Question 1

An equal stream of payments that lasts forever is:

Accepted Answer

A)  a growing annuity. 
B)  a zero coupon bond. 
C)  a perpetuity. 
D)  valueless. 
A)  a growing annuity. 
B)  a zero coupon bond. 
C)  a perpetuity. 
D)  valueless.

Question 2

Which one of the following statements concerning interest rates is correct?

Accepted Answer

A)  The stated rate is the same as the effective annual rate. 
B)  An effective annual rate is the rate that applies if interest were charged annually. 
C)  The annual percentage rate increases as the number of compounding periods per year increases. 
D)  Banks prefer more frequent compounding on their savings accounts. 
E)  For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate. 
A)  The stated rate is the same as the effective annual rate. 
B)  An effective annual rate is the rate that applies if interest were charged annually. 
C)  The annual percentage rate increases as the number of compounding periods per year increases. 
D)  Banks prefer more frequent compounding on their savings accounts. 
E)  For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

Question 3

If you have a choice to earn simple interest on $10,000 for three years at 8% or compound interest at 7.5% for three years which one will pay more and by how much?

Accepted Answer

A)  Simple interest by $1,500. 
B)  Compound interest by $22.97. 
C)  Compound interest by $150.75. 
D)  Simple interest by $150.00. 
A)  Simple interest by $1,500. 
B)  Compound interest by $22.97. 
C)  Compound interest by $150.75. 
D)  Simple interest by $150.00.

Question 4

You are to receive $75 per year indefinitely.The market rate of interest for these types of payments is 8%.The price you would pay for this stream is:

Accepted Answer

A)  $9.38 
B)  $81.00 
C)  $93.75 
D)  $937.50 
A)  $9.38 
B)  $81.00 
C)  $93.75 
D)  $937.50

Question 5

Which of the following amounts is closest to the end value of investing $9,000 for 7 years at a continuously compounded rate of 11%?

Accepted Answer

A)  $18,685.44 
B)  $19,369.83 
C)  $15,930.00 
D)  $19,437.90 
A)  $18,685.44 
B)  $19,369.83 
C)  $15,930.00 
D)  $19,437.90

Question 6

Jim Mayer has deposited $7,000 in a guaranteed investment account with a promised rate of 7% compounded annually.He plans to leave it there for 4 full years when he will make a down payment on a car after graduation.How much of a down payment will he be able to make?

Accepted Answer

A)  $8,960.00 
B)  $1,960.00 
C)  $2,175.57 
D)  $9,175.57 
A)  $8,960.00 
B)  $1,960.00 
C)  $2,175.57 
D)  $9,175.57

Question 7

Which of the following amounts is closest to the net present value of a project that contributes $10,000 at the end of the first year and $5,000 at the end of the second year.The initial cost is $8,000 and the appropriate interest rate is 10%.

Accepted Answer

A)  $5,223 
B)  $5,951 
C)  $7,000 
D)  $21,223 
E)  $23,000 
A)  $5,223 
B)  $5,951 
C)  $7,000 
D)  $21,223 
E)  $23,000

Question 8

Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an annual rate of 4%.The payments are expected to go on indefinitely and the interest rate is 9%.What is the value of the growing perpetuity?

Accepted Answer

A)  $667 
B)  $693 
C)  $1,200 
D)  $1,248 
A)  $667 
B)  $693 
C)  $1,200 
D)  $1,248

Question 9

Your aunt,in her will,left you the sum of $5,000 a year forever with payments starting immediately.However,the news is better.She has specified that the amount should grow at 5% per year to maintain purchasing power.Given an interest rate of 12%,what is the PV of the inheritance?

Accepted Answer

$5,000 + $

Question 10

Mr.Miser,who is 35 years old,has just inherited $11,000 and decides to use the windfall towards his retirement.He places the money in a bank,which promises a return of 6% per year until his planned retirement at age 65.If his funds earn 6% interest compounded annually,how much will he have at retirement? Repeat the analysis for both semi-annual and continuous compounding.

Accepted Answer

$11,000(1.06)³⁰ = $63,

Question 11

If a student borrows $20,000 to start a business as a 5 year,10% loan,the annual payment is:

Accepted Answer

A)  $2,000.00 
B)  $3,275.95 
C)  $4,000.00 
D)  $5,275.95 
A)  $2,000.00 
B)  $3,275.95 
C)  $4,000.00 
D)  $5,275.95

Question 12

Which of the following amounts is closest to the end value of investing $3,000 for 3/4 year at a continuously compounded rate of 12%?

Accepted Answer

A)  $3,163 
B)  $3,283 
C)  $3,263 
D)  $3,287 
E)  $3,317 
A)  $3,163 
B)  $3,283 
C)  $3,263 
D)  $3,287 
E)  $3,317

Question 13

The equation (1 + (r/m))m -1 gives the:

Accepted Answer

A)  effective annual interest rate, and r is the stated annual interest rate. 
B)  effective annual interest rate, and m is the number of years to maturity. 
C)  stated annual interest rate, and r is the effective annual interest rate. 
D)  stated annual interest rate, and m is the number of years to maturity. 
A)  effective annual interest rate, and r is the stated annual interest rate. 
B)  effective annual interest rate, and m is the number of years to maturity. 
C)  stated annual interest rate, and r is the effective annual interest rate. 
D)  stated annual interest rate, and m is the number of years to maturity.

Question 14

An annuity:

Accepted Answer

A)  is a debt instrument that pays no interest. 
B)  is a stream of payments that varies with current market interest. 
C)  is a series of equal payments through time. 
D)  has no value. 
A)  is a debt instrument that pays no interest. 
B)  is a stream of payments that varies with current market interest. 
C)  is a series of equal payments through time. 
D)  has no value.

Question 15

Alan Burnie has just started work and has been wanting to buy a sleek powerboat for sometime.Rather than purchase and finance now,he plans to save every three months and increase the deposits by 3% per annum as he expects raises at least that large.How much must the first deposit be if the boat costs $25,000 today and he expects to earn 10% on the money over the next five years?

Accepted Answer

A)  $1,501.56 
B)  $2,081.99 
C)  $1,561.49 
D)  $6,097.27 
E)  $2,359.82 
A)  $1,501.56 
B)  $2,081.99 
C)  $1,561.49 
D)  $6,097.27 
E)  $2,359.82

Question 16

The compound value is defined as:

Accepted Answer

A)  the value of a dollar received tomorrow. 
B)  the value of a sum after investing over one or more periods. 
C)  the value of a sum today to received in the future. 
D)  the rate of growth in a sum today. 
A)  the value of a dollar received tomorrow. 
B)  the value of a sum after investing over one or more periods. 
C)  the value of a sum today to received in the future. 
D)  the rate of growth in a sum today.

Question 17

What is the effective annual rate if a bank charges you 7.64% compounded quarterly?

Accepted Answer

A)  7.79% 
B)  7.86% 
C)  7.95% 
D)  7.98% 
E)  8.01% 
A)  7.79% 
B)  7.86% 
C)  7.95% 
D)  7.98% 
E)  8.01%

Question 18

The present value factor is:

Accepted Answer

A)  the dollar amount of the future value. 
B)  the rate that equates the present value with the future value. 
C)  the process of calculating future or present values. 
D)  the value of $1 to be received in T periods at a given interest rate. 
A)  the dollar amount of the future value. 
B)  the rate that equates the present value with the future value. 
C)  the process of calculating future or present values. 
D)  the value of $1 to be received in T periods at a given interest rate.

Question 19

You are the beneficiary of a life insurance policy.The insurance company informs you that you have two options for receiving the insurance proceeds.You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years.You can earn 6.5% on your money.Which option should you take and why?

Accepted Answer

A)  You should accept the payments because they are worth $56,451.91 today. 
B)  You should accept the payments because they are worth $56,523.74 today. 
C)  You should accept the payments because they are worth $56,737.08 today. 
D)  You should accept the $50,000 because the payments are only worth $47,757.69 today. 
E)  You should accept the $50,000 because the payments are only worth $47,808.17 today. 
A)  You should accept the payments because they are worth $56,451.91 today. 
B)  You should accept the payments because they are worth $56,523.74 today. 
C)  You should accept the payments because they are worth $56,737.08 today. 
D)  You should accept the $50,000 because the payments are only worth $47,757.69 today. 
E)  You should accept the $50,000 because the payments are only worth $47,808.17 today.

Question 20

Your employer contributes $25 a week to your retirement plan.Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%.Given these assumptions,what is this employee benefit worth to you today?

Accepted Answer

A)  $13,144.43 
B)  $15,920.55 
C)  $16,430.54 
D)  $16,446.34 
E)  $16,519.02 
A)  $13,144.43 
B)  $15,920.55 
C)  $16,430.54 
D)  $16,446.34 
E)  $16,519.02

Exam 5: The Time Value of Money

An equal stream of payments that lasts forever is:

Which one of the following statements concerning interest rates is correct?

If you have a choice to earn simple interest on $10,000 for three years at 8% or compound interest at 7.5% for three years which one will pay more and by how much?

You are to receive $75 per year indefinitely.The market rate of interest for these types of payments is 8%.The price you would pay for this stream is:

Which of the following amounts is closest to the end value of investing $9,000 for 7 years at a continuously compounded rate of 11%?

Jim Mayer has deposited $7,000 in a guaranteed investment account with a promised rate of 7% compounded annually.He plans to leave it there for 4 full years when he will make a down payment on a car after graduation.How much of a down payment will he be able to make?

Which of the following amounts is closest to the net present value of a project that contributes $10,000 at the end of the first year and $5,000 at the end of the second year.The initial cost is $8,000 and the appropriate interest rate is 10%.

Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an annual rate of 4%.The payments are expected to go on indefinitely and the interest rate is 9%.What is the value of the growing perpetuity?

Your aunt,in her will,left you the sum of $5,000 a year forever with payments starting immediately.However,the news is better.She has specified that the amount should grow at 5% per year to maintain purchasing power.Given an interest rate of 12%,what is the PV of the inheritance?

If a student borrows $20,000 to start a business as a 5 year,10% loan,the annual payment is:

Which of the following amounts is closest to the end value of investing $3,000 for 3/4 year at a continuously compounded rate of 12%?

The equation (1 + (r/m))m -1 gives the:

An annuity:

The compound value is defined as:

What is the effective annual rate if a bank charges you 7.64% compounded quarterly?

The present value factor is:

Your employer contributes $25 a week to your retirement plan.Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%.Given these assumptions,what is this employee benefit worth to you today?

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis,real Options,and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk,return,and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

The equation (1 + (r/m))^m -1 gives the: