Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he 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 C

Question 4

A $150,000 loan is to be amortized over 6 years,with annual end-of-year payments.Which of these statements is CORRECT?

Accepted Answer

A)  The proportion of interest versus principal repayment would be the same for each of the 7 payments. 
B)  The annual payments would be larger if the interest rate were lower. 
C)  If the loan were amortized over 10 years rather than 6 years,and if the interest rate were the same in either case,the first payment would include more dollars of interest under the 6-year amortization plan. 
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower. 
E)  The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher. 
A)  The proportion of interest versus principal repayment would be the same for each of the 7 payments. 
B)  The annual payments would be larger if the interest rate were lower. 
C)  If the loan were amortized over 10 years rather than 6 years,and if the interest rate were the same in either case,the first payment would include more dollars of interest under the 6-year amortization plan. 
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower. 
E)  The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

Question 5

A "growing annuity" is any cash flow stream that grows over time.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

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 8

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 open a new restaurant,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 9

You want to purchase a motorcycle 4 years from now,and you plan to save $3,500 per year,beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions,how much will you have 4 years from today?

Accepted Answer

A)  $16,112 
B)  $16,918 
C)  $17,763 
D)  $18,652 
E)  $19,584 
A)  $16,112 
B)  $16,918 
C)  $17,763 
D)  $18,652 
E)  $19,584

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 discount rate increases. 
B)  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. 
C)  The discount rate decreases. 
D)  The riskiness of the investment's cash flows increases. 
E)  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. 
A)  The discount rate increases. 
B)  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. 
C)  The discount rate decreases. 
D)  The riskiness of the investment's cash flows increases. 
E)  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.

Question 11

Which of the following bank accounts has the lowest effective annual return?

Accepted Answer

A)  An account that pays 8% nominal interest with daily (365-day)compounding. 
B)  An account that pays 8% nominal interest with monthly compounding. 
C)  An account that pays 8% nominal interest with annual compounding. 
D)  An account that pays 7% nominal interest with daily (365-day)compounding. 
E)  An account that pays 7% nominal interest with monthly compounding. 
A)  An account that pays 8% nominal interest with daily (365-day)compounding. 
B)  An account that pays 8% nominal interest with monthly compounding. 
C)  An account that pays 8% nominal interest with annual compounding. 
D)  An account that pays 7% nominal interest with daily (365-day)compounding. 
E)  An account that pays 7% nominal interest with monthly compounding.

Question 12

Your sister paid $10,000 (CF at t = 0)for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Accepted Answer

A)  6.77% 
B)  7.13% 
C)  7.50% 
D)  7.88% 
E)  8.27% 
A)  6.77% 
B)  7.13% 
C)  7.50% 
D)  7.88% 
E)  8.27%

Question 13

You are considering investing in a European bank account that pays a nominal annual rate of 18%,compounded monthly.If you invest $5,000 at the beginning of each month,how many months would it take for your account to grow to $250,000? Round fractional months up.

Accepted Answer

A)  23 
B)  27 
C)  32 
D)  38 
E)  44 
A)  23 
B)  27 
C)  32 
D)  38 
E)  44

Question 14

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)  $438.03 
B)  $461.08 
C)  $485.35 
D)  $510.89 
E)  $537.78 
A)  $438.03 
B)  $461.08 
C)  $485.35 
D)  $510.89 
E)  $537.78

Question 15

Your bank pays 4% interest annually.You have $2,500 invested in the bank.How long will it take for your funds to double?

Accepted Answer

A)  14.39 
B)  15.15 
C)  15.95 
D)  16.79 
E)  17.67 
A)  14.39 
B)  15.15 
C)  15.95 
D)  16.79 
E)  17.67

Question 16

Your uncle just won the weekly lottery,receiving $375,000,which he invested at a 7.5% annual rate.He now has decided to retire,and he wants to withdraw $35,000 at the end of each year,starting at the end of this year.What is the maximum number of whole payments that can be withdrawn before the account is exhausted,i.e. ,before the account balance would become negative? (Hint: Round down to the nearest whole number. )

Accepted Answer

A)  22 
B)  23 
C)  24 
D)  25 
E)  26 
A)  22 
B)  23 
C)  24 
D)  25 
E)  26

Question 17

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 18

A perpetuity pays $85 per year and costs $950.What is the rate of return?

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%

Question 19

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year,how large (in millions)will they be 5 years later?

Accepted Answer

A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96 
A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  If CF0 is positive and all the other CFs are negative,then you cannot solve for I. 
B)  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. 
C)  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. 
D)  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 PV of the negative CFs.This is,essentially,a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. 
E)  If you solve for I and get a negative number,then you must have made a mistake. 
A)  If CF0 is positive and all the other CFs are negative,then you cannot solve for I. 
B)  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. 
C)  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. 
D)  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 PV of the negative CFs.This is,essentially,a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. 
E)  If you solve for I and get a negative number,then you must have made a mistake.

Exam 4: Time Value of Money

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

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

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

A $150,000 loan is to be amortized over 6 years,with annual end-of-year payments.Which of these statements is CORRECT?

A "growing annuity" is any cash flow stream that grows over time.

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?

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

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 open a new restaurant,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?

You want to purchase a motorcycle 4 years from now,and you plan to save $3,500 per year,beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions,how much will you have 4 years from 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 increase the calculated value of the investment?

Which of the following bank accounts has the lowest effective annual return?

Your sister paid $10,000 (CF at t = 0)for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

You are considering investing in a European bank account that pays a nominal annual rate of 18%,compounded monthly.If you invest $5,000 at the beginning of each month,how many months would it take for your account to grow to $250,000? Round fractional months up.

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Your bank pays 4% interest annually.You have $2,500 invested in the bank.How long will it take for your funds to double?

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

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year,how large (in millions)will they be 5 years later?

Which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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