Question 1

Your subscription to Investing Wisely Weekly is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $850,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A)  14.76 
B)  14.18 
C)  14.33 
D)  15.47 
E)  17.77

Question 2

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 to deal with situations where some of the cash flows occur annually but others occur quarterly. 
D)  Time lines can only be constructed for annuities where the payments occur at the end of the periods,i.e. ,for ordinary annuities. 
E)  Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

Question 3

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)  The present value of ORD must exceed the present value of DUE,but the future value of ORD may be less than the future value of DUE. 
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 DUE exceeds the present value of ORD,and the future value of DUE also 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 4

Last year Dania Corporation's sales were $525 million.If sales grow at 10.5% per year,how large (in millions)will they be 8 years later?

Accepted Answer

A)  $1,073.61 
B)  $1,166.96 
C)  $1,295.33 
D)  $1,015.26 
E)  $1,225.31

Question 5

Which of the following statements regarding a 15-year (180-month)$125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

Accepted Answer

A)  The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. 
B)  Because the outstanding balance declines over time,the monthly payments will also decline over time. 
C)  Interest payments on the mortgage will increase steadily over time,but the total amount of each payment will remain constant. 
D)  The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. 
E)  The outstanding balance declines at a faster rate in the later years of the loan's life.

Question 6

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 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 cannot be constructed for annuities where the payments occur at the beginning 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 7

A time line is meaningful even if all cash flows do not occur annually.

Accepted Answer

A) True 
 B)False

Question 8

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 5.7%,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)  0.74% 
B)  0.54% 
C)  0.59% 
D)  0.61% 
E)  0.58%

Question 9

Jose now has $500.How much would he have after 6 years if he leaves it invested at 5.1% with annual compounding?

Accepted Answer

A)  $828.88 
B)  $667.15 
C)  $808.66 
D)  $673.89 
E)  $512.15

Question 10

How much would $5,000 due in 15 years be worth today if the discount rate were 5.5%?

Accepted Answer

A)  $2,351.65 
B)  $2,239.67 
C)  $2,441.24 
D)  $2,530.82 
E)  $1,858.92

Question 11

You plan to invest in securities that pay 11.6%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

Accepted Answer

A)  6.10 
B)  4.73 
C)  6.43 
D)  4.18 
E)  5.50

Question 12

What is the PV of an ordinary annuity with 10 payments of $4,400 if the appropriate interest rate is 5.5%?

Accepted Answer

A)  $34,492.18 
B)  $38,472.04 
C)  $34,160.52 
D)  $27,527.41 
E)  $33,165.55

Question 13

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 14

Your child's orthodontist offers you two alternative payment plans.The first plan requires a $4,500 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?

Accepted Answer

A)  7.13% 
B)  6.50% 
C)  6.25% 
D)  5.44% 
E)  5.00%

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  The cash flows for an ordinary (or deferred)annuity all occur at the beginning of the periods. 
B)  If a series of unequal cash flows occurs at regular intervals,such as once a year,then the series is by definition an annuity. 
C)  The cash flows for an annuity due must all occur at the ends of the periods. 
D)  The cash flows for an annuity must all be equal,and they must occur at regular intervals,such as once a year or once a month. 
E)  If some cash flows occur at the beginning of the periods while others occur at the ends,then we have what the textbook defines as a variable annuity.

Question 16

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Accepted Answer

A) True 
 B)False

Question 17

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Suppose you borrowed $50,000 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)  $31,171.28 
B)  $41,146.10 
C)  $40,730.48 
D)  $41,561.71 
E)  $45,302.27

Question 20

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Exam 5: Time Value of Money

Which of the following statements is CORRECT?

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 10.5% per year,how large (in millions) will they be 8 years later?

Which of the following statements regarding a 15-year (180-month) $125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

Which of the following statements is CORRECT?

A time line is meaningful even if all cash flows do not occur annually.

Jose now has $500.How much would he have after 6 years if he leaves it invested at 5.1% with annual compounding?

How much would $5,000 due in 15 years be worth today if the discount rate were 5.5%?

You plan to invest in securities that pay 11.6%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

What is the PV of an ordinary annuity with 10 payments of $4,400 if the appropriate interest rate is 5.5%?

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).

Which of the following statements is CORRECT?

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Suppose you borrowed $50,000 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?

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the greater the present value of a given lump sum to be received at some future date.