Question 1

What is the effective annual interest rate on a credit card with an interest rate of 15% per year, compounded monthly?

Accepted Answer

A)  15.0% 
B)  16.1% 
C)  17.8% 
D)  18.3%

Question 2

Jane wants to have $200,000 in an account in 20 years. If it earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000?

Accepted Answer

A)  $25,116 
B)  $3,115 
C)  $10,000 
D)  $3,492

Question 3

You have just won a lottery that promises to pay you and your heirs $1000 dollars a year forever. How much could you get for this stream of cash today if the interest rate is 6%?

Accepted Answer

A)  $12,500 
B)  $16,667 
C)  $943 
D)  None of the above

Question 4

A contract guarantees payment of $500 a month for the next 18 months starting today. How much is that contract worth today if the interest rate is 12% compounded monthly?

Accepted Answer

A)  $8281.14 
B)  $8199.15 
C)  $9905.58 
D)  $9087.50

Question 5

The present value factor is also known as the discount factor.

Accepted Answer

A) True 
 B)False

Question 6

A business is expected to generate the following cash flows over the next five years after which it will be dissolved. How much is the business worth today if the interest rate is 8%? $\begin{array}{ll}
\text { Year }& \text { Cash Fiow } \
1 & \$ 10,000 \
2 & \$ 15,000 \
3 & \$ 30,000 \
4 & \$ 40,000
\end{array}$

Accepted Answer

A)  $77,615 
B)  $68,304 
C)  $75,333 
D)  $100,025

Question 7

Compound interest occurs when interest is earned on interest.

Accepted Answer

A) True 
 B)False

Question 8

Idlewild Bank has granted you a seven year loan for $50,000. If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging?

Accepted Answer

A)  14% 
B)  23% 
C)  12.6% 
D)  None of the above

Question 9

What is the most you should pay to receive the following cash flows if you require a return of 12 percent? $\begin{array}{ll}
\text { Year 1 } & \$ 5,000 \
\text { Year 2 } & \$ 8,000 \
\text { Year 3 } & \$ 12,000 \
\text { Year 4-10 } & \$ 15,000
\end{array}$

Accepted Answer

A)  $58,580 
B)  $104,135 
C)  $68,105 
D)  None of the above

Question 10

If you owe $1,200.00, which is the most advantageous way to pay it back assuming a 12% APR discount rate?

Accepted Answer

A)  $100.00 monthly payments over the next twelve months 
B)  $300.00 quarterly payments over the next four quarters 
C)  $600.00 paid every six months over the next year 
D)  $1,200.00 paid after one year

Question 11

The ____ of a resource is the benefit that would have been available from its next best use.

Accepted Answer

A)  opportunity cost 
B)  present value 
C)  future value 
D)  all of the above 
E)  none of the above

Question 12

Under which compounding frequency will you earn the most on an investment receiving 12% APR in interest?

Accepted Answer

A)  Monthly 
B)  Quarterly 
C)  Semi-annually 
D)  Annually

Question 13

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 14

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 15

A cash flow projected today for a specific 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

How much must be invested today to have $1,000 in two years if the interest rate is 5%?

Accepted Answer

A)  $909.09 
B)  $900.00 
C)  $907.00 
D)  $950.00

Question 17

You have just won a lottery that promises to pay you and your heirs $1000 dollars a month forever. How much could you get for this stream of cash if the rate of return is 6% compounded monthly?

Accepted Answer

A)  $200,000 
B)  $166,667 
C)  $943,520 
D)  None of the above

Question 18

You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would increase the present value of your cash flows?

Accepted Answer

A)  Assume a longer stream of cash flows of the same amount 
B)  Increase the discount rate 
C)  Decrease the discount rate 
D)  a and c

Question 19

Unlike car loans, mortgage loans on real estate generally require larger payments of principal in the early years of the mortgage and lower payments of interest in the later years.

Accepted Answer

A) True 
 B)False

Question 20

What present amount is equivalent to $100 received at the end of 5 years, given an interest rate of 16%?

Accepted Answer

A)  $47.60 
B)  $327.40 
C)  $40.20 
D)  $163.60 
E)  $32.30

Exam 6: Time Value of Money

What is the effective annual interest rate on a credit card with an interest rate of 15% per year, compounded monthly?

Jane wants to have $200,000 in an account in 20 years. If it earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000?

You have just won a lottery that promises to pay you and your heirs $1000 dollars a year forever. How much could you get for this stream of cash today if the interest rate is 6%?

A contract guarantees payment of $500 a month for the next 18 months starting today. How much is that contract worth today if the interest rate is 12% compounded monthly?

The present value factor is also known as the discount factor.

Compound interest occurs when interest is earned on interest.

Idlewild Bank has granted you a seven year loan for $50,000. If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging?

What is the most you should pay to receive the following cash flows if you require a return of 12 percent? $\begin{array}{ll}\text { Year 1 } & \$ 5,000 \\\text { Year 2 } & \$ 8,000 \\\text { Year 3 } & \$ 12,000 \\\text { Year 4-10 } & \$ 15,000\end{array}$

If you owe $1,200.00, which is the most advantageous way to pay it back assuming a 12% APR discount rate?

The ____ of a resource is the benefit that would have been available from its next best use.

Under which compounding frequency will you earn the most on an investment receiving 12% APR in interest?

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?

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

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

How much must be invested today to have $1,000 in two years if the interest rate is 5%?

You have just won a lottery that promises to pay you and your heirs $1000 dollars a month forever. How much could you get for this stream of cash if the rate of return is 6% compounded monthly?

You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would increase the present value of your cash flows?

Unlike car loans, mortgage loans on real estate generally require larger payments of principal in the early years of the mortgage and lower payments of interest in the later years.

What present amount is equivalent to $100 received at the end of 5 years, given an interest rate of 16%?