Question 1

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

A) The periodic rate of interest is 5% and the effective rate of interest is also 5%. 
B) The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. 
C) The periodic rate of interest is 5% and the effective rate of interest is greater than 5%. 
D) The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. 
E) The periodic rate of interest is 2.5% and the effective rate of interest is 5%. 
A) The periodic rate of interest is 5% and the effective rate of interest is also 5%. 
B) The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. 
C) The periodic rate of interest is 5% and the effective rate of interest is greater than 5%. 
D) The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. 
E) The periodic rate of interest is 2.5% and the effective rate of interest is 5%.

Question 2

An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him with income of $50,000 per year for 30 years,beginning a year from today.The going rate on such annuities is 7.25%.How much would it cost him to buy such an annuity today?

Accepted Answer

A) $574,924 
B) $605,183 
C) $635,442 
D) $667,214 
E) $700,575 
A) $574,924 
B) $605,183 
C) $635,442 
D) $667,214 
E) $700,575

Question 3

Of the following investments,which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A) Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). 
B) Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C) Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D) Investment D pays $2,500 at the end of 10 years (just one payment). 
E) Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). 
A) Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). 
B) Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). 
C) Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). 
D) Investment D pays $2,500 at the end of 10 years (just one payment). 
E) Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Question 4

Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?

Accepted Answer

A) $28,532 
B) $29,959 
C) $31,457 
D) $33,030 
E) $34,681 
A) $28,532 
B) $29,959 
C) $31,457 
D) $33,030 
E) $34,681

Question 5

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Accepted Answer

A) $77.19 
B) $81.25 
C) $85.31 
D) $89.58 
E) $94.06 
A) $77.19 
B) $81.25 
C) $85.31 
D) $89.58 
E) $94.06

Question 6

Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

Accepted Answer

A) 73.67% 
B) 77.55% 
C) 81.63% 
D) 85.93% 
E) 90.45% 
A) 73.67% 
B) 77.55% 
C) 81.63% 
D) 85.93% 
E) 90.45%

Question 7

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 8

The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

Accepted Answer

A) True 
 B)False

Question 9

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year,how large (in millions)will they be 5 years later?

Accepted Answer

A) $271.74 
B) $286.05 
C) $301.10 
D) $316.16 
E) $331.96 
A) $271.74 
B) $286.05 
C) $301.10 
D) $316.16 
E) $331.96

Question 10

At a rate of 6.5%,what is the future value of the following cash flow stream?

Accepted Answer

A) $526.01 
B) $553.69 
C) $582.83 
D) $613.51 
E) $645.80 
A) $526.01 
B) $553.69 
C) $582.83 
D) $613.51 
E) $645.80

Question 11

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Accepted Answer

A) $16,576 
B) $17,449 
C) $18,367 
D) $19,334 
E) $20,352 
A) $16,576 
B) $17,449 
C) $18,367 
D) $19,334 
E) $20,352

Question 12

Suppose you inherited $275,000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?

Accepted Answer

A) $22,598.63 
B) $23,788.03 
C) $25,040.03 
D) $26,357.92 
E) $27,675.82 
A) $22,598.63 
B) $23,788.03 
C) $25,040.03 
D) $26,357.92 
E) $27,675.82

Question 13

If the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.

Accepted Answer

A) True 
 B)False

Question 14

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

Accepted Answer

A) 7.62% 
B) 8.00% 
C) 8.40% 
D) 8.82% 
E) 9.26% 
A) 7.62% 
B) 8.00% 
C) 8.40% 
D) 8.82% 
E) 9.26%

Question 15

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

Accepted Answer

A) 20,701 
B) $21,791 
C) $22,938 
D) $24,085 
E) $25,289 
A) 20,701 
B) $21,791 
C) $22,938 
D) $24,085 
E) $25,289

Question 16

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 smaller the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 17

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

Accepted Answer

A) $2,404.91 
B) $2,531.49 
C) $2,658.06 
D) $2,790.96 
E) $2,930.51 
A) $2,404.91 
B) $2,531.49 
C) $2,658.06 
D) $2,790.96 
E) $2,930.51

Question 18

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

Accepted Answer

A) True 
 B)False

Question 19

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%,compounded semiannually?

Accepted Answer

A) $3,089 
B) $3,251 
C) $3,422 
D) $3,602 
E) $3,782 
A) $3,089 
B) $3,251 
C) $3,422 
D) $3,602 
E) $3,782

Question 20

You are considering two equally risky annuities,each of which pays $25,000 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) 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. 
B) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. 
C) 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. 
D) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
E) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD. 
A) 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. 
B) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. 
C) 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. 
D) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
E) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.

Exam 28: Time Value of Money

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him with income of $50,000 per year for 30 years,beginning a year from today.The going rate on such annuities is 7.25%.How much would it cost him to buy such an annuity today?

Of the following investments,which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year,how large (in millions)will they be 5 years later?

At a rate of 6.5%,what is the future value of the following cash flow stream?

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Suppose you inherited $275,000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?

If the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

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 smaller the present value of a given lump sum to be received at some future date.

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%,compounded semiannually?

You are considering two equally risky annuities,each of which pays $25,000 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?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24^th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?