Question 1

Which set of payments is the most valuable given 12% APR interest?

Accepted Answer

A) $100.00 received monthly for the next 12 months 
B) $300.00 received quarterly for the next four quarters 
C) $600.00 received semi-annually for the next two semi-annual periods 
D) $1,200.00 received one year from today

Question 2

The cash flow projected in a perpetuity is defined as a:

Accepted Answer

A) present value of a single sum. 
B) future value of a single sum. 
C) present value of an annuity. 
D) future value of an annuity.

Question 3

Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the effective annual rate of interest you are being charged on your credit card?

Accepted Answer

A) 18.00% 
B) 18.64% 
C) 19.56% 
D) 29.74%

Question 4

Using an annual interest rate of 9%, how long will it take a deposit of $1,000 to grow to $3,000, assuming no additional deposits are made?

Accepted Answer

A) 8.04 years 
B) 10.00 years 
C) 11.11 years 
D) 12.75 years 
E) 13.50 years

Question 5

The present value of the cash flows expected to come from owning a share of stock:

Accepted Answer

A) is the maximum price an investor should be willing to pay for the share. 
B) is the minimum price an investor should be willing to pay for the share. 
C) is not related to the price that an investor should be willing to pay for the share. 
D) All of the above

Question 6

Suppose you put $100 into a savings account today, the account pays 8% compounded semiannually, and you withdraw $50 one year after your initial deposit. What would your ending balance be 20 years after the initial $100 deposit was made, assuming that you make no additional deposits?

Accepted Answer

A) $250.31 
B) $257.45 
C) $258.16 
D) $430.10 
E) $480.10

Question 7

If the present value of a perpetuity is $6,000 and the discount rate is 8%, how large are the payments?

Accepted Answer

A) $60,000 
B) $750 
C) $480 
D) $1,000 
E) $75,000

Question 8

A sinking fund represent a series of payments made into an account that is dedicated to paying off a bond's principal at maturity.

Accepted Answer

A) True 
 B)False

Question 9

A project has a life of ten years starting today. What is the present value today of a $1,000 annuity that begins at the end of the third year and continues until the end of the tenth year, given a 12% discount rate.

Accepted Answer

A) $4,811 
B) $3,248 
C) $4,734 
D) $5,650 
E) $3,960

Question 10

What is the year-end balance for $1000 deposited at an 8% rate, if the compounding is done monthly?

Accepted Answer

A) $1,007 
B) $1,080 
C) $1,083 
D) $1,960

Question 11

Suppose your savings account pays an annual rate of 3% compounded monthly. What is the yield on this account?

Accepted Answer

A) 2.25% 
B) 2.68% 
C) 3.04% 
D) 3.27%

Question 12

Assume you want to pay off your $10,000, 30-month car loan after only the first 12 months of payments. With interest at 12% compounded monthly, how much will you need pay off the loan in full at the end of the first year?

Accepted Answer

A) $5,639 
B) $6,354 
C) $4,361 
D) $7,425

Question 13

If you invest the $10,000 you receive at graduation (age 22)in a mutual fund which averages a 12% annual return, how much will you have at retirement in 40 years?

Accepted Answer

A) $909,090 
B) $930,510 
C) $783,879 
D) $510,285

Question 14

When a loan is amortized over a five year term, the:

Accepted Answer

A) rate of interest is reduced each year. 
B) amount of interest paid is reduced each year. 
C) payment is reduced each year. 
D) balance is paid as a balloon payment in the fifth year.

Question 15

A cash flow projected today for a future period of time is a:

Accepted Answer

A) present value of a single sum. 
B) future value of a single sum. 
C) present value of an annuity. 
D) future value of an annuity.

Question 16

Opportunity cost is the:

Accepted Answer

A) benefit that would have been available from the next best use of money. 
B) prime rate for large firms. 
C) unemployment rate. 
D) rate on standard savings accounts.

Question 17

You have borrowed $10,000 to pay off your Spring Break trips. You plan to make monthly payments over a 10-year period. If the loan's interest rate is 10% compounded monthly, how much interest will you pay over the life of the loan?

Accepted Answer

A) $2,195 
B) $3,753 
C) $5,856 
D) $6,987

Question 18

What is the rate of return on an investment if you lend $1,000 and are repaid $1,254.70 two years later?

Accepted Answer

A) 12% 
B) 25% 
C) 6% 
D) 18% 
E) 4%

Question 19

If an investor prefers the present value of an investment to its future value:

Accepted Answer

A) he has selected an interest rate that is too high. 
B) he has selected an interest rate that is too low. 
C) he has a zero time value of money. 
D) None of the above

Question 20

With an annuity due, payments:

Accepted Answer

A) occur at the end of each period. 
B) occur at the beginning of each period. 
C) are due at the end of each period. 
D) occur at the end of each loan.

Exam 6: Time Value of Money