Question 1

You decide to take out a 30-year mortgage for $445,000 at 6% APR.What are your monthly payments?

Accepted Answer

A)  $2,622.69 
B)  $2,646.96 
C)  $2,694.06 
D)  $2,688.32 
E)  $2,667.99 
A)  $2,622.69 
B)  $2,646.96 
C)  $2,694.06 
D)  $2,688.32 
E)  $2,667.99

Question 2

The term "opportunity" in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested.

Accepted Answer

A) True 
 B)False

Question 3

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
  
-Consider an investment that pays $1000 certain at the end of each of the next four years.If the investment costs $3,500 and has a net present value (NPV)of $74.26,then the four year risk-free interest rate is closest to:

Accepted Answer

A)  4.5% 
B)  4.58% 
C)  4.55% 
D)  4.53% 
E)  5.0% 
A)  4.5% 
B)  4.58% 
C)  4.55% 
D)  4.53% 
E)  5.0%

Question 4

Howard is saving for a long holiday.He deposits a fixed amount every month in a bank account with an EAR of 7.5%.If this account pays interest every month then how much should he save from each monthly paycheck in order to have $10,000 in the account in two years' time?

Accepted Answer

A)  $161 
B)  $166 
C)  $388 
D)  $4818 
E)  $417 
A)  $161 
B)  $166 
C)  $388 
D)  $4818 
E)  $417

Question 5

A small business refits its store.The builders charge them $125,000,which will be paid back in monthly installments over three years at 6% APR.The builders will reduce this rate to 5.5% APR if they pay $2500 up front.By approximately how much will this reduce the monthly loan repayments ?

Accepted Answer

A)  $104 
B)  $28 
C)  $214 
D)  $77 
E)  $192 
A)  $104 
B)  $28 
C)  $214 
D)  $77 
E)  $192

Question 6

Michael has credit card debt of $60,000 that has an 18% APR,compounded monthly.The minimum monthly payment only requires him to pay the interest on his debt.He receives an offer for a credit card with an APR of 10% compounded monthly.If he rolls over his debt onto this card and makes the same monthly payment as before,how long will it take him to pay off his credit card debt?

Accepted Answer

A)  72 months 
B)  78 months 
C)  84 months 
D)  98 months 
E)  104 months 
A)  72 months 
B)  78 months 
C)  84 months 
D)  98 months 
E)  104 months

Question 7

What is the general relationship between the absolute values of APR and EAR for an investment?

Accepted Answer

The APR of a project will eith

Question 8

What,typically,is used to calculate the opportunity cost of capital on a risk-free investment?

Accepted Answer

A)  the best available expected return offered in any investment available in the market 
B)  the interest rate on Government of Canada securities with the same term 
C)  the interest rate of any investments alternatives that are available 
D)  the best rate of return offered by Government of Canada securities 
E)  the interest rate on short-term Government of Canada securities 
A)  the best available expected return offered in any investment available in the market 
B)  the interest rate on Government of Canada securities with the same term 
C)  the interest rate of any investments alternatives that are available 
D)  the best rate of return offered by Government of Canada securities 
E)  the interest rate on short-term Government of Canada securities

Question 9

Why,in general,do investment opportunities offer a rate greater than that offered by Government of Canada securities for the same horizon?

Accepted Answer

A)  Most investment opportunities offer far greater risk than those offered by Government of Canada. 
B)  The return from Government of Canada securities generally attracts less tax than the returns from other investments. 
C)  The opportunity cost of capital for a given horizon is generally based on Government of Canada securities with that same horizon. 
D)  Government of Canada securities are generally considered to be the best alternative to most investments. 
E)  Government of Canada securities are the least attractive investment available. 
A)  Most investment opportunities offer far greater risk than those offered by Government of Canada. 
B)  The return from Government of Canada securities generally attracts less tax than the returns from other investments. 
C)  The opportunity cost of capital for a given horizon is generally based on Government of Canada securities with that same horizon. 
D)  Government of Canada securities are generally considered to be the best alternative to most investments. 
E)  Government of Canada securities are the least attractive investment available.

Question 10

You decide to take out a 25-year mortgage for $375,000 at 5% APR.What will your outstanding balance be at the end of the mortgage's initial 5-year term?

Accepted Answer

A)  $330,000 
B)  $332,176 
C)  $331,584 
D)  $331,903 
E)  $244,139 
A)  $330,000 
B)  $332,176 
C)  $331,584 
D)  $331,903 
E)  $244,139

Question 11

Elinore is asked to invest $5000 in a friend's business with the promise that the friend will repay $5500 in one year's time.Elinore finds her best alternative to this investment,with similar risk,is one that will pay her $5400 in one year's time.U.S.securities of similar term offer a rate of return of 6%.What is the opportunity cost of capital in this case?

Accepted Answer

A)  6% 
B)  8% 
C)  9% 
D)  10% 
E)  7% 
A)  6% 
B)  8% 
C)  9% 
D)  10% 
E)  7%

Question 12

What is the effective annual rate (EAR)?

Accepted Answer

A)  the interest rate that would earn the same interest with annual compounding 
B)  the ratio of the number of the annual percentage rate to the number of compounding periods per year 
C)  the discount rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction) 
D)  the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year 
E)  the amount of simple interest earned in one year without considering the effects of compounding. 
A)  the interest rate that would earn the same interest with annual compounding 
B)  the ratio of the number of the annual percentage rate to the number of compounding periods per year 
C)  the discount rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction) 
D)  the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year 
E)  the amount of simple interest earned in one year without considering the effects of compounding.

Question 13

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
  
-What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV)of an annuity?

Accepted Answer

The built-in functions for pre

Question 14

Use the table for the question(s) below.
Consider the following investment alternatives:
  
-Which alternative offers you the lowest effective rate of return?

Accepted Answer

A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  Investment D 
E)  Investment E 
A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  Investment D 
E)  Investment E

Question 15

How do we handle a situation when both compounding period and cash flow interval are given to us,but both are less than a year and not equal to each other?

Accepted Answer

Additional care should be taken when the

Question 16

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

Accepted Answer

A)  10.52% 
B)  10.25% 
C)  10.38% 
D)  10.00% 
E)  10.47% 
A)  10.52% 
B)  10.25% 
C)  10.38% 
D)  10.00% 
E)  10.47%

Question 17

A bank offers a loan that will requires you to pay 6% interest compounded monthly.Which of the following is closest to the EAR charged by the bank?

Accepted Answer

A)  5.84% 
B)  6.00% 
C)  6.17% 
D)  72.00% 
E)  6.48% 
A)  5.84% 
B)  6.00% 
C)  6.17% 
D)  72.00% 
E)  6.48%

Question 18

Your bank account pays monthly interest with an EAR of 8%.What amount of interest will you earn each month?

Accepted Answer

A)  0.64% 
B)  0.67% 
C)  1.00% 
D)  0.60% 
E)  0.80% 
A)  0.64% 
B)  0.67% 
C)  1.00% 
D)  0.60% 
E)  0.80%

Question 19

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

Accepted Answer

A) True 
 B)False

Question 20

A truck costing $112,000 is paid off in monthly installments over four years with 8% APR.After three years the owner wishes to sell the truck.What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck?

Accepted Answer

A)  $24,867 
B)  $28,678 
C)  $31,432 
D)  $87,255 
E)  $44,792 
A)  $24,867 
B)  $28,678 
C)  $31,432 
D)  $87,255 
E)  $44,792

Exam 5: Interest Rates

You decide to take out a 30-year mortgage for $445,000 at 6% APR.What are your monthly payments?

The term "opportunity" in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested.

Howard is saving for a long holiday.He deposits a fixed amount every month in a bank account with an EAR of 7.5%.If this account pays interest every month then how much should he save from each monthly paycheck in order to have $10,000 in the account in two years' time?

A small business refits its store.The builders charge them $125,000,which will be paid back in monthly installments over three years at 6% APR.The builders will reduce this rate to 5.5% APR if they pay $2500 up front.By approximately how much will this reduce the monthly loan repayments ?

What is the general relationship between the absolute values of APR and EAR for an investment?

What,typically,is used to calculate the opportunity cost of capital on a risk-free investment?

Why,in general,do investment opportunities offer a rate greater than that offered by Government of Canada securities for the same horizon?

You decide to take out a 25-year mortgage for $375,000 at 5% APR.What will your outstanding balance be at the end of the mortgage's initial 5-year term?

What is the effective annual rate (EAR)?

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV)of an annuity?

Use the table for the question(s) below. Consider the following investment alternatives: -Which alternative offers you the lowest effective rate of return?

How do we handle a situation when both compounding period and cash flow interval are given to us,but both are less than a year and not equal to each other?

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

A bank offers a loan that will requires you to pay 6% interest compounded monthly.Which of the following is closest to the EAR charged by the bank?

Your bank account pays monthly interest with an EAR of 8%.What amount of interest will you earn each month?

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

A truck costing $112,000 is paid off in monthly installments over four years with 8% APR.After three years the owner wishes to sell the truck.What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

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