Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements regarding a 15-year (180-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Accepted Answer

A)  the outstanding balance declines at a faster rate in the later years of the loan's life. 
B)  the remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. 
C)  because the outstanding balance declines over time, the monthly payments will also decline over time. 
D)  interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. 
E)  the proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. 
A)  the outstanding balance declines at a faster rate in the later years of the loan's life. 
B)  the remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. 
C)  because the outstanding balance declines over time, the monthly payments will also decline over time. 
D)  interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. 
E)  the proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

Question 3

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

Question 4

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)  $7,531 
B)  $7,927 
C)  $8,323 
D)  $8,740 
E)  $9,177 
A)  $7,531 
B)  $7,927 
C)  $8,323 
D)  $8,740 
E)  $9,177

Question 5

Suppose a State of North Carolina 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 6

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 7

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. When she makes her last withdrawal (at the beginning of a year), she also wants to have enough left in the account so that you can make a final withdrawal of $50,000 at the end of that year (her last withdrawal is at the beginning of the year, your withdrawal is at the end of that same year). What is the maximum number of $45,000 withdrawals that she can make and still have enough in the account so that you can make a $50,000 withdrawal at the end of the year of her last withdrawal? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

Accepted Answer

A)  13 
B)  14 
C)  15 
D)  16 
E)  17 
A)  13 
B)  14 
C)  15 
D)  16 
E)  17

Question 8

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A)  7.12% 
B)  7.49% 
C)  7.87% 
D)  8.26% 
E)  8.67% 
A)  7.12% 
B)  7.49% 
C)  7.87% 
D)  8.26% 
E)  8.67%

Question 9

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)  $1,537.69 
B)  $1,618.62 
C)  $1,699.55 
D)  $1,784.53 
E)  $1,873.76 
A)  $1,537.69 
B)  $1,618.62 
C)  $1,699.55 
D)  $1,784.53 
E)  $1,873.76

Question 10

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 11

Suppose United 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 12

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 13

You are considering two equally risky annuities, each of which pays $25,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Accepted Answer

A)  if the going rate of interest decreases from 10% to 0%, the difference between the present value of ord and the present value of due would remain constant. 
B)  a rational investor would be willing to pay more for due than for ord, so their market prices should differ. 
C)  the present value of due exceeds the present value of ord, while the future value of due is less than the future value of ord. 
D)  the present value of ord exceeds the present value of due, and the future value of ord also exceeds the future value of due. 
E)  the present value of ord exceeds the present value of due, while the future value of due exceeds the future value of ord. 
A)  if the going rate of interest decreases from 10% to 0%, the difference between the present value of ord and the present value of due would remain constant. 
B)  a rational investor would be willing to pay more for due than for ord, so their market prices should differ. 
C)  the present value of due exceeds the present value of ord, while the future value of due is less than the future value of ord. 
D)  the present value of ord exceeds the present value of due, and the future value of ord also exceeds the future value of due. 
E)  the present value of ord exceeds the present value of due, while the future value of due exceeds the future value of ord.

Question 14

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

Accepted Answer

A)  $3,704.02 
B)  $3,889.23 
C)  $4,083.69 
D)  $4,287.87 
E)  $4,502.26 
A)  $3,704.02 
B)  $3,889.23 
C)  $4,083.69 
D)  $4,287.87 
E)  $4,502.26

Question 15

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?

Accepted Answer

A)  $15,234.08 
B)  $16,035.88 
C)  $16,837.67 
D)  $17,679.55 
E)  $18,563.53 
A)  $15,234.08 
B)  $16,035.88 
C)  $16,837.67 
D)  $17,679.55 
E)  $18,563.53

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

Accepted Answer

A) True 
 B)False

Question 18

Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Woodburn Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern?

Accepted Answer

A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24% 
A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24%

Question 19

Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Accepted Answer

A)  $205.83 
B)  $216.67 
C)  $228.07 
D)  $240.08 
E)  $252.08 
A)  $205.83 
B)  $216.67 
C)  $228.07 
D)  $240.08 
E)  $252.08

Question 20

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

Exam 28: Time Value of Money

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

Which of the following statements regarding a 15-year (180-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

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

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

Suppose a State of North Carolina 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?

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

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Suppose United 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?

You are considering two equally risky annuities, each of which pays $25,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

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

If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

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

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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