Question 1

Your bank offers a savings account that pays 3.5% interest,compounded annually.How much will $500 invested today be worth at the end of 25 years?

Accepted Answer

A)  $1,122.54 
B)  $1,181.62 
C)  $1,240.70 
D)  $1,302.74 
E)  $1,367.88 
A)  $1,122.54 
B)  $1,181.62 
C)  $1,240.70 
D)  $1,302.74 
E)  $1,367.88

Question 2

You plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

Accepted Answer

A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59 
A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59

Question 3

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 4

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Accepted Answer

A) True 
 B)False

Question 5

The going rate of interest on a 5-year treasury bond is 4.25%.You have one that will pay $2,500 five years from now.How much is the bond worth today?

Accepted Answer

A)  $1,928.78 
B)  $2,030.30 
C)  $2,131.81 
D)  $2,238.40 
E)  $2,350.32 
A)  $1,928.78 
B)  $2,030.30 
C)  $2,131.81 
D)  $2,238.40 
E)  $2,350.32

Question 6

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR)on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?

Accepted Answer

A)  18.58% 
B)  19.56% 
C)  20.54% 
D)  21.57% 
E)  22.65% 
A)  18.58% 
B)  19.56% 
C)  20.54% 
D)  21.57% 
E)  22.65%

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Ten years ago,Kronan Corporation earned $0.50 per share.Its earnings this year were $2.20.What was the growth rate in earnings per share (EPS)over the 10-year period?

Accepted Answer

A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49% 
A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49%

Question 9

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 10

Disregarding risk,if money has time value,it is impossible for the present value of a given sum to exceed its future value.

Accepted Answer

A) True 
 B)False

Question 11

Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%,compounded monthly.The loan (principal plus interest)must be repaid at the end of the year.Woodburn Bank also offers to lend you the $50,000,but it will charge an annual rate of 7.0%,with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern?

Accepted Answer

A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24% 
A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24%

Question 12

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate,compounded quarterly.If you also add another $5,000 to the account one year (4 quarters)from now and another $7,500 to the account two years (8 quarters)from now,how much will be in the account three years (12 quarters)from now?

Accepted Answer

A)  $15,234.08 
B)  $16,035.88 
C)  $16,837.67 
D)  $17,679.55 
E)  $18,563.53 
A)  $15,234.08 
B)  $16,035.88 
C)  $16,837.67 
D)  $17,679.55 
E)  $18,563.53

Question 13

You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?

Accepted Answer

A)  Bank 1;6.1% with annual compounding. 
B)  Bank 2;6.0% with monthly compounding. 
C)  Bank 3;6.0% with annual compounding. 
D)  Bank 4;6.0% with quarterly compounding. 
E)  Bank 5;6.0% with daily (365-day)compounding. 
A)  Bank 1;6.1% with annual compounding. 
B)  Bank 2;6.0% with monthly compounding. 
C)  Bank 3;6.0% with annual compounding. 
D)  Bank 4;6.0% with quarterly compounding. 
E)  Bank 5;6.0% with daily (365-day)compounding.

Question 14

What is the present value of the following cash flow stream at a rate of 8.0%?

Accepted Answer

A)  $7,917 
B)  $8,333 
C)  $8,772 
D)  $9,233 
E)  $9,695 
A)  $7,917 
B)  $8,333 
C)  $8,772 
D)  $9,233 
E)  $9,695

Question 15

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 16

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 17

Geraldine was injured in a car accident,and the insurance company has offered her the choice of $25,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave her as well off financially as with the annuity?

Accepted Answer

A)  $225,367 
B)  $237,229 
C)  $249,090 
D)  $261,545 
E)  $274,622 
A)  $225,367 
B)  $237,229 
C)  $249,090 
D)  $261,545 
E)  $274,622

Question 18

The store where you bought new home furnishings offers you two alternative payment plans.The first plan requires a $4,000 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?

Accepted Answer

A)  12.31% 
B)  12.96% 
C)  13.64% 
D)  14.36% 
E)  15.08% 
A)  12.31% 
B)  12.96% 
C)  13.64% 
D)  14.36% 
E)  15.08%

Question 19

Suppose a State of New Mexico bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%,how much is the bond worth today?

Accepted Answer

A)  $651.60 
B)  $684.18 
C)  $718.39 
D)  $754.31 
E)  $792.02 
A)  $651.60 
B)  $684.18 
C)  $718.39 
D)  $754.31 
E)  $792.02

Question 20

Which of the following statements regarding a 20-year (240-month)$225,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

Accepted Answer

A)  The outstanding balance declines at a slower rate in the later years of the loan's life. 
B)  The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years. 
C)  Because it is a fixed-rate mortgage,the monthly loan payments (which include both interest and principal payments)are constant. 
D)  Interest payments on the mortgage will increase steadily over time,but the total amount of each payment will remain constant. 
E)  The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. 
A)  The outstanding balance declines at a slower rate in the later years of the loan's life. 
B)  The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years. 
C)  Because it is a fixed-rate mortgage,the monthly loan payments (which include both interest and principal payments)are constant. 
D)  Interest payments on the mortgage will increase steadily over time,but the total amount of each payment will remain constant. 
E)  The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

Exam 4: Time Value of Money

Your bank offers a savings account that pays 3.5% interest,compounded annually.How much will $500 invested today be worth at the end of 25 years?

You plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

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

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

The going rate of interest on a 5-year treasury bond is 4.25%.You have one that will pay $2,500 five years from now.How much is the bond worth today?

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR)on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?

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

Ten years ago,Kronan Corporation earned $0.50 per share.Its earnings this year were $2.20.What was the growth rate in earnings per share (EPS)over the 10-year period?

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?

Disregarding risk,if money has time value,it is impossible for the present value of a given sum to exceed its future value.

You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?

What is the present value of the following cash flow stream at a rate of 8.0%?

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.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Geraldine was injured in a car accident,and the insurance company has offered her the choice of $25,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave her as well off financially as with the annuity?

Suppose a State of New Mexico bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%,how much is the bond worth today?

Which of the following statements regarding a 20-year (240-month)$225,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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