Question 1

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 cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can be constructed for annuities where the payments occur at either the beginning or the end 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 2

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 3

What is the present value of the following cash flow stream at a rate of 8.0%?

Accepted Answer

A)  $7,917 
B)  $8,333 
C)  $8,772 
D)  $9,233 
E)  $9,695

Question 4

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 $150,000?

Accepted Answer

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

Question 5

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Accepted Answer

A)  $1,200.33 
B)  $1,263.50 
C)  $1,330.00 
D)  $1,400.00 
E)  $1,470.00

Question 6

Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?

Accepted Answer

A)  15.54 
B)  16.36 
C)  17.22 
D)  18.08 
E)  18.99

Question 7

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 6.0%? Years: 0 1 2 3 4 | | | | | CFs: $0 $1,000 $2,000 $2,000 $2,000

Accepted Answer

A)  $5,987 
B)  $6,286 
C)  $6,600 
D)  $6,930 
E)  $7,277

Question 8

Your uncle has $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)  $28,843.38 
B)  $30,361.46 
C)  $31,959.43 
D)  $33,641.50 
E)  $35,323.58

Question 9

You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?

Accepted Answer

A)  12.37 
B)  13.74 
C)  15.27 
D)  16.97 
E)  18.85

Question 10

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 11

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)  $651.60 
B)  $684.18 
C)  $718.39 
D)  $754.31 
E)  $792.02

Question 12

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Accepted Answer

A) True 
 B)False

Question 13

Pace Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?

Accepted Answer

A)  $120.83 
B)  $126.88 
C)  $133.22 
D)  $139.88 
E)  $146.87

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 16

You deposit $1,000 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)  $2,245.08 
B)  $2,363.24 
C)  $2,481.41 
D)  $2,605.48 
E)  $2,735.75

Question 17

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, 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

Question 18

You are negotiating to make a 7-year loan of $25,000 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)  $4,271.67 
B)  $4,496.49 
C)  $4,733.15 
D)  $4,969.81 
E)  $5,218.30

Question 19

Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. Merchants Bank offers to lend you the $50,000, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?

Accepted Answer

A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72%

Question 20

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 smaller the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Exam 5: Time Value of Money

Which of the following statements is CORRECT?

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.

What is the present value of the following cash flow stream at a rate of 8.0%?

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 $150,000?

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

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 6.0%? Years: 0 1 2 3 4 | | | | | CFs: $0 $1,000 $2,000 $2,000 $2,000

Your uncle has $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?

You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?

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

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Pace Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?

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

You deposit $1,000 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?

Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

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 smaller the percentage of the payment that will be a repayment of principal.