Question 1

Which of the following statements regarding a 15-year (180-month)$125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

Accepted Answer

A)  The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. 
B)  Because it is a fixed-rate mortgage,the monthly loan payments (which include both interest and principal payments)are constant. 
C)  Interest payments on the mortgage will increase steadily over time,but the total amount of each payment will remain constant. 
D)  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. 
E)  The outstanding balance declines at a slower rate in the later years of the loan's life. 
A)  The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. 
B)  Because it is a fixed-rate mortgage,the monthly loan payments (which include both interest and principal payments)are constant. 
C)  Interest payments on the mortgage will increase steadily over time,but the total amount of each payment will remain constant. 
D)  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. 
E)  The outstanding balance declines at a slower rate in the later years of the loan's life.

Question 2

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 3

You are negotiating to make a 7-year loan of $37,500 to Breck Inc.To repay you,Breck will pay $2,500 at the end of Year 1,$5,000 at the end of Year 2,and $7,500 at the end of Year 3,plus a fixed but currently unspecified cash flow,X,at the end of each year from Year 4 through Year 7.Breck is essentially riskless,so you are confident the payments will be made.You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan.What cash flow must the investment provide at the end of each of the final 4 years,that is,what is X?

Accepted Answer

A)  $9,487.32 
B)  $11,479.65 
C)  $8,918.08 
D)  $11,384.78 
E)  $10,246.30 
A)  $9,487.32 
B)  $11,479.65 
C)  $8,918.08 
D)  $11,384.78 
E)  $10,246.30

Question 4

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

Accepted Answer

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

Question 5

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Accepted Answer

A)  The monthly payments will increase over time. 
B)  A larger proportion of the first monthly payment will be interest,and a smaller proportion will be principal,than for the last monthly payment. 
C)  The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. 
D)  The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. 
E)  Exactly 10% of the first monthly payment represents interest. 
A)  The monthly payments will increase over time. 
B)  A larger proportion of the first monthly payment will be interest,and a smaller proportion will be principal,than for the last monthly payment. 
C)  The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. 
D)  The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. 
E)  Exactly 10% of the first monthly payment represents interest.

Question 6

Your father's employer was just acquired,and he was given a severance payment of $442,500,which he invested at a 7.5% annual rate.He now plans to retire,and he wants to withdraw $35,000 at the end of each year,starting at the end of this year.How many years will it take to exhaust his funds,i.e. ,run the account down to zero?

Accepted Answer

A)  45.85 
B)  31.11 
C)  31.52 
D)  48.31 
E)  40.94 
A)  45.85 
B)  31.11 
C)  31.52 
D)  48.31 
E)  40.94

Question 7

You deposit $500 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 20 years?

Accepted Answer

A)  $1,539.43 
B)  $1,747.89 
C)  $1,908.25 
D)  $1,699.78 
E)  $1,603.57 
A)  $1,539.43 
B)  $1,747.89 
C)  $1,908.25 
D)  $1,699.78 
E)  $1,603.57

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Suppose you are buying your first condo for $300,000,and you will make a $15,000 down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Accepted Answer

A)  $1,459.13 
B)  $1,369.06 
C)  $2,179.69 
D)  $2,215.71 
E)  $1,801.39 
A)  $1,459.13 
B)  $1,369.06 
C)  $2,179.69 
D)  $2,215.71 
E)  $1,801.39

Question 10

Steve and Ed are cousins who were both born on the same day,and both turned 25 today.Their grandfather began putting $2,300 per year into a trust fund for Steve on his 20th birthday,and he just made a 6th payment into the fund.The grandfather (or his estate's trustee)will make 40 more $2,300 payments until a 46th and final payment is made on Steve's 65th birthday.The grandfather set things up this way because he wants Steve to work,not be a "trust fund baby," but he also wants to ensure that Steve is provided for in his old age. ​
Until now,the grandfather has been disappointed with Ed,hence has not given him anything.However,they recently reconciled,and the grandfather decided to make an equivalent provision for Ed.He will make the first payment to a trust for Ed today,and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65,when the 41st and final payment will be made.If both trusts earn an annual return of 8%,how much must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?

Accepted Answer

A)  $2,639 
B)  $2,673 
C)  $3,359 
D)  $3,428 
E)  $3,565 
A)  $2,639 
B)  $2,673 
C)  $3,359 
D)  $3,428 
E)  $3,565

Question 11

Suppose you have $2,350 and plan to purchase a 5-year certificate of deposit (CD)that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

Accepted Answer

A)  $2,539.87 
B)  $2,791.06 
C)  $2,428.22 
D)  $3,488.83 
E)  $3,153.90 
A)  $2,539.87 
B)  $2,791.06 
C)  $2,428.22 
D)  $3,488.83 
E)  $3,153.90

Question 12

Which of the following statements is CORRECT?

Accepted Answer

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

Question 13

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 14

Last year Dania Corporation's sales were $525 million.If sales grow at 9.5% per year,how large (in millions)will they be 8 years later?

Accepted Answer

A)  $965.74 
B)  $1,085.11 
C)  $1,204.47 
D)  $976.60 
E)  $1,020.00 
A)  $965.74 
B)  $1,085.11 
C)  $1,204.47 
D)  $976.60 
E)  $1,020.00

Question 15

You sold a car and accepted a note with the following cash flow stream as your payment.What was the effective price you received for the car assuming an interest rate of 7.0%?   ​

Accepted Answer

A)  $5,081 
B)  $5,840 
C)  $5,723 
D)  $6,716 
E)  $6,424 
A)  $5,081 
B)  $5,840 
C)  $5,723 
D)  $6,716 
E)  $6,424

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)  If you have a series of cash flows,each of which is positive,you can solve for I,where the solution value of I causes the PV of the cash flows will be more than the cash flow at Time 0. 
B)  If you have a series of cash flows,and CF0 is negative but each of the following CFs is positive,you can solve for I,but only if the sum of the undiscounted cash flows exceeds the cost. 
C)  To solve for I,one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs.This is,essentially,a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. 
D)  If you solve for I and get a negative number,then you must have made a mistake. 
E)  If CF0 is positive and all the other CFs are negative,then you cannot solve for I. 
A)  If you have a series of cash flows,each of which is positive,you can solve for I,where the solution value of I causes the PV of the cash flows will be more than the cash flow at Time 0. 
B)  If you have a series of cash flows,and CF0 is negative but each of the following CFs is positive,you can solve for I,but only if the sum of the undiscounted cash flows exceeds the cost. 
C)  To solve for I,one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs.This is,essentially,a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. 
D)  If you solve for I and get a negative number,then you must have made a mistake. 
E)  If CF0 is positive and all the other CFs are negative,then you cannot solve for I.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Starting to invest early for retirement increases the benefits of compound interest.

Accepted Answer

A) True 
 B)False

Question 19

Suppose an Exxon Corporation bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 5.60%,how much is the bond worth today?

Accepted Answer

A)  $3,001.04 
B)  $2,609.60 
C)  $2,139.87 
D)  $2,218.16 
E)  $2,948.84 
A)  $3,001.04 
B)  $2,609.60 
C)  $2,139.87 
D)  $2,218.16 
E)  $2,948.84

Question 20

Sue now has $280.How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Accepted Answer

A)  $537.77 
B)  $462.48 
C)  $473.24 
D)  $639.95 
E)  $510.88 
A)  $537.77 
B)  $462.48 
C)  $473.24 
D)  $639.95 
E)  $510.88

Exam 5: Time Value of Money

Which of the following statements regarding a 15-year (180-month)$125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the greater the present value of a given lump sum to be received at some future date.

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

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

You deposit $500 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 20 years?

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

Suppose you are buying your first condo for $300,000,and you will make a $15,000 down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Suppose you have $2,350 and plan to purchase a 5-year certificate of deposit (CD)that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

Which of the following statements is CORRECT?

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

Last year Dania Corporation's sales were $525 million.If sales grow at 9.5% per year,how large (in millions)will they be 8 years later?

You sold a car and accepted a note with the following cash flow stream as your payment.What was the effective price you received for the car assuming an interest rate of 7.0%? ​

Which of the following statements is CORRECT?

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

Starting to invest early for retirement increases the benefits of compound interest.

Suppose an Exxon Corporation bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 5.60%,how much is the bond worth today?

Sue now has $280.How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow,and Taxes

Analysis of Financial Statements

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Distribution to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Interest Rates and Compounding

Zero Coupon Bonds and Taxation

Taxes, Bankruptcy Act, and Financial Management

Capital Budgeting and Risk Analysis

Financial Analysis and Capital Structure Decision Making

Comparing Two Mutually Exclusive Projects: NPV and Equivalent Annual Annuity Analysis

Financial Leverage and Operating Leverage

Filters

You sold a car and accepted a note with the following cash flow stream as your payment.What was the effective price you received for the car assuming an interest rate of 7.0%?