Question 1

Cash flows occurring in different periods should not be compared unless:

Accepted Answer

A)  interest rates are expected to be stable. 
B)  the flows occur no more than one year from each other. 
C)  high rates of interest can be earned on the flows. 
D) the flows have been discounted to a common date. 
A)  interest rates are expected to be stable. 
B)  the flows occur no more than one year from each other. 
C)  high rates of interest can be earned on the flows. 
D) the flows have been discounted to a common date.

Question 2

Assume you are making $989 monthly payments on your amortized mortgage. The amount of each payment that is applied to the principal balance:

Accepted Answer

A)  decreases with each succeeding payment. 
B)  increases with each succeeding payment. 
C)  is constant throughout the loan term. 
D) fluctuates monthly with changes in market interest rates. 
A)  decreases with each succeeding payment. 
B)  increases with each succeeding payment. 
C)  is constant throughout the loan term. 
D) fluctuates monthly with changes in market interest rates.

Question 3

Discuss the statement, "It is always preferred to select an account that offers compound interest over an account that offers simple interest."

Accepted Answer

This statement is True if the APRs are e

Question 4

Assume the total expense for your current year in college equals $20,000. How much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

Accepted Answer

A)  $952.46 
B)  $1,600.00 
C)  $1,728.08 
D) $3,973.11 
A)  $952.46 
B)  $1,600.00 
C)  $1,728.08 
D) $3,973.11

Question 5

You are considering the purchase of a home that would require a mortgage of $150,000. How much more in total interest will you pay if you select a 30-year mortgage at 5.65% rather than a 15-year mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places.)

Accepted Answer

A)  $86,311.18 
B)  $78,487.92 
C)  $99,595.80 
D) $102,486.68 
A)  $86,311.18 
B)  $78,487.92 
C)  $99,595.80 
D) $102,486.68

Question 6

What is the present value of your trust fund if you have projected that it will provide you with $50,000 on your 30th birthday (7 years from today) and it earns 10% compounded annually?

Accepted Answer

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

Question 7

What problem can be caused by "mixing" real and nominal cash flows in discounting exercises?

Accepted Answer

One of the primary components of a nomin

Question 8

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 9

To calculate present value, we discount the future value by some interest rate r, the discount rate.

Accepted Answer

A) True 
 B)False

Question 10

Prizes are often not "worth" as much as claimed. Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today. Assume an interest rate of 7%.

Accepted Answer

A)  $2,833,898.81 
B)  $2,911,015.68 
C)  $2,609,144.14 
D) $2,738,304.13 
A)  $2,833,898.81 
B)  $2,911,015.68 
C)  $2,609,144.14 
D) $2,738,304.13

Question 11

A furniture store is offering free credit on purchases over $1,000. You observe that a big-screen television can be purchased for nothing down and $4,000 due in one year. The store next door offers an identical television for $3,650 but does not offer credit terms. Which statement below best describes the cost of the "free" credit?

Accepted Answer

A)  8.75% 
B)  9.13% 
C)  9.59% 
D) 0% 
A)  8.75% 
B)  9.13% 
C)  9.59% 
D) 0%

Question 12

How many monthly payments remain to be paid on an 8% mortgage with a 30-year amortization and monthly payments of $733.76, when the balance reaches one-half of the $100,000 mortgage?

Accepted Answer

A)  Approximately 268 payments 
B)  Approximately 180 payments 
C)  Approximately 91 payments 
D) Approximately 68 payments 
A)  Approximately 268 payments 
B)  Approximately 180 payments 
C)  Approximately 91 payments 
D) Approximately 68 payments

Question 13

What is the difference between real and nominal cash flows and between real and nominal interest rates?

Accepted Answer

A dollar is a dollar, but the amount of

Question 14

A stream of equal cash payments lasting forever is termed:

Accepted Answer

A)  an annuity. 
B)  an annuity due. 
C)  an installment plan. 
D) a perpetuity. 
A)  an annuity. 
B)  an annuity due. 
C)  an installment plan. 
D) a perpetuity.

Question 15

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 multiyear 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 multiyear period of time. 
D) determining the APR of the investment.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate?

Accepted Answer

A)  1.04% 
B)  4.17% 
C)  5.00% 
D) 8.19% 
A)  1.04% 
B)  4.17% 
C)  5.00% 
D) 8.19%

Question 18

Other things being equal, the more frequent the compounding period, the:

Accepted Answer

A)  higher the annual percentage rate. 
B)  lower the annual percentage rate. 
C)  higher the effective annual interest rate. 
D) lower the effective annual interest rate. 
A)  higher the annual percentage rate. 
B)  lower the annual percentage rate. 
C)  higher the effective annual interest rate. 
D) lower the effective annual interest rate.

Question 19

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year. The annual interest rate is 12% and payments begin in one month. What is the present value of this 2-year loan?

Accepted Answer

A)  $6,246.34 
B)  $6,389.78 
C)  $6,428.57 
D) $6,753.05 
A)  $6,246.34 
B)  $6,389.78 
C)  $6,428.57 
D) $6,753.05

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 5: The Time Value of Money

Cash flows occurring in different periods should not be compared unless:

Assume you are making $989 monthly payments on your amortized mortgage. The amount of each payment that is applied to the principal balance:

Discuss the statement, "It is always preferred to select an account that offers compound interest over an account that offers simple interest."

Assume the total expense for your current year in college equals $20,000. How much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

You are considering the purchase of a home that would require a mortgage of $150,000. How much more in total interest will you pay if you select a 30-year mortgage at 5.65% rather than a 15-year mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places.)

What is the present value of your trust fund if you have projected that it will provide you with $50,000 on your 30th birthday (7 years from today) and it earns 10% compounded annually?

What problem can be caused by "mixing" real and nominal cash flows in discounting exercises?

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

To calculate present value, we discount the future value by some interest rate r, the discount rate.

Prizes are often not "worth" as much as claimed. Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today. Assume an interest rate of 7%.

How many monthly payments remain to be paid on an 8% mortgage with a 30-year amortization and monthly payments of $733.76, when the balance reaches one-half of the $100,000 mortgage?

What is the difference between real and nominal cash flows and between real and nominal interest rates?

A stream of equal cash payments lasting forever is termed:

The concept of compound interest refers to:

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

If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate?

Other things being equal, the more frequent the compounding period, the:

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year. The annual interest rate is 12% and payments begin in one month. What is the present value of this 2-year loan?

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

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Measuring Corporate Performance

Valuing Bonds

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Using Discounted Cash-Flow Analysis to Make Investment Decisions

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What is the present value of your trust fund if you have projected that it will provide you with $50,000 on your 30^th birthday (7 years from today) and it earns 10% compounded annually?