Question 1

Which account would be preferred by a depositor: an 8% APR with monthly compounding or 8.5% APR with semiannual compounding?

Accepted Answer

A)  8.0% with monthly compounding. 
B)  8.5% with semiannual compounding. 
C)  The depositor would be indifferent. 
D)  The time period must be known to select the preferred account. 
A)  8.0% with monthly compounding. 
B)  8.5% with semiannual compounding. 
C)  The depositor would be indifferent. 
D)  The time period must be known to select the preferred account.

Question 2

$50,000 is borrowed,to be repaid in three equal,annual payments with 10% interest.Approximately how much principal is amortized with the first payment?

Accepted Answer

A)  $2,010.60 
B)  $5,000.00 
C)  $15,105.74 
D)  $20,105.74 
A)  $2,010.60 
B)  $5,000.00 
C)  $15,105.74 
D)  $20,105.74

Question 3

A corporation has promised to pay $1,000 20 years from today for each bond sold now.No interest will be paid on the bonds during the 20 years,and the bonds are discounted at a 7% interest rate.Approximately how much should an investor pay for each bond?

Accepted Answer

A)  $70.00 
B)  $258.42 
C)  $629.56 
D)  $857.43 
A)  $70.00 
B)  $258.42 
C)  $629.56 
D)  $857.43

Question 4

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

Accepted Answer

A)  7.36% 
B)  7.50% 
C)  7.64% 
D)  8.01% 
A)  7.36% 
B)  7.50% 
C)  7.64% 
D)  8.01%

Question 5

With $1.5 million in an account expected to earn 8% annually over the retiree's 30 years of life expectancy,what annual annuity can be withdrawn,beginning today?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 
A)  $112,150 
B)  $120,000 
C)  $123,371 
D)  $133,241

Question 6

In calculating the present value of $1,000 to be received 5 years from today,the discount factor has been calculated to be .7008.What is the apparent interest rate?

Accepted Answer

A)  5.43% 
B)  7.37% 
C)  8.00% 
D)  9.50% 
A)  5.43% 
B)  7.37% 
C)  8.00% 
D)  9.50%

Question 7

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 8

What will be the approximate population of the United States,if its current population of 300 million grows at a compound rate of 2% annually for 25 years?

Accepted Answer

A)  413 million 
B)  430 million 
C)  488 million 
D)  492 million 
A)  413 million 
B)  430 million 
C)  488 million 
D)  492 million

Question 9

A cash-strapped young professional offers to buy your car with four,equal annual payments of $3,000,beginning 2 years from today.Assuming you're indifferent to cash versus credit,that you can invest at 10%,and that you want to receive $9,000 for the car,should you accept?

Accepted Answer

A)  Yes; present value is $9,510. 
B)  Yes; present value is $11,372. 
C)  No; present value is $8,645. 
D)  No; present value is $7,461. 
A)  Yes; present value is $9,510. 
B)  Yes; present value is $11,372. 
C)  No; present value is $8,645. 
D)  No; present value is $7,461.

Question 10

Your real estate agent mentions that homes in your price range require a payment of approximately $1,200 per month over 30 years at 9% interest.What is the approximate size of the mortgage with these terms?

Accepted Answer

A)  $128,035 
B)  $147,940 
C)  $149,140 
D)  $393,120 
A)  $128,035 
B)  $147,940 
C)  $149,140 
D)  $393,120

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

Accepted Answer

A) True 
 B)False

Question 13

An annuity factor represents the future value of $1 that is deposited today.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following factors is fixed and thus cannot change for a specific perpetuity?

Accepted Answer

A)  PV of a perpetuity 
B)  Cash payment of a perpetuity 
C)  Interest rate on a perpetuity 
D)  Discount rate of a perpetuity 
A)  PV of a perpetuity 
B)  Cash payment of a perpetuity 
C)  Interest rate on a perpetuity 
D)  Discount rate of a perpetuity

Question 15

The Excel function for interest rate is RATE (nper,pmt,PV,FV).

Accepted Answer

A) True 
 B)False

Question 16

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 17

What is the APR on a loan with an effective annual rate of 15.01% and weekly compounding of interest?

Accepted Answer

A)  12.00% 
B)  12.50% 
C)  13.00% 
D)  14.00% 
A)  12.00% 
B)  12.50% 
C)  13.00% 
D)  14.00%

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

What is the present value of the following set of cash flows at an interest rate of 7%: $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?

Accepted Answer

A)  $9,731 
B)  $10,412 
C)  $10,524 
D)  $11,524 
A)  $9,731 
B)  $10,412 
C)  $10,524 
D)  $11,524

Question 20

How much must be deposited today in an account earning 6% annually to accumulate a 20% 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%?

Accepted Answer

A)  $3,774 
B)  $3,782 
C)  $3,925 
D)  $4,080 
A)  $3,774 
B)  $3,782 
C)  $3,925 
D)  $4,080

Exam 5: The Time Value of Money

Which account would be preferred by a depositor: an 8% APR with monthly compounding or 8.5% APR with semiannual compounding?

$50,000 is borrowed,to be repaid in three equal,annual payments with 10% interest.Approximately how much principal is amortized with the first payment?

A corporation has promised to pay $1,000 20 years from today for each bond sold now.No interest will be paid on the bonds during the 20 years,and the bonds are discounted at a 7% interest rate.Approximately how much should an investor pay for each bond?

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

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

In calculating the present value of $1,000 to be received 5 years from today,the discount factor has been calculated to be .7008.What is the apparent interest rate?

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?

What will be the approximate population of the United States,if its current population of 300 million grows at a compound rate of 2% annually for 25 years?

A cash-strapped young professional offers to buy your car with four,equal annual payments of $3,000,beginning 2 years from today.Assuming you're indifferent to cash versus credit,that you can invest at 10%,and that you want to receive $9,000 for the car,should you accept?

Your real estate agent mentions that homes in your price range require a payment of approximately $1,200 per month over 30 years at 9% interest.What is the approximate size of the mortgage with these terms?

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

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

An annuity factor represents the future value of $1 that is deposited today.

Which of the following factors is fixed and thus cannot change for a specific perpetuity?

The Excel function for interest rate is RATE (nper,pmt,PV,FV).

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

What is the APR on a loan with an effective annual rate of 15.01% and weekly compounding of interest?

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

What is the present value of the following set of cash flows at an interest rate of 7%: $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?

How much must be deposited today in an account earning 6% annually to accumulate a 20% 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%?

Goals and Governance of the Corporation

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Accounting and Finance

Measuring Corporate Performance

Valuing Bonds

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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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

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Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

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