Question 1

You 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 2

Last year Dania Corporation's sales were $525 million.If sales grow at 9.8% per year,how large (in millions)will they be 8 years later?

Accepted Answer

A)  $1,142.39 
B)  $1,109.12 
C)  $1,364.22 
D)  $1,131.30 
E)  $842.93

Question 3

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or less than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 4

Suppose you borrowed $80,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

Accepted Answer

A)  $66,338.29 
B)  $68,795.27 
C)  $63,267.08 
D)  $61,424.35 
E)  $74,323.46

Question 5

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.

Question 6

What's the future value of $4,400 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Accepted Answer

A)  $5,381.04 
B)  $5,913.23 
C)  $7,214.14 
D)  $5,794.97 
E)  $4,612.32

Question 7

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 8

You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?

Accepted Answer

A)  Bank 1;6.1% with annual compounding. 
B)  Bank 2;6.0% with monthly compounding. 
C)  Bank 3;6.0% with annual compounding. 
D)  Bank 4;6.0% with quarterly compounding. 
E)  Bank 5;6.0% with daily (365-day)compounding.

Question 9

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  The present value of a 3-year,$150 annuity due will exceed the present value of a 3-year,$150 ordinary annuity. 
B)  If a loan has a nominal annual rate of 8%,then the effective rate can never be greater than 8%. 
C)  If a loan or investment has annual payments,then the effective,periodic,and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

Question 11

Which of the following bank accounts has the lowest effective annual return?

Accepted Answer

A)  An account that pays 8% nominal interest with monthly compounding. 
B)  An account that pays 8% nominal interest with annual compounding. 
C)  An account that pays 7% nominal interest with daily (365-day)compounding. 
D)  An account that pays 7% nominal interest with monthly compounding. 
E)  An account that pays 8% nominal interest with daily (365-day)compounding.

Question 12

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 greater than its effective annual rate. 
D)  If an investment pays 10% interest,compounded quarterly,its effective annual rate will be greater 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 13

Which of the following statements is CORRECT?

Accepted Answer

A)  The present value of a 3-year,$150 ordinary annuity will exceed the present value of a 3-year,$150 annuity due. 
B)  If a loan has a nominal annual rate of 8%,then the effective rate will never be less than 8%. 
C)  If a loan or investment has annual payments,then the effective,periodic,and nominal rates of interest will all be different. 
D)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
E)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

Question 14

Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%,compounded monthly.The loan (principal plus interest)must be repaid at the end of the year.Midwest Bank also offers to lend you the $50,000,but it will charge an annual rate of 7.8%,with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?

Accepted Answer

A)  1.02% 
B)  1.35% 
C)  1.10% 
D)  1.05% 
E)  1.24%

Question 15

Your girlfriend just won the Florida lottery.She has the choice of $11,500,000 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? Disregard taxes.

Accepted Answer

A)  7.69% 
B)  6.44% 
C)  5.13% 
D)  6.58% 
E)  5.59%

Question 16

Bob has $2,500 invested in a bank that pays 5.4% annually.How long will it take for his funds to double?

Accepted Answer

A)  13.44 years 
B)  16.34 years 
C)  13.18 years 
D)  14.89 years 
E)  12.92 years

Question 17

Last year Thomson Inc's earnings per share were $3.50,and its growth rate during the prior 5 years was 6.6% per year.If that growth rate were maintained,how many years would it take for Thomson's EPS to triple?

Accepted Answer

A)  15.99 
B)  15.13 
C)  17.19 
D)  15.81 
E)  13.41

Question 18

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 5.4%,how much is the bond worth today?

Accepted Answer

A)  $551.51 
B)  $768.18 
C)  $656.56 
D)  $518.68 
E)  $722.22

Question 19

You want to go to Europe 5 years from now,and you can save $3,800 per year,beginning one year from today.You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.Under these conditions,how much would you have just after you make the 5th deposit,5 years from now?

Accepted Answer

A)  $19,364.12 
B)  $27,244.86 
C)  $19,814.45 
D)  $22,741.58 
E)  $22,516.42

Question 20

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD)that pays 11.1% interest,compounded annually.How much will you have when the CD matures?

Accepted Answer

A)  $7,105.46 
B)  $5,730.21 
C)  $6,818.95 
D)  $6,303.23 
E)  $4,526.87

Exam 5: Time Value of Money

You 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?

Last year Dania Corporation's sales were $525 million.If sales grow at 9.8% per year,how large (in millions) will they be 8 years later?

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or less than the nominal rate on the deposit (or loan).

Suppose you borrowed $80,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

Which of the following statements is CORRECT?

What's the future value of $4,400 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Which of the following statements is CORRECT?

Which of the following bank accounts has the lowest effective annual return?

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

Which of the following statements is CORRECT?

Your girlfriend just won the Florida lottery.She has the choice of $11,500,000 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? Disregard taxes.

Bob has $2,500 invested in a bank that pays 5.4% annually.How long will it take for his funds to double?

Last year Thomson Inc's earnings per share were $3.50,and its growth rate during the prior 5 years was 6.6% per year.If that growth rate were maintained,how many years would it take for Thomson's EPS to triple?

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 5.4%,how much is the bond worth today?

You want to go to Europe 5 years from now,and you can save $3,800 per year,beginning one year from today.You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.Under these conditions,how much would you have just after you make the 5th deposit,5 years from now?

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 11.1% interest,compounded annually.How much will you have when the CD matures?