Question 1

What is the present value of a stream of annual end-of-the-year annuity cash flows if the discount rate is 0%, and the cash flows of $50 last for 20 years?

Accepted Answer

A)  Less than $1,000 
B)  Exactly $1,000 
C)  More than $1,000 
D)  This question cannot be answered because we have an interest rate of 0.0%. 
A)  Less than $1,000 
B)  Exactly $1,000 
C)  More than $1,000 
D)  This question cannot be answered because we have an interest rate of 0.0%.

Question 2

Willis has won the $4,700,000 state lottery and intends to save all of the money for his retirement. He chooses to receive an annual cash flow of $235,000 for twenty years, with the first payment to be received one year from today. How much money will be in his retirement account in twenty years if he can reinvest his money at an annual rate of 6.75%?

Accepted Answer

A)  $9,374,989 
B)  $17,356,235 
C)  $10,007,801 
D)  $4,700,000 
A)  $9,374,989 
B)  $17,356,235 
C)  $10,007,801 
D)  $4,700,000

Question 3

The furniture store offers you no-money-down on a new set of living room furniture. Further, you may pay for the furniture in three equal annual end-of-the-year payments of $1,000 each with the first payment to be made one year from today. If the discount rate is 6%, what is the present value of the furniture payments?

Accepted Answer

A)  $3,183.60 
B)  $3,000.00 
C)  $2,833.39 
D)  $2,673.01 
A)  $3,183.60 
B)  $3,000.00 
C)  $2,833.39 
D)  $2,673.01

Question 4

You have accumulated $800,000 for your retirement. How much money can you withdraw in equal annual beginning-of-the-year cash flows if you invest the money at a rate of 7% for thirty years?

Accepted Answer

A)  $64,469.12 
B)  $60,251.52 
C)  $8,469.12 
D)  $9,061.96 
A)  $64,469.12 
B)  $60,251.52 
C)  $8,469.12 
D)  $9,061.96

Question 5

You have won the lottery and received a check for $1,275,156 today. You invest the lottery check today at an annual interest rate of 8% and allow it to build for a full ten years. At that point in time, you shift the money to an account paying only 6% per year. You plan to spend $175,000 per year in retirement (assume equal annual end-of-the-year cash flows) for 30 years, and your first retirement cash flow is exactly eleven years from today. Will you have enough money to fully fund your desired retirement? Use a calculator to determine your answer.

Accepted Answer

A)  Yes, because your investment will allow you to spend up to $225,000 per year in retirement. 
B)  No, because your investment will allow you to spend up to only $158,000 per year in retirement. 
C)  Yes, because your investment will allow you to spend up to $200,000 per year in retirement. 
D)  No, because your investment will allow you to spend up to only $137,000 per year in retirement. 
A)  Yes, because your investment will allow you to spend up to $225,000 per year in retirement. 
B)  No, because your investment will allow you to spend up to only $158,000 per year in retirement. 
C)  Yes, because your investment will allow you to spend up to $200,000 per year in retirement. 
D)  No, because your investment will allow you to spend up to only $137,000 per year in retirement.

Question 6

Present values and interest rates are inversely related. This means that if you deposit $1,000 into an interest-earning account today, it will take longer to reach a future value of $5,000 at an interest rate of 6% than at a rate of 4%.

Accepted Answer

A) True 
 B)False

Question 7

What is the future value in year twelve of an ordinary annuity cash flow of $6,000 per year at an interest rate of 4.00% per year?

Accepted Answer

A)  $90,154.83 
B)  $93,761.02 
C)  $28,675.97 
D)  $32,117.08 
A)  $90,154.83 
B)  $93,761.02 
C)  $28,675.97 
D)  $32,117.08

Question 8

Twelve years ago, you paid for the right to twelve $25,000 annual end-of-the-year cash flows. If discounting the cash flows at an annual rate of 8%, what did you pay for these cash flows back then?

Accepted Answer

A)  $$474,428.16 
B)  $300,000.00 
C)  $203,474.11 
D)  $188,401.95 
A)  $$474,428.16 
B)  $300,000.00 
C)  $203,474.11 
D)  $188,401.95

Question 9

Which of the following is NOT true regarding the total payment in an equal payment amortization table?

Accepted Answer

A)  The total payment for any period is equal to the principal plus interest payments for that same period. 
B)  The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment. 
C)  The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate. 
D)  All of the above are true. 
A)  The total payment for any period is equal to the principal plus interest payments for that same period. 
B)  The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment. 
C)  The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate. 
D)  All of the above are true.

Question 10

Your employer has agreed to place year-end deposits of $1,000, $2,000 and $3,000 into your retirement account. The $1,000 deposit will be one year from today, the $2,000 deposit two years from today, and the $3,000 deposit three years from today. If your account earns 5% per year, how much money will you have in the account at the end of year three when the last deposit is made?

Accepted Answer

A)  $5,357.95 
B)  $6,000 
C)  $6,202.50 
D)  $6,727.88 
A)  $5,357.95 
B)  $6,000 
C)  $6,202.50 
D)  $6,727.88

Question 11

Which is greater, the present value of a five-year ordinary annuity of $300 discounted at 10%, or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?

Accepted Answer

A)  The first annuity because the cash flows occur sooner. 
B)  The second annuity because the cash flows are discounted at a lower interest rate. 
C)  The two annuities are of equal value. 
D)  The answer to this question cannot be determined. 
A)  The first annuity because the cash flows occur sooner. 
B)  The second annuity because the cash flows are discounted at a lower interest rate. 
C)  The two annuities are of equal value. 
D)  The answer to this question cannot be determined.

Question 12

If you borrow $50,000 at an annual interest rate of 12% for six years, what is the annual payment (prior to maturity) on an interest-only type of loan?

Accepted Answer

A)  $0.00 
B)  $6,000.00 
C)  $8,333.33 
D)  $12,161.29 
A)  $0.00 
B)  $6,000.00 
C)  $8,333.33 
D)  $12,161.29

Question 13

The present value of a $100 three-year annuity due (first cash flow occurs today) discounted at a rate of 10% is equal to ________.

Accepted Answer

A)  $248.69 
B)  $273.55 
C)  $135.17 
D)  $300.00 
A)  $248.69 
B)  $273.55 
C)  $135.17 
D)  $300.00

Question 14

Discuss the nature and importance of the TVM equation.

Accepted Answer

The TVM equation makes the fundamental p

Question 15

Amortization tables are common and can be used for all but which of the following?

Accepted Answer

A)  Car loans 
B)  Mortgage loans 
C)  Consumer product loans 
D)  Amortization tables may be used for all of the above. 
A)  Car loans 
B)  Mortgage loans 
C)  Consumer product loans 
D)  Amortization tables may be used for all of the above.

Question 16

Amortization tables are useful for each of the following reasons EXCEPT:

Accepted Answer

A)  determining the principal balance due if the loan is being paid off early. 
B)  determining how much of a total payment is interest and how much is principal for tax purposes. 
C)  determining the regular periodic total payment. 
D)  All of these are useful purposes of an amortization table. 
A)  determining the principal balance due if the loan is being paid off early. 
B)  determining how much of a total payment is interest and how much is principal for tax purposes. 
C)  determining the regular periodic total payment. 
D)  All of these are useful purposes of an amortization table.

Question 17

You have just turned 25 and may now spend a portion of the trust fund your parents established for you. The terms of the trust fund allow you to withdraw 60 beginning-of-the-year cash flows of $100,000 each. An investment firm has offered to pay you cash for all of the fund today. If the rate they use to discount the cash flows is 16% per year, what is their offer price today for your pension fund?

Accepted Answer

A)  $4,605,750,853 
B)  $6,000,000.00 
C)  $624,915.20 
D)  $724,901.63 
A)  $4,605,750,853 
B)  $6,000,000.00 
C)  $624,915.20 
D)  $724,901.63

Question 18

Randy W. recently won the Western States Lottery of $6,500,000. The lottery pays either a total of twenty $325,000 payments per year with the first payment today (i.e., an annuity due), or $3,500,000 today. At what interest rate would Randy be financially indifferent between these two payout choices?

Accepted Answer

A)  5.37% 
B)  7.36% 
C)  7.76% 
D)  8.00% 
A)  5.37% 
B)  7.36% 
C)  7.76% 
D)  8.00%

Question 19

It is fortunate that we have formula, calculator, and spreadsheets as tools to solve for variables of the TVM equation, because there is no real way to visualize the timing and amount of cash flows.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is NOT a form of perpetuity?

Accepted Answer

A)  A British consol bond 
B)  Preferred stock that pays the same dividend forever 
C)  A philanthropic endowment fund that pays the same charitable amount every year forever 
D)  All are examples of perpetuities. 
A)  A British consol bond 
B)  Preferred stock that pays the same dividend forever 
C)  A philanthropic endowment fund that pays the same charitable amount every year forever 
D)  All are examples of perpetuities.

What is the present value of a stream of annual end-of-the-year annuity cash flows if the discount rate is 0%, and the cash flows of $50 last for 20 years?

You have accumulated $800,000 for your retirement. How much money can you withdraw in equal annual beginning-of-the-year cash flows if you invest the money at a rate of 7% for thirty years?

Present values and interest rates are inversely related. This means that if you deposit $1,000 into an interest-earning account today, it will take longer to reach a future value of $5,000 at an interest rate of 6% than at a rate of 4%.

What is the future value in year twelve of an ordinary annuity cash flow of $6,000 per year at an interest rate of 4.00% per year?

Twelve years ago, you paid for the right to twelve $25,000 annual end-of-the-year cash flows. If discounting the cash flows at an annual rate of 8%, what did you pay for these cash flows back then?

Which of the following is NOT true regarding the total payment in an equal payment amortization table?

Which is greater, the present value of a five-year ordinary annuity of $300 discounted at 10%, or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?

If you borrow $50,000 at an annual interest rate of 12% for six years, what is the annual payment (prior to maturity) on an interest-only type of loan?

The present value of a $100 three-year annuity due (first cash flow occurs today) discounted at a rate of 10% is equal to ________.

Discuss the nature and importance of the TVM equation.

Amortization tables are common and can be used for all but which of the following?

Amortization tables are useful for each of the following reasons EXCEPT:

It is fortunate that we have formula, calculator, and spreadsheets as tools to solve for variables of the TVM equation, because there is no real way to visualize the timing and amount of cash flows.

Which of the following is NOT a form of perpetuity?

Financial Management

Financial Statements

The Time Value of Money Part 1

Interest Rates

Bonds and Bond Valuation

Stocks and Stock Valuation

Risk and Return

Capital Budgeting Decision Models

Cash Flow Estimation

The Cost of Capital

Forecasting and Short-Term Financial Planning

Working Capital Management

Financial Ratios and Firm Performance

Raising Capital

Capital Structure

Dividends, Dividend Policy, and Stock Splits

International Financial Management

Filters

Exam 4: The Time Value of Money Part 2

What is the present value of a stream of annual end-of-the-year annuity cash flows if the discount rate is 0%, and the cash flows of $50 last for 20 years?

You have accumulated $800,000 for your retirement. How much money can you withdraw in equal annual beginning-of-the-year cash flows if you invest the money at a rate of 7% for thirty years?

Present values and interest rates are inversely related. This means that if you deposit $1,000 into an interest-earning account today, it will take longer to reach a future value of $5,000 at an interest rate of 6% than at a rate of 4%.

What is the future value in year twelve of an ordinary annuity cash flow of $6,000 per year at an interest rate of 4.00% per year?

Twelve years ago, you paid for the right to twelve $25,000 annual end-of-the-year cash flows. If discounting the cash flows at an annual rate of 8%, what did you pay for these cash flows back then?

Which of the following is NOT true regarding the total payment in an equal payment amortization table?

Which is greater, the present value of a five-year ordinary annuity of $300 discounted at 10%, or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?

If you borrow $50,000 at an annual interest rate of 12% for six years, what is the annual payment (prior to maturity) on an interest-only type of loan?

The present value of a $100 three-year annuity due (first cash flow occurs today) discounted at a rate of 10% is equal to ________.

Discuss the nature and importance of the TVM equation.

Amortization tables are common and can be used for all but which of the following?

Amortization tables are useful for each of the following reasons EXCEPT:

It is fortunate that we have formula, calculator, and spreadsheets as tools to solve for variables of the TVM equation, because there is no real way to visualize the timing and amount of cash flows.

Which of the following is NOT a form of perpetuity?

Financial Management

Financial Statements

The Time Value of Money Part 1

Interest Rates

Bonds and Bond Valuation

Stocks and Stock Valuation

Risk and Return

Capital Budgeting Decision Models

Cash Flow Estimation

The Cost of Capital

Forecasting and Short-Term Financial Planning

Working Capital Management

Financial Ratios and Firm Performance

Raising Capital

Capital Structure

Dividends, Dividend Policy, and Stock Splits

International Financial Management

Filters