Question 1

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Accepted Answer

A) The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
B) A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
C) A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
D) If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. 
E) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
A) The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
B) A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
C) A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
D) If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. 
E) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

Question 2

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is CORRECT?

Accepted Answer

A) The periodic interest rate is greater than 3%. 
B) The periodic rate is less than 3%. 
C) The present value would be greater if the lump sum were discounted back for more periods. 
D) The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually. 
E) The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity. 
A) The periodic interest rate is greater than 3%. 
B) The periodic rate is less than 3%. 
C) The present value would be greater if the lump sum were discounted back for more periods. 
D) The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually. 
E) The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.

Question 3

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.By how much would you reduce the amount you owe in the first year?

Accepted Answer

A) $2,404.91 
B) $2,531.49 
C) $2,658.06 
D) $2,790.96 
E) $2,930.51 
A) $2,404.91 
B) $2,531.49 
C) $2,658.06 
D) $2,790.96 
E) $2,930.51

Question 4

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

A) The periodic rate of interest is 2% and the effective rate of interest is 4%. 
B) The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. 
C) The periodic rate of interest is 4% and the effective rate of interest is less than 8%. 
D) The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. 
E) The periodic rate of interest is 8% and the effective rate of interest is also 8%. 
A) The periodic rate of interest is 2% and the effective rate of interest is 4%. 
B) The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. 
C) The periodic rate of interest is 4% and the effective rate of interest is less than 8%. 
D) The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. 
E) The periodic rate of interest is 8% and the effective rate of interest is also 8%.

Question 5

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Accepted Answer

A) 15.27% 
B) 16.08% 
C) 16.88% 
D) 17.72% 
E) 18.61% 
A) 15.27% 
B) 16.08% 
C) 16.88% 
D) 17.72% 
E) 18.61%

Question 6

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Accepted Answer

A) $4,750 
B) $5,000 
C) $5,250 
D) $5,513 
E) $5,788 
A) $4,750 
B) $5,000 
C) $5,250 
D) $5,513 
E) $5,788

Question 7

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 8

How much would $100,growing at 5% per year,be worth after 75 years?

Accepted Answer

A) $3,689.11 
B) $3,883.27 
C) $4,077.43 
D) $4,281.30 
E) $4,495.37 
A) $3,689.11 
B) $3,883.27 
C) $4,077.43 
D) $4,281.30 
E) $4,495.37

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?

Accepted Answer

A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. 
B) The discount rate decreases. 
C) The riskiness of the investment's cash flows increases. 
D) The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. 
E) The discount rate increases. 
A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. 
B) The discount rate decreases. 
C) The riskiness of the investment's cash flows increases. 
D) The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. 
E) The discount rate increases.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

Accepted Answer

A) True 
 B)False

Question 13

Your uncle is about to retire,and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years,with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost him to buy the annuity today?

Accepted Answer

A) $ 825,835 
B) $ 869,300 
C) $ 915,052 
D) $ 963,213 
E) $1,011,374 
A) $ 825,835 
B) $ 869,300 
C) $ 915,052 
D) $ 963,213 
E) $1,011,374

Question 14

Your aunt has $500,000 invested at 5.5%,and she now wants to retire.She wants to withdraw $45,000 at the beginning of each year,beginning immediately.She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account.For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?

Accepted Answer

A) 15.54 
B) 16.36 
C) 17.22 
D) 18.08 
E) 18.99 
A) 15.54 
B) 16.36 
C) 17.22 
D) 18.08 
E) 18.99

Question 15

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Accepted Answer

A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. 
B) The discount rate increases. 
C) The riskiness of the investment's cash flows decreases. 
D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. 
E) The discount rate decreases. 
A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. 
B) The discount rate increases. 
C) The riskiness of the investment's cash flows decreases. 
D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. 
E) The discount rate decreases.

Question 16

Sam was injured in an accident,and the insurance company has offered him the choice of $25,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave him as well off financially as with the annuity?

Accepted Answer

A) $225,367 
B) $237,229 
C) $249,090 
D) $261,545 
E) $274,622 
A) $225,367 
B) $237,229 
C) $249,090 
D) $261,545 
E) $274,622

Question 17

A $50,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is CORRECT?

Accepted Answer

A) The annual payments would be larger if the interest rate were lower. 
B) If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. 
C) The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
D) The last payment would have a higher proportion of interest than the first payment. 
E) The proportion of interest versus principal repayment would be the same for each of the 7 payments. 
A) The annual payments would be larger if the interest rate were lower. 
B) If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. 
C) The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
D) The last payment would have a higher proportion of interest than the first payment. 
E) The proportion of interest versus principal repayment would be the same for each of the 7 payments.

Question 18

You plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

Accepted Answer

A) $1,994.49 
B) $2,099.46 
C) $2,209.96 
D) $2,326.27 
E) $2,442.59 
A) $1,994.49 
B) $2,099.46 
C) $2,209.96 
D) $2,326.27 
E) $2,442.59

Question 19

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Accepted Answer

A) 6.85% 
B) 7.21% 
C) 7.59% 
D) 7.99% 
E) 8.41% 
A) 6.85% 
B) 7.21% 
C) 7.59% 
D) 7.99% 
E) 8.41%

Question 20

Suppose you inherited $275,000 and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?

Accepted Answer

A) $28,532 
B) $29,959 
C) $31,457 
D) $33,030 
E) $34,681 
A) $28,532 
B) $29,959 
C) $31,457 
D) $33,030 
E) $34,681

Exam 5: Time Value of Money

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is CORRECT?

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.By how much would you reduce the amount you owe in the first year?

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

How much would $100,growing at 5% per year,be worth after 75 years?

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

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?

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

The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

Your uncle is about to retire,and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years,with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost him to buy the annuity today?

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Sam was injured in an accident,and the insurance company has offered him the choice of $25,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave him as well off financially as with the annuity?

A $50,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is CORRECT?

You plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Suppose you inherited $275,000 and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?

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