Question 1

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 to equal 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 FV of the negative CFs.It is impossible to find the value of I without a computer or financial calculator. 
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 can still solve for I.

Question 2

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

Question 3

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually.How much will you have when the CD matures?

Accepted Answer

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

Question 4

a result of compounding, the effective annual rate on a bank deposit

Accepted Answer

A) True 
 B)False

Question 5

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 6

inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today.If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Accepted Answer

A) $284,595 
B) $299,574 
C) $314,553 
D) $330,281 
E) $346,795

Question 7

girlfriend just won the Florida lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today.What rate of return is built into the annuity?

Accepted Answer

A) 3.44% 
B) 3.79% 
C) 4.17% 
D) 4.58% 
E) 5.04%

Question 8

plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Accepted Answer

A) The cash flows are in the form of a deferred annuity, and they total to $100,000.You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. 
B) The discount rate increases. 
C) The riskiness of the investment's cash flows decreases. 
D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. 
E) The discount rate decreases.

Question 9

are considering two equally risky annuities, each of which pays $5,000 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) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. 
B) 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. 
C) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
D) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD. 
E) 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.

Question 10

Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

Accepted Answer

A) True 
 B)False

Question 11

Suppose a State of New York 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

Question 12

sister turned 35 today, and she is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today.She will invest in a mutual fund that's expected to provide a return of 7.5% per year.She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90.Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year.

Accepted Answer

A) $58,601 
B) $61,686 
C) $64,932 
D) $68,179 
E) $71,588

Question 13

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 $5,000.What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A) 3.82% 
B) 4.25% 
C) 4.72% 
D) 5.24% 
E) 5.77%

Question 14

is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Accepted Answer

A) $16,576 
B) $17,449 
C) $18,367 
D) $19,334 
E) $20,352

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

now has $500.How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

Accepted Answer

A) $591.09 
B) $622.20 
C) $654.95 
D) $689.42 
E) $723.89

Question 17

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 periodic interest rate is greater than 3%. 
B) The periodic rate is less than 3%. 
C) The present value would be greater if the lump sum were discounted back for more periods. 
D) The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually. 
E) The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.

Question 18

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 $150,000?

Accepted Answer

A) 39.60 
B) 44.00 
C) 48.40 
D) 53.24 
E) 58.57

Question 19

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.

Question 20

deposit $500 today in a savings account that pays 3.5% interest, compounded annually.How much will your account be worth at the end of 25 years?

Accepted Answer

A) $1,122.54 
B) $1,181.62 
C) $1,240.70 
D) $1,302.74 
E) $1,367.88

Exam 4: Time Value of Money

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?

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually.How much will you have when the CD matures?

a result of compounding, the effective annual rate on a bank deposit

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

inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today.If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

girlfriend just won the Florida lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today.What rate of return is built into the annuity?

plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

are considering two equally risky annuities, each of which pays $5,000 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?

Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

Suppose a State of New York 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?

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 $5,000.What interest rate would you earn if you bought this bond at the offer price?

is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

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

now has $500.How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?

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?

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 $150,000?

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

deposit $500 today in a savings account that pays 3.5% interest, compounded annually.How much will your account be worth at the end of 25 years?