Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  an investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
B)  the present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
C)  if a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%. 
D)  if a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
E)  the proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
A)  an investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
B)  the present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
C)  if a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%. 
D)  if a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
E)  the proportion of the payment that goes toward interest on a fully amortized loan increases over time. C

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 pv of the $1,000 lump sum has a smaller 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 larger if interest were compounded monthly rather than semiannually. 
A)  the pv of the $1,000 lump sum has a smaller 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 larger if interest were compounded monthly rather than semiannually. A

Question 3

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. E

Question 4

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Accepted Answer

A)  7.62% 
B)  8.00% 
C)  8.40% 
D)  8.82% 
E)  9.26% 
A)  7.62% 
B)  8.00% 
C)  8.40% 
D)  8.82% 
E)  9.26%

Question 5

Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings, which is invested to earn a guaranteed 5% rate of return. If inflation averages 2% per year, how much can she withdraw (to the nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

Accepted Answer

A)  $65,632 
B)  $72,925 
C)  $81,027 
D)  $89,130 
E)  $98,043 
A)  $65,632 
B)  $72,925 
C)  $81,027 
D)  $89,130 
E)  $98,043

Question 6

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Accepted Answer

A)  $1,200.33 
B)  $1,263.50 
C)  $1,330.00 
D)  $1,400.00 
E)  $1,470.00 
A)  $1,200.33 
B)  $1,263.50 
C)  $1,330.00 
D)  $1,400.00 
E)  $1,470.00

Question 7

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Accepted Answer

A)  exactly 8% of the first monthly payment represents interest. 
B)  the monthly payments will decline over time. 
C)  a smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
D)  the total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. 
E)  the amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%. 
A)  exactly 8% of the first monthly payment represents interest. 
B)  the monthly payments will decline over time. 
C)  a smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
D)  the total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. 
E)  the amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.

Question 8

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 9

At the end of 10 years, which of the following investments would have the highest future 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 beginning 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 end of every year for the next 10 years (a total of 10 payments). 
A)  investment a pays $250 at the beginning 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 end of every year for the next 10 years (a total of 10 payments).

Question 10

How much would $1, growing at 3.5% per year, be worth after 75 years?

Accepted Answer

A)  $12.54 
B)  $13.20 
C)  $13.86 
D)  $14.55 
E)  $15.28 
A)  $12.54 
B)  $13.20 
C)  $13.86 
D)  $14.55 
E)  $15.28

Question 11

Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, beginning at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. What is the maximum number of $35,000 withdrawals that he can make and still have at least $25,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

Accepted Answer

A)  12 
B)  13 
C)  14 
D)  15 
E)  16 
A)  12 
B)  13 
C)  14 
D)  15 
E)  16

Question 12

You have $5,000 invested in a bank that pays 3.8% annually. How long will it take for your funds to triple?

Accepted Answer

A)  23.99 
B)  25.26 
C)  26.58 
D)  27.98 
E)  29.46 
A)  23.99 
B)  25.26 
C)  26.58 
D)  27.98 
E)  29.46

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)  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. 
B)  the present value of a 5-year, $250 annuity due will be lower than the pv of a similar ordinary annuity. 
C)  a 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D)  a bank loan's nominal interest rate will always be equal to or greater than its effective annual rate. 
E)  if an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%. 
A)  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. 
B)  the present value of a 5-year, $250 annuity due will be lower than the pv of a similar ordinary annuity. 
C)  a 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D)  a bank loan's nominal interest rate will always be equal to or greater than its effective annual rate. 
E)  if an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.

Question 16

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 17

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 18

You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?

Accepted Answer

A)  $1,067.95 
B)  $1,124.16 
C)  $1,183.33 
D)  $1,245.61 
E)  $1,311.17 
A)  $1,067.95 
B)  $1,124.16 
C)  $1,183.33 
D)  $1,245.61 
E)  $1,311.17

Question 19

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Accepted Answer

A)  $11,262.88 
B)  $11,826.02 
C)  $12,417.32 
D)  $13,038.19 
E)  $13,690.10 
A)  $11,262.88 
B)  $11,826.02 
C)  $12,417.32 
D)  $13,038.19 
E)  $13,690.10

Question 20

Of the following investments, which 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).

Exam 28: Time Value of Money

Which of the following statements is CORRECT?

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?

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

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

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.

At the end of 10 years, which of the following investments would have the highest future value?Assume that the effective annual rate for all investments is the same and is greater than zero.

How much would $1, growing at 3.5% per year, be worth after 75 years?

You have $5,000 invested in a bank that pays 3.8% annually. How long will it take for your funds to triple?

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

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

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

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?

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

You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

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

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

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