Question 1

A bank offers an account with an APR of 6% and an EAR of 6.09%.How does the bank compound interest for this account?

Accepted Answer

A)  weekly compounding 
B)  monthly compounding 
C)  semi-annual compounding 
D)  annual compounding 
E)  daily compounding 
A)  weekly compounding 
B)  monthly compounding 
C)  semi-annual compounding 
D)  annual compounding 
E)  daily compounding

Question 2

Five years ago you took out a 30-year mortgage with a quoted APR of 6.5% for $200,000.If you were to refinance the mortgage today for 20 years at a quoted APR of 4.25%,,by how much would your monthly payment change?

Accepted Answer

A)  The monthly payment will increase by $98.33. 
B)  The monthly payment will decrease by $98.33. 
C)  The monthly payment will increase by $343.12. 
D)  The monthly payment will decrease by $343.12. 
E)  The monthly payment will not change. 
A)  The monthly payment will increase by $98.33. 
B)  The monthly payment will decrease by $98.33. 
C)  The monthly payment will increase by $343.12. 
D)  The monthly payment will decrease by $343.12. 
E)  The monthly payment will not change.

Question 3

You decide to take out a car loan for $35,000 at 5% APR with monthly payments of $838.12.Over how many years is your loan being paid?

Accepted Answer

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

Question 4

Five years ago you took out a 30-year mortgage with a quoted APR of 6.5% for $200,000.If you were to refinance the mortgage today for 20 years at a quoted APR of 4.25% ,how much would you save in total interest expense?

Accepted Answer

A)  $176,846 
B)  $75,848 
C)  $151,696 
D)  $98,770 
E)  $108,340 
A)  $176,846 
B)  $75,848 
C)  $151,696 
D)  $98,770 
E)  $108,340

Question 5

Your bank account pays monthly interest with an APR of 8%.You are planning to buy a house in 6 years,and you wish to save $40,000 for the down payment.If you currently have no money in your account,how much will you need to save at the end of each month?

Accepted Answer

A)  $451.18 
B)  $500.34 
C)  $555.56 
D)  $434.66 
E)  $438.53 
A)  $451.18 
B)  $500.34 
C)  $555.56 
D)  $434.66 
E)  $438.53

Question 6

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)  $478 
E)  $497 
A)  $1454 
B)  $527 
C)  $467 
D)  $478 
E)  $497

Question 7

Your bank account pays quarterly interest with an EAR of 7%.What amount of interest will you earn each quarter?

Accepted Answer

A)  1.80% 
B)  1.75% 
C)  1.70% 
D)  1.50% 
E)  2.00% 
A)  1.80% 
B)  1.75% 
C)  1.70% 
D)  1.50% 
E)  2.00%

Question 8

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
  
-After examining the yield curve,what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?

Accepted Answer

This is an inverted yield curve,which im

Question 9

You decide to take out a car loan for $20,000 at 7% APR for 60 months.How much are your monthly payments?

Accepted Answer

A)  $396.02 
B)  $333.33 
C)  $406.48 
D)  $400.00 
E)  $367.54 
A)  $396.02 
B)  $333.33 
C)  $406.48 
D)  $400.00 
E)  $367.54

Question 10

An 8% APR with monthly compounding is closest to which of the following?

Accepted Answer

A)  an EAR of 6.7% 
B)  an EAR of 7.72% 
C)  an EAR of 8.3% 
D)  an EAR of 8.5% 
E)  an EAR of 9.14% 
A)  an EAR of 6.7% 
B)  an EAR of 7.72% 
C)  an EAR of 8.3% 
D)  an EAR of 8.5% 
E)  an EAR of 9.14%

Question 11

What care,if any,should be taken when cash flows occur in periodicities that are shorter than a year-e.g.,quarterly or monthly cash flows?

Accepted Answer

In the real world,cash flows can occur w

Question 12

The annual percentage rate indicates the amount of interest,including the effect of any compounding.

Accepted Answer

A) True 
 B)False

Question 13

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.
-The amount of your original loan is closest to:

Accepted Answer

A)  $37,000 
B)  $32,000 
C)  $20,300 
D)  $31,250 
E)  $29,000 
A)  $37,000 
B)  $32,000 
C)  $20,300 
D)  $31,250 
E)  $29,000

Question 14

In which of the following situations would it not be appropriate to use the following formula: PV = C₁/(1 + r₁)+ C₂/(1 + r₂)² + ....+ Cn/(1 + rn)ⁿ
When determining the present value (PV)of a cash flow stream?

Accepted Answer

A)  when yield curves are flat 
B)  when short-term and long-term interest rates vary widely 
C)  when the inflation rate is high 
D)  when the discount rate is high 
E)  when the real interest rate is high 
A)  when yield curves are flat 
B)  when short-term and long-term interest rates vary widely 
C)  when the inflation rate is high 
D)  when the discount rate is high 
E)  when the real interest rate is high

Question 15

You are purchasing a new home and need to borrow $325,000 from a mortgage lender.The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month).The mortgage lender also tells you that if you are willing to pay one point,they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage.One point is equal to 1% of the loan value.So if you take the lower rate and pay the points,you will need to borrow an additional $3250 to cover points you are paying the lender.Assuming that you do not intend to prepay your mortgage (pay off your mortgage early),are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?

Accepted Answer

Pay the points!
Points (6.25% APR)
First

Question 16

The table above shows the rate of return (APR)for four investment alternatives.Which offers the highest EAR?

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 17

Your bank account pays quarterly interest with an APR of 7%.What is the EAR?

Accepted Answer

A)  7.50% 
B)  7.2% 
C)  7.0% 
D)  7.8% 
E)  8.0% 
A)  7.50% 
B)  7.2% 
C)  7.0% 
D)  7.8% 
E)  8.0%

Question 18

Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it.

Accepted Answer

A) True 
 B)False

Question 19

Given an inflation rate of 3.24%,and a short-term municipal bond offers a rate of 2.9%,which of the following statements is correct?

Accepted Answer

A)  The purchasing power of investors in these bonds grew over the course of the year. 
B)  The real interest rate for investors in these bonds was greater than the rate of inflation. 
C)  Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. 
D)  The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds. 
E)  Interest rates must have risen during the year. 
A)  The purchasing power of investors in these bonds grew over the course of the year. 
B)  The real interest rate for investors in these bonds was greater than the rate of inflation. 
C)  Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. 
D)  The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds. 
E)  Interest rates must have risen during the year.

Question 20

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
  
-The yield curve is typically

Accepted Answer

A)  downward sloping. 
B)  upward sloping. 
C)  flat. 
D)  inverted. 
E)  fluctuating. 
A)  downward sloping. 
B)  upward sloping. 
C)  flat. 
D)  inverted. 
E)  fluctuating.

Exam 5: Interest Rates

A bank offers an account with an APR of 6% and an EAR of 6.09%.How does the bank compound interest for this account?

Five years ago you took out a 30-year mortgage with a quoted APR of 6.5% for $200,000.If you were to refinance the mortgage today for 20 years at a quoted APR of 4.25%,,by how much would your monthly payment change?

You decide to take out a car loan for $35,000 at 5% APR with monthly payments of $838.12.Over how many years is your loan being paid?

Five years ago you took out a 30-year mortgage with a quoted APR of 6.5% for $200,000.If you were to refinance the mortgage today for 20 years at a quoted APR of 4.25% ,how much would you save in total interest expense?

Your bank account pays monthly interest with an APR of 8%.You are planning to buy a house in 6 years,and you wish to save $40,000 for the down payment.If you currently have no money in your account,how much will you need to save at the end of each month?

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:

Your bank account pays quarterly interest with an EAR of 7%.What amount of interest will you earn each quarter?

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -After examining the yield curve,what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?

You decide to take out a car loan for $20,000 at 7% APR for 60 months.How much are your monthly payments?

An 8% APR with monthly compounding is closest to which of the following?

What care,if any,should be taken when cash flows occur in periodicities that are shorter than a year-e.g.,quarterly or monthly cash flows?

The annual percentage rate indicates the amount of interest,including the effect of any compounding.

In which of the following situations would it not be appropriate to use the following formula: PV = C₁/(1 + r₁)+ C₂/(1 + r₂)² + ....+ Cn/(1 + rn)ⁿ When determining the present value (PV)of a cash flow stream?

The table above shows the rate of return (APR)for four investment alternatives.Which offers the highest EAR?

Your bank account pays quarterly interest with an APR of 7%.What is the EAR?

Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it.

Given an inflation rate of 3.24%,and a short-term municipal bond offers a rate of 2.9%,which of the following statements is correct?

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -The yield curve is typically

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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