Question 1

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 2

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 3

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).

Question 4

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 5

The going rate of interest on a 5-year treasury bond is 4.25%. You have one that will pay $2,500 five years from now. How much is the bond worth today?

Accepted Answer

A)  $1,928.78 
B)  $2,030.30 
C)  $2,131.81 
D)  $2,238.40 
E)  $2,350.32 
A)  $1,928.78 
B)  $2,030.30 
C)  $2,131.81 
D)  $2,238.40 
E)  $2,350.32

Question 6

Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. If you invest $2,000 in the CD, how much will you have when it matures?

Accepted Answer

A)  $3,754.27 
B)  $3,941.99 
C)  $4,139.09 
D)  $4,346.04 
E)  $4,563.34 
A)  $3,754.27 
B)  $3,941.99 
C)  $4,139.09 
D)  $4,346.04 
E)  $4,563.34

Question 7

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 8

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

Accepted Answer

A)  $11,973 
B)  $12,603 
C)  $13,267 
D)  $13,930 
E)  $14,626 
A)  $11,973 
B)  $12,603 
C)  $13,267 
D)  $13,930 
E)  $14,626

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
B)  A time line is not meaningful unless all cash flows occur annually. 
C)  Time lines are useful for visualizing complex problems prior to doing actual calculations. 
D)  Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
E)  Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. 
A)  Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
B)  A time line is not meaningful unless all cash flows occur annually. 
C)  Time lines are useful for visualizing complex problems prior to doing actual calculations. 
D)  Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
E)  Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.

Question 10

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 11

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 12

A time line is meaningful even if all cash flows do not occur annually.

Accepted Answer

A) True 
 B)False

Question 13

Ten years ago, Kronan Corporation earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

Accepted Answer

A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49% 
A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49%

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 
B)  A time line is not meaningful unless all cash flows occur annually. 
C)  Time lines are not useful for visualizing complex problems prior to doing actual calculations. 
D)  Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
E)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
A)  Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 
B)  A time line is not meaningful unless all cash flows occur annually. 
C)  Time lines are not useful for visualizing complex problems prior to doing actual calculations. 
D)  Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
E)  Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

Your Green Investment Tips subscription is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33 
A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33

Question 18

You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandmother just gave you a $25,000 graduation gift that you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

Accepted Answer

A)  $238,176 
B)  $250,712 
C)  $263,907 
D)  $277,797 
E)  $291,687 
A)  $238,176 
B)  $250,712 
C)  $263,907 
D)  $277,797 
E)  $291,687

Question 19

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 20

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

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?

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?

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.

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

The going rate of interest on a 5-year treasury bond is 4.25%. You have one that will pay $2,500 five years from now. How much is the bond worth today?

Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. If you invest $2,000 in the CD, how much will you have when it matures?

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.

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

Which of the following statements is CORRECT?

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

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 time line is meaningful even if all cash flows do not occur annually.

Ten years ago, Kronan Corporation earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

Which of the following statements is CORRECT?

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

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.

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

An Overview of Financial Management and the Financial Environment

Analysis of Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

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 Forecasting Financial Statements

Corporate Valuation, Value-Based Management and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

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Exam 4: Time Value of Money

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?

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?

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.

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

The going rate of interest on a 5-year treasury bond is 4.25%. You have one that will pay $2,500 five years from now. How much is the bond worth today?

Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. If you invest $2,000 in the CD, how much will you have when it matures?

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.

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

Which of the following statements is CORRECT?

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

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 time line is meaningful even if all cash flows do not occur annually.

Ten years ago, Kronan Corporation earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

Which of the following statements is CORRECT?

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

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.

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

An Overview of Financial Management and the Financial Environment

Analysis of Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

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 Forecasting Financial Statements

Corporate Valuation, Value-Based Management and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Filters