Question 1

If the current inflation rate is 5%,then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to:

Accepted Answer

A)  13.0% 
B)  13.4% 
C)  4.9% 
D)  3.0% 
E)  8.0% 
A)  13.0% 
B)  13.4% 
C)  4.9% 
D)  3.0% 
E)  8.0%

Question 2

You decide to take out a car loan for $14,995 at 3% APR for 48 months.How much are your monthly payments?

Accepted Answer

A)  $312.40 
B)  $321.77 
C)  $331.90 
D)  $593.47 
E)  $336.17 
A)  $312.40 
B)  $321.77 
C)  $331.90 
D)  $593.47 
E)  $336.17

Question 3

Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?

Accepted Answer

A)  There is a greater chance that a borrower will default in a longer time-frame. 
B)  The penalties for closing out a long-term loan early make them unattractive to many investors. 
C)  Long-term loans typically have ongoing costs that accumulate over the life of the loan. 
D)  The loan values are very sensitive to changes in market interest rates. 
E)  There is a greater chance that an investor will need cash before the loan term is complete. 
A)  There is a greater chance that a borrower will default in a longer time-frame. 
B)  The penalties for closing out a long-term loan early make them unattractive to many investors. 
C)  Long-term loans typically have ongoing costs that accumulate over the life of the loan. 
D)  The loan values are very sensitive to changes in market interest rates. 
E)  There is a greater chance that an investor will need cash before the loan term is complete.

Question 4

A homeowner has a $200,000 home with a 20-year mortgage,paid monthly at a quoted APR of 7.25%.After five years he receives $50,000 as an inheritance.If he pays this $50,000 toward his mortgage along with his regular payment,by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?

Accepted Answer

A)  6 years 
B)  5 years 
C)  4 years 
D)  3 years 
E)  2 years 
A)  6 years 
B)  5 years 
C)  4 years 
D)  3 years 
E)  2 years

Question 5

What is the present value (PV)of an investment that pays $10,000 every year for four years if the interest rate is 7% APR,compounded quarterly?

Accepted Answer

A)  $33,730 
B)  $33,872 
C)  $38,680 
D)  $40,000 
E)  $30,516 
A)  $33,730 
B)  $33,872 
C)  $38,680 
D)  $40,000 
E)  $30,516

Question 6

When the costs of an investment come before that investment's benefits,what will be the the effect of a rise in interest rates on the attractiveness of that investment to potential investors?

Accepted Answer

A)  It will make it more attractive, since it will increase the investment's net present value (NPV). 
B)  It will make it more attractive, since it will decrease the investment's net present value (NPV). 
C)  It will make it less attractive, since it will increase the investment's net present value (NPV). 
D)  It will make it less attractive, since it will decrease the investment's net present value (NPV). 
E)  It will be unchanged, since NPV calculations ignore changes in interest rates to more accurately compare the NPVs of projects beginning at different times. 
A)  It will make it more attractive, since it will increase the investment's net present value (NPV). 
B)  It will make it more attractive, since it will decrease the investment's net present value (NPV). 
C)  It will make it less attractive, since it will increase the investment's net present value (NPV). 
D)  It will make it less attractive, since it will decrease the investment's net present value (NPV). 
E)  It will be unchanged, since NPV calculations ignore changes in interest rates to more accurately compare the NPVs of projects beginning at different times.

Question 7

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 the equation to calculate the present value (PV)of perpetuity is used?

Accepted Answer

The equation for computation o

Question 8

Emma runs a small factory that needs a vacuum oven for brazing small fittings.She can purchase the model she needs for $180,000 up front,or she can lease it for five years for $4200 per month.She can borrow at 7% APR,compounded monthly.Assuming that the oven will be used for five years,should she purchase the oven or should she lease it?

Accepted Answer

A)  Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. 
B)  Lease, since the present value (PV) of the lease is $8642 less than the cost of the oven. 
C)  Lease, since the present value (PV) of the lease is $2212 less than the cost of the oven. 
D)  Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven. 
E)  Buy, since the present value (PV) of the lease is $72,000 more than the cost of the oven. 
A)  Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. 
B)  Lease, since the present value (PV) of the lease is $8642 less than the cost of the oven. 
C)  Lease, since the present value (PV) of the lease is $2212 less than the cost of the oven. 
D)  Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven. 
E)  Buy, since the present value (PV) of the lease is $72,000 more than the cost of the oven.

Question 9

An investor buys a property for $640,000 with a 25-year mortgage and monthly payments at a quoted APR of 8%.After 18 months the investor resells the property for $712,000.How much cash will the investor have made from the sale,once the mortgage is paid off?

Accepted Answer

A)  $63,218 
B)  $72,412 
C)  $85,082 
D)  $92,644 
E)  $72,000 
A)  $63,218 
B)  $72,412 
C)  $85,082 
D)  $92,644 
E)  $72,000

Question 10

Assume your current mortgage payment is $900 per month.If you begin to pay $1,000 per month (with the extra $100 per month going to principal),which of the following will be TRUE?

Accepted Answer

A)  The mortgage balance will decrease faster with $1,000 monthly payments compared to $900 monthly payments. 
B)  The total paid (principal and interest) will increase with $1,000 monthly payments compared to $900 monthly payments. 
C)  The total interest expense will increase with $1,000 monthly payments compared to $900 monthly payments. 
D)  The total principal paid will decrease with $1,000 monthly payments compared to $900 monthly payments. 
E)  The time until your mortgage is paid off will increase with $1,000 monthly payments compared to $900 monthly payments 
A)  The mortgage balance will decrease faster with $1,000 monthly payments compared to $900 monthly payments. 
B)  The total paid (principal and interest) will increase with $1,000 monthly payments compared to $900 monthly payments. 
C)  The total interest expense will increase with $1,000 monthly payments compared to $900 monthly payments. 
D)  The total principal paid will decrease with $1,000 monthly payments compared to $900 monthly payments. 
E)  The time until your mortgage is paid off will increase with $1,000 monthly payments compared to $900 monthly payments

Question 11

What is a mortgage?

Accepted Answer

A mortgage is a loan

Question 12

Given a real interest rate of 2.5% and an inflation rate of 4.5%,what is the nominal interest rate?

Accepted Answer

A)  2.5% 
B)  -2.0% 
C)  2.0% 
D)  7.1% 
E)  4.5% 
A)  2.5% 
B)  -2.0% 
C)  2.0% 
D)  7.1% 
E)  4.5%

Question 13

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
  
-Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.

Accepted Answer

The nominal interest rate can never be n

Question 14

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
  
-The net present value (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 
E)  $0 
A)  $21.47 
B)  $1665.62 
C)  -$100.26 
D)  -$71.38 
E)  $0

Question 15

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.
-A 12% APR with bi-monthly compounding is equivalent to an EAR of:

Accepted Answer

A)  11.98% 
B)  12.50% 
C)  12.00% 
D)  12.62% 
E)  12.14% 
A)  11.98% 
B)  12.50% 
C)  12.00% 
D)  12.62% 
E)  12.14%

Question 16

You are in the process of purchasing a new automobile that will cost you $25,000.The dealership is offering you either a $1000 rebate (applied toward the purchase price)or 3.9% financing for 60 months (with payments made at the end of the month).You have been pre-approved for an auto loan through your local credit union at an interest rate of 7.5% for 60 months.Should you take the $1000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3.9% APR?

Accepted Answer

First we need the monthly interest rate

Question 17

Which of the following accounts has the highest EAR?

Accepted Answer

A)  one that pays 6.1% every six months 
B)  one that pays 1.0% per month 
C)  one that pays 12.6% per year 
D)  one that pays 3% every three months 
E)  one that pays 0.2% per week 
A)  one that pays 6.1% every six months 
B)  one that pays 1.0% per month 
C)  one that pays 12.6% per year 
D)  one that pays 3% every three months 
E)  one that pays 0.2% per week

Question 18

Joe borrows $100,000 and agrees to repay the principal,plus 7% APR interest compounded monthly,at the end of three years.Joe has taken out an amortizing loan.

Accepted Answer

A) True 
 B)False

Question 19

Everything else remaining the same,under what situation will APR and EAR be equal?

Accepted Answer

An APR will equal EA

Question 20

Which of the following formulas gives you the growth in purchasing power?

Accepted Answer

A)  growth of money + growth of prices 
B)  (1 + real rate) / (1 + nominal rate) 
C)  (1 + inflation rate) / (1 + nominal rate) 
D)  growth of money / growth of prices 
E)  growth of money × growth of prices 
A)  growth of money + growth of prices 
B)  (1 + real rate) / (1 + nominal rate) 
C)  (1 + inflation rate) / (1 + nominal rate) 
D)  growth of money / growth of prices 
E)  growth of money × growth of prices

Exam 5: Interest Rates

If the current inflation rate is 5%,then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to:

You decide to take out a car loan for $14,995 at 3% APR for 48 months.How much are your monthly payments?

Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?

What is the present value (PV)of an investment that pays $10,000 every year for four years if the interest rate is 7% APR,compounded quarterly?

When the costs of an investment come before that investment's benefits,what will be the the effect of a rise in interest rates on the attractiveness of that investment to potential investors?

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 the equation to calculate the present value (PV)of perpetuity is used?

An investor buys a property for $640,000 with a 25-year mortgage and monthly payments at a quoted APR of 8%.After 18 months the investor resells the property for $712,000.How much cash will the investor have made from the sale,once the mortgage is paid off?

Assume your current mortgage payment is $900 per month.If you begin to pay $1,000 per month (with the extra $100 per month going to principal),which of the following will be TRUE?

What is a mortgage?

Given a real interest rate of 2.5% and an inflation rate of 4.5%,what is the nominal interest rate?

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -The net present value (NPV)of an investment that costs $2700 and pays $1000 certain at the end of one,three,and five years is closest to:

Which of the following accounts has the highest EAR?

Joe borrows $100,000 and agrees to repay the principal,plus 7% APR interest compounded monthly,at the end of three years.Joe has taken out an amortizing loan.

Everything else remaining the same,under what situation will APR and EAR be equal?

Which of the following formulas gives you the growth in purchasing power?

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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