

Which account would be preferred by a depositor: an 8 percent APR with monthly compounding or 8.5 percent APR with semi-annual compounding?

Accepted Answer

A) 8 percent with monthly compounding 
B) 8.5 percent with semi-annual compounding 
C) The depositor would be indifferent 
D) The time period must be known to select the preferred account (1.0667)12-1 = 8.3%
(1)0425)2-1 = 8.68% 
A) 8 percent with monthly compounding 
B) 8.5 percent with semi-annual compounding 
C) The depositor would be indifferent 
D) The time period must be known to select the preferred account (1.0667)12-1 = 8.3%
(1)0425)2-1 = 8.68%

Question 5

What is the present value of the following payment stream, discounted at 8 percent 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) $5,022.11 
B) $5,144.03 
C) $5,423.87 
D) $5,520.00 PV = 
A) $5,022.11 
B) $5,144.03 
C) $5,423.87 
D) $5,520.00 PV =

Question 6

A perpetuity is a special form of an annuity.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following characteristics applies to the amortization of a loan such as a home mortgage?

Accepted Answer

A) The amortization decreases with each payment 
B) The amortization increases with each payment 
C) The amortization is constant throughout the loan 
D) The amortization fluctuates monthly with changes in interest rates 
A) The amortization decreases with each payment 
B) The amortization increases with each payment 
C) The amortization is constant throughout the loan 
D) The amortization fluctuates monthly with changes in interest rates

Question 8

How much must be deposited today in an account earning 6 percent annually to accumulate a 20 percent down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4 percent?

Accepted Answer

A) $3,774 
B) $3,782 
C) $3,925 
D) $4,080 Need $20,800 x .2 = $4,160
PV = $4,160/(1.06) 
A) $3,774 
B) $3,782 
C) $3,925 
D) $4,080 Need $20,800 x .2 = $4,160
PV = $4,160/(1.06)

Question 9

The more frequent the compounding, the higher the future value, other things equal.

Accepted Answer

A) True 
 B)False

Question 10

A credit card account that charges interest at the rate of 1.25 percent per month would have an annually compounded rate of _______ and an APR of _______.

Accepted Answer

A) 16.08 percent; 15.00 percent 
B) 14.55 percent; 16.08 percent 
C) 12.68 percent; 15.00 percent 
D) 15.00 percent; 14.55 percent Annually compounded rate = (1.0125)12-1 = 16.08% 
A) 16.08 percent; 15.00 percent 
B) 14.55 percent; 16.08 percent 
C) 12.68 percent; 15.00 percent 
D) 15.00 percent; 14.55 percent Annually compounded rate = (1.0125)12-1 = 16.08%

Question 11

If the effective annual rate of interest is known to be 16.08 percent on a debt that has quarterly payments, what is the annual percentage rate?

Accepted Answer

A) 4.02 percent 
B) 10.02 percent 
C) 14.50 percent 
D) 15.19 percent (1.1608).25 = 1 + quarterly rate
1)0380 - 1 = quarterly rate
)0380 = quarterly rate 
A) 4.02 percent 
B) 10.02 percent 
C) 14.50 percent 
D) 15.19 percent (1.1608).25 = 1 + quarterly rate
1)0380 - 1 = quarterly rate
)0380 = quarterly rate

Question 12

The present value of the following cash flows is known to be $6,939.91; $500 today, $2,000 in one year, and $5,000 in two years.What discount rate is being used?

Accepted Answer

A) 3 percent 
B) 4 percent 
C) 5 percent 
D) 6 percent $6,939.91 = $500/(1 + i)0 + $2,000/(1 + i)1 + $5,000/(1 + i)2 
A) 3 percent 
B) 4 percent 
C) 5 percent 
D) 6 percent $6,939.91 = $500/(1 + i)0 + $2,000/(1 + i)1 + $5,000/(1 + i)2

Question 13

Determine the amount that must be deposited today in order for an investor to withdraw $400 per month for 3 years and have $10,500 remaining.Interest is assumed to be 6.45% compounded annually.

Accepted Answer

A) $19,190 
B) $20,694 
C) $21,801 
D) $22,522 
A) $19,190 
B) $20,694 
C) $21,801 
D) $22,522

Question 14

What is the APR on a loan that charges interest at the rate of 1.4 percent per month?

Accepted Answer

A) 10.20 percent 
B) 14.00 percent 
C) 16.80 percent 
D) 18.16 percent 
A) 10.20 percent 
B) 14.00 percent 
C) 16.80 percent 
D) 18.16 percent

Question 15

Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?

Accepted Answer

Evaluating a project by APR alone ignore

Question 16

What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today) and earns 10 percent compounded annually?

Accepted Answer

A) $25,000.00 
B) $25,657.91 
C) $28,223.70 
D) $29,411.76 PV = 
A) $25,000.00 
B) $25,657.91 
C) $28,223.70 
D) $29,411.76 PV =

Question 17

You invest $10,000 in an investment earning 10.57% interest compounded annually.You also withdraw $200 per year.How many years will it take to double your initial investment to $20,000?

Accepted Answer

A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years 
A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years

Question 18

The salesperson offers, "Buy this new car for $25,000 cash or, with appropriate down payment, pay $500 per month for 48 months at 8 percent interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment.

Accepted Answer

A) $1,000.00 
B) $4,520.64 
C) $5,127.24 
D) $8,000.00 PV = $500 
A) $1,000.00 
B) $4,520.64 
C) $5,127.24 
D) $8,000.00 PV = $500

Question 19

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

Accepted Answer

A) $7,472.58 
B) $10,303.62 
C) $13,000.00 
D) $13,382.26 FV = PV + (PV x r x t) 
A) $7,472.58 
B) $10,303.62 
C) $13,000.00 
D) $13,382.26 FV = PV + (PV x r x t)

Question 20

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

Exam 5: The Time Value of Money

The term "constant dollars" refers to equal payments for amortizing a loan.

With $1.5 million in an account expected to earn 8 percent annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today?

How much must be saved annually, beginning one year from now, in order to accumulate $50,000 over the next 10 years, earning 9 percent annually?

Which account would be preferred by a depositor: an 8 percent APR with monthly compounding or 8.5 percent APR with semi-annual compounding?

What is the present value of the following payment stream, discounted at 8 percent 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?

A perpetuity is a special form of an annuity.

Which of the following characteristics applies to the amortization of a loan such as a home mortgage?

How much must be deposited today in an account earning 6 percent annually to accumulate a 20 percent down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4 percent?

The more frequent the compounding, the higher the future value, other things equal.

A credit card account that charges interest at the rate of 1.25 percent per month would have an annually compounded rate of _______ and an APR of _______.

If the effective annual rate of interest is known to be 16.08 percent on a debt that has quarterly payments, what is the annual percentage rate?

The present value of the following cash flows is known to be $6,939.91; $500 today, $2,000 in one year, and $5,000 in two years.What discount rate is being used?

Determine the amount that must be deposited today in order for an investor to withdraw $400 per month for 3 years and have $10,500 remaining.Interest is assumed to be 6.45% compounded annually.

What is the APR on a loan that charges interest at the rate of 1.4 percent per month?

Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?

What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today) and earns 10 percent compounded annually?

You invest $10,000 in an investment earning 10.57% interest compounded annually.You also withdraw $200 per year.How many years will it take to double your initial investment to $20,000?

The salesperson offers, "Buy this new car for $25,000 cash or, with appropriate down payment, pay $500 per month for 48 months at 8 percent interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment.

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

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

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

Filters

A credit card account that charges interest at the rate of 1.25 percent per month would have an annually compounded rate of _ and an APR of _.

What is the present value of your trust fund if it promises to pay you $50,000 on your 30^th birthday (7 years from today) and earns 10 percent compounded annually?