Question 1

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
B) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
C) The cash flows for an annuity due must all occur at the ends of the periods. 
D) The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. 
E) If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. 
A) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
B) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
C) The cash flows for an annuity due must all occur at the ends of the periods. 
D) The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. 
E) If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

Question 3

Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%,simple interest,with interest paid quarterly.Merchants Bank offers to lend you the $50,000,but it will charge 6.0%,simple interest,with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?

Accepted Answer

A) 1.56% 
B) 1.30% 
C) 1.09% 
D) 0.91% 
E) 0.72% 
A) 1.56% 
B) 1.30% 
C) 1.09% 
D) 0.91% 
E) 0.72%

Question 4

All other things held constant,the present value of a given annual annuity increases as the number of periods per year increases.

Accepted Answer

A) True 
 B)False

Question 5

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A) $ 8,509 
B) $ 8,957 
C) $ 9,428 
D) $ 9,924 
E) $10,446 
A) $ 8,509 
B) $ 8,957 
C) $ 9,428 
D) $ 9,924 
E) $10,446

Question 6

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

Accepted Answer

A) $10,155.68 
B) $10,690.19 
C) $11,252.83 
D) $11,845.09 
E) $12,468.51 
A) $10,155.68 
B) $10,690.19 
C) $11,252.83 
D) $11,845.09 
E) $12,468.51

Question 7

You inherited an oil well that will pay you $25,000 per year for 25 years,with the first payment being made today.If you think a fair return on the well is 7.5%,how much should you ask for it if you decide to sell it?

Accepted Answer

A) $284,595 
B) $299,574 
C) $314,553 
D) $330,281 
E) $346,795 
A) $284,595 
B) $299,574 
C) $314,553 
D) $330,281 
E) $346,795

Question 8

At a rate of 6.5%,what is the future value of the following cash flow stream? ​
​
  ​​

Accepted Answer

A) $526.01 
B) $553.69 
C) $582.83 
D) $613.51 
E) $645.80 
A) $526.01 
B) $553.69 
C) $582.83 
D) $613.51 
E) $645.80

Question 9

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

Accepted Answer

A) 73.67% 
B) 77.55% 
C) 81.63% 
D) 85.93% 
E) 90.45% 
A) 73.67% 
B) 77.55% 
C) 81.63% 
D) 85.93% 
E) 90.45%

Question 10

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A) Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). 
B) Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C) Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D) Investment D pays $2,500 at the end of 10 years (just one payment). 
E) Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). 
A) Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). 
B) Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C) Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D) Investment D pays $2,500 at the end of 10 years (just one payment). 
E) Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Question 11

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Accepted Answer

A) True 
 B)False

Question 12

Your father is about to retire,and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Accepted Answer

A) $1,063,968 
B) $1,119,966 
C) $1,178,912 
D) $1,240,960 
E) $1,303,008 
A) $1,063,968 
B) $1,119,966 
C) $1,178,912 
D) $1,240,960 
E) $1,303,008

Question 13

You deposit $500 today in a savings account that pays 3.5% interest,compounded annually.How much will your account be worth at the end of 25 years?

Accepted Answer

A) $1,122.54 
B) $1,181.62 
C) $1,240.70 
D) $1,302.74 
E) $1,367.88 
A) $1,122.54 
B) $1,181.62 
C) $1,240.70 
D) $1,302.74 
E) $1,367.88

Question 14

Suppose a U.S.treasury bond will pay $2,500 five years from now.If the going interest rate on 5-year treasury bonds is 4.25%,how much is the bond worth today?

Accepted Answer

A) $1,928.78 
B) $2,030.30 
C) $2,131.81 
D) $2,238.40 
E) $2,350.32 
A) $1,928.78 
B) $2,030.30 
C) $2,131.81 
D) $2,238.40 
E) $2,350.32

Question 15

Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%,compounded monthly.The loan (principal plus interest)must be repaid at the end of the year.Midwest Bank also offers to lend you the $50,000,but it will charge an annual rate of 7.0%,with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?

Accepted Answer

A) 0.52% 
B) 0.44% 
C) 0.36% 
D) 0.30% 
E) 0.24% 
A) 0.52% 
B) 0.44% 
C) 0.36% 
D) 0.30% 
E) 0.24%

Question 16

Starting to invest early for retirement increases the benefits of compound interest.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A) The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
B) If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%. 
C) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
D) The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
A) The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
B) If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%. 
C) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
D) The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

Question 18

After graduation,you plan to work for Dynamo Corporation for 12 years and then start your own business.You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6)and $15,000 annually for the following 6 years (t = 7 through t = 12).The first deposit will be made a year from today.In addition,your grandfather just gave you a $25,000 graduation gift which you will deposit immediately (t = 0).If the account earns 9% compounded annually,how much will you have when you start your business 12 years from now?

Accepted Answer

A) $238,176 
B) $250,712 
C) $263,907 
D) $277,797 
E) $291,687 
A) $238,176 
B) $250,712 
C) $263,907 
D) $277,797 
E) $291,687

Question 19

Five years ago,Weed Go Inc.earned $1.50 per share.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS)over the 5-year period?

Accepted Answer

A) 15.54% 
B) 16.36% 
C) 17.18% 
D) 18.04% 
E) 18.94% 
A) 15.54% 
B) 16.36% 
C) 17.18% 
D) 18.04% 
E) 18.94%

Question 20

Your subscription to Investing Wisely Weekly is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $850,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A) 7.48 
B) 8.80 
C) 10.35 
D) 12.18 
E) 14.33 
A) 7.48 
B) 8.80 
C) 10.35 
D) 12.18 
E) 14.33

Exam 5: Time Value of Money

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Which of the following statements is CORRECT?

All other things held constant,the present value of a given annual annuity increases as the number of periods per year increases.

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

You inherited an oil well that will pay you $25,000 per year for 25 years,with the first payment being made today.If you think a fair return on the well is 7.5%,how much should you ask for it if you decide to sell it?

At a rate of 6.5%,what is the future value of the following cash flow stream? ​ ​ ​​

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Your father is about to retire,and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

You deposit $500 today in a savings account that pays 3.5% interest,compounded annually.How much will your account be worth at the end of 25 years?

Suppose a U.S.treasury bond will pay $2,500 five years from now.If the going interest rate on 5-year treasury bonds is 4.25%,how much is the bond worth today?

Starting to invest early for retirement increases the benefits of compound interest.

Which of the following statements is CORRECT?

Five years ago,Weed Go Inc.earned $1.50 per share.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS)over the 5-year period?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, leasing, warrants, and Convertibles

Mergers and Acquisitions

Continuous Compounding and Discounting

Zero Coupon Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the Capm to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Degree of Leverage

Filters

At a rate of 6.5%,what is the future value of the following cash flow stream?