Question 1

Suppose you inherited $645,000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?

Accepted Answer

A)  $62,439.53 
B)  $56,875.61 
C)  $66,148.80 
D)  $61,821.31 
E)  $59,966.67 
A)  $62,439.53 
B)  $56,875.61 
C)  $66,148.80 
D)  $61,821.31 
E)  $59,966.67

Question 2

You are considering investing in a bank account that pays a nominal annual rate of 7%,compounded monthly.If you invest $3,000 at the end of each month,how many months will it take for your account to grow to $205,000?

Accepted Answer

A)  66.91 
B)  68.64 
C)  49.60 
D)  57.68 
E)  65.18 
A)  66.91 
B)  68.64 
C)  49.60 
D)  57.68 
E)  65.18

Question 3

Your uncle has $485,000 and wants to retire.He expects to live for another 25 years,and he also expects to earn 7.5% on his invested funds.How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)  $40,474.12 
B)  $35,617.22 
C)  $39,259.89 
D)  $50,592.65 
E)  $47,759.46 
A)  $40,474.12 
B)  $35,617.22 
C)  $39,259.89 
D)  $50,592.65 
E)  $47,759.46

Question 4

How much would $10,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)  $285.02 
B)  $217.80 
C)  $266.20 
D)  $268.89 
E)  $204.36 
A)  $285.02 
B)  $217.80 
C)  $266.20 
D)  $268.89 
E)  $204.36

Question 5

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

Question 6

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 7

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 decline over time. 
B)  A smaller proportion of the last monthly payment will be interest,and a larger proportion will be principal,than for the first monthly payment. 
C)  The total dollar amount of principal being paid off each month gets smaller 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 decline over time. 
B)  A smaller proportion of the last monthly payment will be interest,and a larger proportion will be principal,than for the first monthly payment. 
C)  The total dollar amount of principal being paid off each month gets smaller 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 8

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 30 years?

Accepted Answer

A)  $3,331.22 
B)  $2,756.88 
C)  $2,670.72 
D)  $3,503.53 
E)  $2,871.75 
A)  $3,331.22 
B)  $2,756.88 
C)  $2,670.72 
D)  $3,503.53 
E)  $2,871.75

Question 9

Suppose the U.S.Treasury offers to sell you a bond for $3,000.No payments will be made until the bond matures 10 years from now,at which time it will be redeemed for $5,600.What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A)  7.47% 
B)  5.41% 
C)  6.44% 
D)  6.25% 
E)  7.92% 
A)  7.47% 
B)  5.41% 
C)  6.44% 
D)  6.25% 
E)  7.92%

Question 10

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 11

You want to buy a new ski boat 2 years from now,and you plan to save $2,900 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?

Accepted Answer

A)  $6,099 
B)  $5,980 
C)  $7,056 
D)  $5,262 
E)  $6,877 
A)  $6,099 
B)  $5,980 
C)  $7,056 
D)  $5,262 
E)  $6,877

Question 12

What's the rate of return you would earn if you paid $2,880 for a perpetuity that pays $85 per year?

Accepted Answer

A)  3.04% 
B)  3.19% 
C)  3.48% 
D)  2.42% 
E)  2.95% 
A)  3.04% 
B)  3.19% 
C)  3.48% 
D)  2.42% 
E)  2.95%

Question 13

What is the present value of the following cash flow stream at a rate of 11.5%? ​

Accepted Answer

A)  $9,109.07 
B)  $9,282.58 
C)  $8,328.29 
D)  $9,369.33 
E)  $8,675.31 
A)  $9,109.07 
B)  $9,282.58 
C)  $8,328.29 
D)  $9,369.33 
E)  $8,675.31

Question 14

Steve and Ed are cousins who were both born on the same day,and both turned 25 today.Their grandfather began putting $3,200 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 $3,200 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? Assume that all payments are made at the end of the year.

Accepted Answer

A)  $5,436 
B)  $4,483 
C)  $3,577 
D)  $4,769 
E)  $4,340 
A)  $5,436 
B)  $4,483 
C)  $3,577 
D)  $4,769 
E)  $4,340

Question 15

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $92,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Accepted Answer

A)  18.11% 
B)  15.33% 
C)  14.24% 
D)  15.48% 
E)  11.61% 
A)  18.11% 
B)  15.33% 
C)  14.24% 
D)  15.48% 
E)  11.61%

Question 16

Your father is about to retire,and he wants to buy an annuity that will provide him with $78,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Accepted Answer

A)  $1,013,498.95 
B)  $1,241,251.52 
C)  $933,785.55 
D)  $1,138,762.86 
E)  $854,072.15 
A)  $1,013,498.95 
B)  $1,241,251.52 
C)  $933,785.55 
D)  $1,138,762.86 
E)  $854,072.15

Question 17

What's the future value of $1,600 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A)  $2,093.42 
B)  $2,158.16 
C)  $2,179.74 
D)  $2,676.12 
E)  $2,417.14 
A)  $2,093.42 
B)  $2,158.16 
C)  $2,179.74 
D)  $2,676.12 
E)  $2,417.14

Question 18

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $200.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A)  8.24% 
B)  7.75% 
C)  6.43% 
D)  6.84% 
E)  7.09% 
A)  8.24% 
B)  7.75% 
C)  6.43% 
D)  6.84% 
E)  7.09%

Question 19

Your uncle has $1,375,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)  $92,514.13 
B)  $127,052.74 
C)  $97,448.22 
D)  $123,352.17 
E)  $124,585.70 
A)  $92,514.13 
B)  $127,052.74 
C)  $97,448.22 
D)  $123,352.17 
E)  $124,585.70

Question 20

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

Exam 5: Time Value of Money

Suppose you inherited $645,000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?

You are considering investing in a bank account that pays a nominal annual rate of 7%,compounded monthly.If you invest $3,000 at the end of each month,how many months will it take for your account to grow to $205,000?

Your uncle has $485,000 and wants to retire.He expects to live for another 25 years,and he also expects to earn 7.5% on his invested funds.How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

How much would $10,000 due in 50 years be worth today if the discount rate were 7.5%?

Which of the following statements is CORRECT?

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

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 30 years?

Suppose the U.S.Treasury offers to sell you a bond for $3,000.No payments will be made until the bond matures 10 years from now,at which time it will be redeemed for $5,600.What interest rate would you earn if you bought this bond at the offer price?

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.

You want to buy a new ski boat 2 years from now,and you plan to save $2,900 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?

What's the rate of return you would earn if you paid $2,880 for a perpetuity that pays $85 per year?

What is the present value of the following cash flow stream at a rate of 11.5%? ​

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $92,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Your father is about to retire,and he wants to buy an annuity that will provide him with $78,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

What's the future value of $1,600 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $200.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Your uncle has $1,375,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

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

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

A Continuous-Compounding-And-Discounting

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

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Zero-Coupon-Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the CAPM to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Comparing Mutually Exclusive Projects with Unequal Lives

Degree of Leverage

Filters

What is the present value of the following cash flow stream at a rate of 11.5%?