Question 1

Given a set future value, which of the following will contribute to a lower present value?

Accepted Answer

A)  Higher discount rate 
B)  Fewer time periods 
C)  Less frequent discounting 
D) Lower discount factor

Question 2

What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding?

Accepted Answer

A)  10.00% 
B)  10.47% 
C)  10.52% 
D) 11.05%

Question 3

A perpetuity is a special form of an annuity.

Accepted Answer

A) True 
 B)False

Question 4

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?

Accepted Answer

A)  The APR is lower than the annually compounded rate. 
B)  The APR is higher than the annually compounded rate. 
C)  The APR equals the annually compounded rate. 
D) The answer depends on the interest rate.

Question 5

A loan officer states, "Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest. Both mortgages are for $100,000 and have monthly payments. What is the difference in total dollars that will be paid to the lender under each loan? (Round the monthly payment amounts to 2 decimal places.)

Accepted Answer

A)  $89,211 
B)  $98,406 
C)  $112,410 
D) $124,300

Question 6

In 2013, the U.S. inflation rate was below 2% and a few countries were even experiencing deflation.

Accepted Answer

A) True 
 B)False

Question 7

How should we compare interest rates quoted over different time intervals-for example, monthly versus annual rates?

Accepted Answer

The answer of How should we compare interest rates quoted...

Question 8

Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold. If inflation averaged 4% annually during the period, then over his career his purchasing power:

Accepted Answer

A)  remained on par with inflation. 
B)  increased by nearly 1% annually. 
C)  increased by nearly 2% annually. 
D) decreased.

Question 9

What is the discount factor for $1 to be received in 5 years at a discount rate of 8%?

Accepted Answer

A)  .4693 
B)  .5500 
C)  .6000 
D) .6806

Question 10

The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.

Accepted Answer

A) True 
 B)False

Question 11

An interest rate that has been annualized using compound interest is termed the:

Accepted Answer

A)  simple interest rate. 
B)  annual percentage rate. 
C)  discounted interest rate. 
D) effective annual interest rate.

Question 12

Three thousand dollars is deposited into an account paying 10% annually to provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second payment has been withdrawn?

Accepted Answer

A)  $1,326.97 
B)  $1,206.34 
C)  $1,096.69 
D) $587.32

Question 13

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an interest rate of 10% and cash flows at the end of each period.

Accepted Answer

A)  $297.29 
B)  $1,486.44 
C)  $1,635.08 
D) $2,000.00

Question 14

How much more would you be willing to pay today for an investment offering $10,000 in 4 years rather than in 5 years? Your discount rate is 8%.

Accepted Answer

A)  $544.47 
B)  $681.48 
C)  $740.74 
D) $800.00

Question 15

You should never compare cash flows occurring at different times without first discounting them to a common date.

Accepted Answer

A) True 
 B)False

Question 16

How much must be deposited today in an account earning 6% annually to accumulate a 20% down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4%?

Accepted Answer

A)  $3,774.61 
B)  $3,782.20 
C)  $3,924.53 
D) $4,080.08

Question 17

If inflation in Wonderland averaged about 3% per month in 2013, what was the annual rate of inflation?

Accepted Answer

A)  36.00% 
B)  42.58% 
C)  40.09% 
D) 41.27%

Question 18

A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment. What is the loan's APR?

Accepted Answer

A)  6% 
B)  9% 
C)  11% 
D) 12%

Question 19

What is the APR on a loan with an effective annual rate of 15.26% and weekly compounding of interest?

Accepted Answer

A)  14.35% 
B)  14.49% 
C)  13.97% 
D) 14.22%

Exam 5: The Time Value of Money

Given a set future value, which of the following will contribute to a lower present value?

What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding?

A perpetuity is a special form of an annuity.

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?

In 2013, the U.S. inflation rate was below 2% and a few countries were even experiencing deflation.

How should we compare interest rates quoted over different time intervals-for example, monthly versus annual rates?

Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold. If inflation averaged 4% annually during the period, then over his career his purchasing power:

What is the discount factor for $1 to be received in 5 years at a discount rate of 8%?

The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.

An interest rate that has been annualized using compound interest is termed the:

Three thousand dollars is deposited into an account paying 10% annually to provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second payment has been withdrawn?

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an interest rate of 10% and cash flows at the end of each period.

How much more would you be willing to pay today for an investment offering $10,000 in 4 years rather than in 5 years? Your discount rate is 8%.

You should never compare cash flows occurring at different times without first discounting them to a common date.

How much must be deposited today in an account earning 6% annually to accumulate a 20% down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4%?

If inflation in Wonderland averaged about 3% per month in 2013, what was the annual rate of inflation?

A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment. What is the loan's APR?

What is the APR on a loan with an effective annual rate of 15.26% and weekly compounding of interest?