Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments. 
B) The equivalent after-tax interest rate is r(1 - τ). 
C) The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term. 
D) To compensate for the risk that they will receive less than promised if the firm defaults,investors demand a lower interest rate than the rate on U.S.Treasuries. 
A) The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments. 
B) The equivalent after-tax interest rate is r(1 - τ). 
C) The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term. 
D) To compensate for the risk that they will receive less than promised if the firm defaults,investors demand a lower interest rate than the rate on U.S.Treasuries. D

Question 2

Suppose the interest rate is 9% APR with monthly compounding.Then the present value of an annuity that pays $250 every three months for the next five years is closest to:

Accepted Answer

A) $2280. 
B) $3985. 
C) $3990. 
D) $3995. 
A) $2280. 
B) $3985. 
C) $3990. 
D) $3995. B

Question 3

Use the information for the question(s)below.
Your firm needs to invest in a new delivery truck.The life expectancy of the delivery truck is five years.You can purchase a new delivery truck for an upfront cost of $200,000,or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month).Your firm can borrow at 6% APR with quarterly compounding.
-The effective annual rate for a certificate of deposit that pays 3.9% APR compounded monthly is closest to:

Accepted Answer

A) 3.83%. 
B) 3.90%. 
C) 3.97%. 
D) 4.04%. 
A) 3.83%. 
B) 3.90%. 
C) 3.97%. 
D) 4.04%. C

Question 4

The NPV of an investment that costs $2700 and pays $1000 certain at the end of one,three,and five years is closest to:

Accepted Answer

A) $21.47. 
B) $1665.62. 
C) -$100.26. 
D) -$71.38. 
A) $21.47. 
B) $1665.62. 
C) -$100.26. 
D) -$71.38.

Question 5

Use the following information to answer the question(s)below.
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage.The mortgage has a 30-year term with monthly payments and has an APR of 5.4%.
-The total amount of principal that Dagny will pay during the first three months of her mortgage is closest to:

Accepted Answer

A) $1340. 
B) $1345. 
C) $5395. 
D) $6740. 
A) $1340. 
B) $1345. 
C) $5395. 
D) $6740.

Question 6

Use the table for the question(s)below.
Suppose you have the following Loans/Investments  
-What is the effective after-tax rate of each instrument,expressed as an EAR?

Accepted Answer

Credit Card
Interest is not deductible s

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) The amount of earned interest kept by an investor will depend on how the interest is taxed. 
B) The equivalent after-tax interest rate is r(1 - τ). 
C) The highest interest rate,for a given horizon,is the rate paid on U.S.Treasury securities. 
D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows. 
A) The amount of earned interest kept by an investor will depend on how the interest is taxed. 
B) The equivalent after-tax interest rate is r(1 - τ). 
C) The highest interest rate,for a given horizon,is the rate paid on U.S.Treasury securities. 
D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows.

Question 8

The effective annual rate (EAR)for a savings account with a stated APR of 4% compounded daily (use 365-day year)is closest to:

Accepted Answer

A) 3.92%. 
B) 4.00%. 
C) 4.08%. 
D) 14.60%. 
A) 3.92%. 
B) 4.00%. 
C) 4.08%. 
D) 14.60%.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) U.S.Treasury securities are widely regarded to be risk-free because there is virtually no chance the government will default on these bonds. 
B) In general,if the interest rate is r and the tax rate is τ,then for each $1 invested you will earn interest equal to r and owe taxes of τ × r on the interest. 
C) Investors may receive less than the stated interest rate if the borrowing company has financial difficulties and is unable to fully repay the loan. 
D) Taxes reduce the amount of interest the investor can keep,and we refer to this reduced amount as the tax effective interest rate. 
A) U.S.Treasury securities are widely regarded to be risk-free because there is virtually no chance the government will default on these bonds. 
B) In general,if the interest rate is r and the tax rate is τ,then for each $1 invested you will earn interest equal to r and owe taxes of τ × r on the interest. 
C) Investors may receive less than the stated interest rate if the borrowing company has financial difficulties and is unable to fully repay the loan. 
D) Taxes reduce the amount of interest the investor can keep,and we refer to this reduced amount as the tax effective interest rate.

Question 10

Should the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.

Accepted Answer

The nominal interest rate should never b

Question 11

The effective annual rate (EAR)for a loan with a stated APR of 8% compounded monthly is closest to:

Accepted Answer

A) 7.72%. 
B) 8.00%. 
C) 8.30%. 
D) 8.66%. 
A) 7.72%. 
B) 8.00%. 
C) 8.30%. 
D) 8.66%.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) The equivalent after-tax interest rate is r - (τ × r). 
B) Interest rates vary based on the identity of the borrower. 
C) The ability to deduct the interest expense increases the effective after-tax interest rate paid on the loan. 
D) For loans to borrowers other than the U.S.Treasury,the stated interest rate is the maximum amount that investors will receive. 
A) The equivalent after-tax interest rate is r - (τ × r). 
B) Interest rates vary based on the identity of the borrower. 
C) The ability to deduct the interest expense increases the effective after-tax interest rate paid on the loan. 
D) For loans to borrowers other than the U.S.Treasury,the stated interest rate is the maximum amount that investors will receive.

Question 13

Interest on James Taggart's credit card balances are compounded daily at an effect annual rate of 14.91%.The APR on his credit card is closest to:

Accepted Answer

A) 13.90%. 
B) 13.95%. 
C) 14.91%. 
D) 16.08%. 
A) 13.90%. 
B) 13.95%. 
C) 14.91%. 
D) 16.08%.

Question 14

Use the information for the question(s)below.
Two years ago,you purchased a new SUV.You financed your SUV for 60 months (with payments made at the end of the month)with a loan at 5.9% APR.You monthly payments are $617.16 and you have just made your 24th monthly payment on your SUV.
-Assuming that you have made all of the first 24 payments on time,then the outstanding principal balance on your SUV loan is closest to:

Accepted Answer

A) $14,808. 
B) $20,300. 
C) $22,212. 
D) $32,000. 
A) $14,808. 
B) $20,300. 
C) $22,212. 
D) $32,000.

Question 15

Hugh Akston took out a 30-year mortgage with an EAR of 5.9%.If Hugh borrowed $300,000 to buy his home,then his monthly payment will be closest to:

Accepted Answer

A) $835. 
B) $1750. 
C) $1780. 
D) $10,240. 
A) $835. 
B) $1750. 
C) $1780. 
D) $10,240.

Question 16

If the current inflation rate is 4% and you have an investment opportunity that pays 10%,then the real rate of interest on your investment is closest to:

Accepted Answer

A) 10.0%. 
B) 14.0%. 
C) 6.0%. 
D) 5.8%. 
A) 10.0%. 
B) 14.0%. 
C) 6.0%. 
D) 5.8%.

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan. 
B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. 
C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. 
D) Fundamentally,interest rates are determined by the Federal Reserve. 
A) The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan. 
B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. 
C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. 
D) Fundamentally,interest rates are determined by the Federal Reserve.

Question 18

The effective annual rate (EAR)for a loan with a stated APR of 10% compounded quarterly is closest to:

Accepted Answer

A) 9.65%. 
B) 10.00%. 
C) 10.38%. 
D) 12.50%. 
A) 9.65%. 
B) 10.00%. 
C) 10.38%. 
D) 12.50%.

Question 19

You are considering purchasing a new automobile that will cost you $28,000.The dealer offers you 4.9% APR financing for 60 months (with payments made at the end of the month).Assuming you finance the entire $28,000 and finance through the dealer,your monthly payments will be closest to:

Accepted Answer

A) $1454. 
B) $527. 
C) $467. 
D) $457. 
A) $1454. 
B) $527. 
C) $467. 
D) $457.

Question 20

Use the information for the question(s)below.
Your firm needs to invest in a new delivery truck.The life expectancy of the delivery truck is five years.You can purchase a new delivery truck for an upfront cost of $200,000,or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month).Your firm can borrow at 6% APR with quarterly compounding.
-The effective annual rate on your firm's borrowings is closest to:

Accepted Answer

A) 6.00%. 
B) 6.14%. 
C) 6.25%. 
D) 6.30%. 
A) 6.00%. 
B) 6.14%. 
C) 6.25%. 
D) 6.30%.

Exam 5: Interest Rates

Which of the following statements is FALSE?

Suppose the interest rate is 9% APR with monthly compounding.Then the present value of an annuity that pays $250 every three months for the next five years is closest to:

The NPV of an investment that costs $2700 and pays $1000 certain at the end of one,three,and five years is closest to:

Use the table for the question(s)below. Suppose you have the following Loans/Investments -What is the effective after-tax rate of each instrument,expressed as an EAR?

Which of the following statements is FALSE?

The effective annual rate (EAR)for a savings account with a stated APR of 4% compounded daily (use 365-day year)is closest to:

Which of the following statements is FALSE?

Should the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.

The effective annual rate (EAR)for a loan with a stated APR of 8% compounded monthly is closest to:

Which of the following statements is FALSE?

Interest on James Taggart's credit card balances are compounded daily at an effect annual rate of 14.91%.The APR on his credit card is closest to:

Hugh Akston took out a 30-year mortgage with an EAR of 5.9%.If Hugh borrowed $300,000 to buy his home,then his monthly payment will be closest to:

If the current inflation rate is 4% and you have an investment opportunity that pays 10%,then the real rate of interest on your investment is closest to:

Which of the following statements is FALSE?

The effective annual rate (EAR)for a loan with a stated APR of 10% compounded quarterly is closest to:

You are considering purchasing a new automobile that will cost you $28,000.The dealer offers you 4.9% APR financing for 60 months (with payments made at the end of the month).Assuming you finance the entire $28,000 and finance through the dealer,your monthly payments will be closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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