Question 1

Which of the following is an example of arbitrage?

Accepted Answer

A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. 
B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today,when the interest rate is 10%. 
C) An investor,seeing that the price of palladium on the metals exchange in two different countries is slightly different,buys on one and sells on the other to make a profit. 
D) A firm buys $250,000 of palladium today,with an option to sell it at $275,000 in one year if interest rates rise above 10%. 
A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. 
B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today,when the interest rate is 10%. 
C) An investor,seeing that the price of palladium on the metals exchange in two different countries is slightly different,buys on one and sells on the other to make a profit. 
D) A firm buys $250,000 of palladium today,with an option to sell it at $275,000 in one year if interest rates rise above 10%.

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) Finding the present value (PV)and compounding are the same. 
B) A dollar today and a dollar in one year are not equivalent. 
C) If you want to compare or combine cash flows that occur at different points in time,you first need to convert the cash flows into the same units or move them to the same point in time. 
D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money. 
A) Finding the present value (PV)and compounding are the same. 
B) A dollar today and a dollar in one year are not equivalent. 
C) If you want to compare or combine cash flows that occur at different points in time,you first need to convert the cash flows into the same units or move them to the same point in time. 
D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

Question 3

An investment will pay you $100 in one year and $200 in two years.If the interest rate is 5%,what is the present value of these cash flows?

Accepted Answer

A) $305.00 
B) $285.71 
C) $276.65 
D) 258.32 
A) $305.00 
B) $285.71 
C) $276.65 
D) 258.32

Question 4

If $15,000 is invested at 10% per year,in approximately how many years will the investment double?

Accepted Answer

A) 7.3 years 
B) 8.4 years 
C) 10.6 years 
D) 14.8 years 
A) 7.3 years 
B) 8.4 years 
C) 10.6 years 
D) 14.8 years

Question 5

A lender lends $10,000,which is to be repaid in annual payments of $2,000 for 6 years.Which of the following shows the timeline of the loan from the lender's perspective?

Accepted Answer

A)   
B)   
C)   
D)   
A)   
B)   
C)   
D)

Question 6

A coin collector treasures his 1969-S Lincoln cent with a doubled die obverse because he found it in his pocket change,rather than purchasing it.He can sell it on the open market for $35,000,but would only sell it for at least twice that price,due to its sentimental value to him.It is anticipated that the coin will increase in market value in the foreseeable future.What is the value of the coin?

Accepted Answer

A) $0.01,since he paid nothing to obtain the coin and it has a face value of one cent. 
B) $35,000,since this is the price that the coin would fetch on the open market. 
C) At least $35,000,since he could replace the coin for $35,000,but the coin he owns has additional intangible value due to its sentimental value. 
D) At least $35,000,since the value of the coin will increase in the future. 
A) $0.01,since he paid nothing to obtain the coin and it has a face value of one cent. 
B) $35,000,since this is the price that the coin would fetch on the open market. 
C) At least $35,000,since he could replace the coin for $35,000,but the coin he owns has additional intangible value due to its sentimental value. 
D) At least $35,000,since the value of the coin will increase in the future.

Question 7

Consider the following timeline:  
If the current market rate of interest is 8%,then the value as of year 1 is closest to:

Accepted Answer

A) $0 
B) $1003 
C) $540 
D) $77 
A) $0 
B) $1003 
C) $540 
D) $77

Question 8

You are scheduled to receive $10,000 in one year.An increase in the interest rate will have what effect on the future value of this cash flow?

Accepted Answer

A) It will cause the future value to fall. 
B) It will cause the future value to rise. 
C) It will have no effect on the future value. 
D) The effect cannot be determined with the information provided. 
A) It will cause the future value to fall. 
B) It will cause the future value to rise. 
C) It will have no effect on the future value. 
D) The effect cannot be determined with the information provided.

Question 9

How can we perform cost benefit analysis in case they are occurring in different currencies?

Accepted Answer

We need to convert costs and b

Question 10

If the exchange rates,after fees,in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171,which of the following would you expect to occur?

Accepted Answer

A) a surge in conversion of dollars to yen in Tokyo 
B) a surge in conversion of euros to yen in Tokyo 
C) a surge in conversion of euros to dollars in Paris 
D) a surge in conversion of euros to yen in Paris 
A) a surge in conversion of dollars to yen in Tokyo 
B) a surge in conversion of euros to yen in Tokyo 
C) a surge in conversion of euros to dollars in Paris 
D) a surge in conversion of euros to yen in Paris

Question 11

If money is invested at 8% per year,after approximately how many years will the interest earned be equal to the original investment?

Accepted Answer

A) 5 years 
B) 6 years 
C) 9 years 
D) 12 years 
A) 5 years 
B) 6 years 
C) 9 years 
D) 12 years

Question 12

Which of the following best explains why market prices are useful to a financial manager when performing a cost benefit analysis?

Accepted Answer

A) They can be used to determine how much an asset can be sold for. 
B) They can be used to convert different services and commodities into equivalent cash values which can be compared. 
C) They allow all commodities and services to be assigned a fixed and unchanging value. 
D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value. 
A) They can be used to determine how much an asset can be sold for. 
B) They can be used to convert different services and commodities into equivalent cash values which can be compared. 
C) They allow all commodities and services to be assigned a fixed and unchanging value. 
D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.

Question 13

Jeff has the opportunity to receive lump-sum payments either now or in the future.Which of the following opportunities is the best,given that the interest rate is 7% per year?

Accepted Answer

A) one that pays $1,000 now 
B) one that pays $1,200 in two years 
C) one that pays $1,500 in five years 
D) one that pays $1,800 in ten years 
A) one that pays $1,000 now 
B) one that pays $1,200 in two years 
C) one that pays $1,500 in five years 
D) one that pays $1,800 in ten years

Question 14

The timeline shown below best describes which of the following situations?

Accepted Answer

A) You make payments of $250 per month for six months. 
B) You receive payments of $250 per month for six months. 
C) You make payments of $250 per month for five months. 
D) You receive payments of $250 per month for five months. 
A) You make payments of $250 per month for six months. 
B) You receive payments of $250 per month for six months. 
C) You make payments of $250 per month for five months. 
D) You receive payments of $250 per month for five months.

Question 15

A wholesale food retailer is offered $14 per two-layer carton for 5000 cartons of peaches.The wholesaler can buy peaches from their growers at $12.50 per carton.Shipping costs $1.50 per carton,for the first 1000 cartons,and $1.00 per carton for every carton over that.Will taking this opportunity increase the value of the wholesale food retailer?

Accepted Answer

A) No.The costs are $1200 more than the benefits. 
B) No.The costs and the benefits are the same. 
C) Yes.The costs are $1000 less than the benefits. 
D) Yes.The costs are $2000 less than the benefits. 
A) No.The costs are $1200 more than the benefits. 
B) No.The costs and the benefits are the same. 
C) Yes.The costs are $1000 less than the benefits. 
D) Yes.The costs are $2000 less than the benefits.

Question 16

To compute the future value of a cash flow,you must:

Accepted Answer

A) discount it. 
B) compound it. 
C) double it. 
D) arbitrage it. 
A) discount it. 
B) compound it. 
C) double it. 
D) arbitrage it.

Question 17

Samantha enters a rent-to-own agreement for living room furniture.She will pay $60 per month for one year.Which of the following shows the timeline for her payments if the first payment is one month from now?

Accepted Answer

A)   
B)   
C)   
D)   
A)   
B)   
C)   
D)

Question 18

What is the future value (FV)of $60,000 in five years,assuming the interest rate is 5% per year?

Accepted Answer

A) $62,500.00 
B) $72,674.86 
C) $75,000.00 
D) $76,576.89 
A) $62,500.00 
B) $72,674.86 
C) $75,000.00 
D) $76,576.89

Question 19

You are scheduled to receive $10,000 in one year.An increase in the interest rate will have what effect on the present value of this cash flow?

Accepted Answer

A) It will cause the present value to fall. 
B) It will cause the present value to rise. 
C) It will have no effect on the present value. 
D) The effect cannot be determined with the information provided. 
A) It will cause the present value to fall. 
B) It will cause the present value to rise. 
C) It will have no effect on the present value. 
D) The effect cannot be determined with the information provided.

Question 20

Which of the following statements regarding the Law of One Price is INCORRECT?

Accepted Answer

A) At any point in time,the price of two equivalent goods trading in different competitive markets will be the same. 
B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV),we can use any competitive price to determine a cash value,without checking the price in all possible markets. 
C) If equivalent goods or securities trade simultaneously in different competitive markets,then they will trade for the same price in both markets. 
D) An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible. 
A) At any point in time,the price of two equivalent goods trading in different competitive markets will be the same. 
B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV),we can use any competitive price to determine a cash value,without checking the price in all possible markets. 
C) If equivalent goods or securities trade simultaneously in different competitive markets,then they will trade for the same price in both markets. 
D) An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.

Exam 3: Time Value of Money: An Introduction

Which of the following is an example of arbitrage?

Which of the following statements is FALSE?

An investment will pay you $100 in one year and $200 in two years.If the interest rate is 5%,what is the present value of these cash flows?

If $15,000 is invested at 10% per year,in approximately how many years will the investment double?

A lender lends $10,000,which is to be repaid in annual payments of $2,000 for 6 years.Which of the following shows the timeline of the loan from the lender's perspective?

Consider the following timeline: If the current market rate of interest is 8%,then the value as of year 1 is closest to:

You are scheduled to receive $10,000 in one year.An increase in the interest rate will have what effect on the future value of this cash flow?

How can we perform cost benefit analysis in case they are occurring in different currencies?

If the exchange rates,after fees,in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171,which of the following would you expect to occur?

If money is invested at 8% per year,after approximately how many years will the interest earned be equal to the original investment?

Which of the following best explains why market prices are useful to a financial manager when performing a cost benefit analysis?

Jeff has the opportunity to receive lump-sum payments either now or in the future.Which of the following opportunities is the best,given that the interest rate is 7% per year?

The timeline shown below best describes which of the following situations?

To compute the future value of a cash flow,you must:

Samantha enters a rent-to-own agreement for living room furniture.She will pay $60 per month for one year.Which of the following shows the timeline for her payments if the first payment is one month from now?

What is the future value (FV)of $60,000 in five years,assuming the interest rate is 5% per year?

You are scheduled to receive $10,000 in one year.An increase in the interest rate will have what effect on the present value of this cash flow?

Which of the following statements regarding the Law of One Price is INCORRECT?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: A Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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