Question 1

Suppose a State of New York bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%,how much is the bond worth today?

Accepted Answer

A) $585.43 
B) $614.70 
C) $645.44 
D) $677.71 
E) $711.59 
A) $585.43 
B) $614.70 
C) $645.44 
D) $677.71 
E) $711.59

Question 2

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A) A time line is not meaningful unless all cash flows occur annually. 
B) Time lines are useful for visualizing complex problems prior to doing actual calculations. 
C) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
D) Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. 
E) Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
A) A time line is not meaningful unless all cash flows occur annually. 
B) Time lines are useful for visualizing complex problems prior to doing actual calculations. 
C) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
D) Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. 
E) Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

Question 4

Suppose Sally Smith plans to invest $1,000.She can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be more than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 5

Charter Bank pays a 4.50% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%)does the bank pay?

Accepted Answer

A) 3.72% 
B) 4.13% 
C) 4.59% 
D) 5.05% 
E) 5.56% 
A) 3.72% 
B) 4.13% 
C) 4.59% 
D) 5.05% 
E) 5.56%

Question 6

Suppose Randy Jones plans to invest $1,000.He can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be somewhat less than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 7

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A) 8.24% 
B) 8.45% 
C) 8.66% 
D) 8.88% 
E) 9.10% 
A) 8.24% 
B) 8.45% 
C) 8.66% 
D) 8.88% 
E) 9.10%

Question 8

Suppose a State of California bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%,how much is the bond worth today?

Accepted Answer

A) $651.60 
B) $684.18 
C) $718.39 
D) $754.31 
E) $792.02 
A) $651.60 
B) $684.18 
C) $718.39 
D) $754.31 
E) $792.02

Question 9

You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years.You could earn 4.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Accepted Answer

A) $20,701 
B) $21,791 
C) $22,938 
D) $24,085 
E) $25,289 
A) $20,701 
B) $21,791 
C) $22,938 
D) $24,085 
E) $25,289

Question 10

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 11

If a bank compounds savings accounts quarterly,the effective annual rate will exceed the nominal rate.

Accepted Answer

A) True 
 B)False

Question 12

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Accepted Answer

A) True 
 B)False

Question 13

Your child's orthodontist offers you two alternative payment plans.The first plan requires a $4,000 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?

Accepted Answer

A) 12.31% 
B) 12.96% 
C) 13.64% 
D) 14.36% 
E) 15.08% 
A) 12.31% 
B) 12.96% 
C) 13.64% 
D) 14.36% 
E) 15.08%

Question 14

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

A) $16,806 
B) $17,690 
C) $18,621 
D) $19,601 
E) $20,633 
A) $16,806 
B) $17,690 
C) $18,621 
D) $19,601 
E) $20,633

Question 15

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A) $ 969 
B) $1,020 
C) $1,074 
D) $1,131 
E) $1,187 
A) $ 969 
B) $1,020 
C) $1,074 
D) $1,131 
E) $1,187

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD)that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

Accepted Answer

A) $1,781.53 
B) $1,870.61 
C) $1,964.14 
D) $2,062.34 
E) $2,165.46 
A) $1,781.53 
B) $1,870.61 
C) $1,964.14 
D) $2,062.34 
E) $2,165.46

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A) If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
B) If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. 
C) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator. 
D) If you solve for I and get a negative number, then you must have made a mistake. 
E) If CF0 is positive and all the other CFs are negative, then you can still solve for I. 
A) If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
B) If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. 
C) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator. 
D) If you solve for I and get a negative number, then you must have made a mistake. 
E) If CF0 is positive and all the other CFs are negative, then you can still solve for I.

Question 19

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or greater than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 20

​What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

Accepted Answer

A) ​8.95% 
B) ​9.39% 
C) ​9.86% 
D) ​10.36% 
E) ​10.88% 
A) ​8.95% 
B) ​9.39% 
C) ​9.86% 
D) ​10.36% 
E) ​10.88%

Exam 5: Time Value of Money

Suppose a State of New York bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%,how much is the bond worth today?

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Which of the following statements is CORRECT?

Charter Bank pays a 4.50% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%)does the bank pay?

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Suppose a State of California bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%,how much is the bond worth today?

You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years.You could earn 4.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

If a bank compounds savings accounts quarterly,the effective annual rate will exceed the nominal rate.

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

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

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD)that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

Which of the following statements is CORRECT?

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or greater than the nominal rate on the deposit (or loan).

​What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

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

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?