Question 1

Which of the following statements is false?

Accepted Answer

A)  Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows. 
B)  The effective annual rate indicates the amount of interest that will be earned at the end of one year. 
C)  The annual percentage rate indicates the amount of simple interest earned in one year. 
D)  The annual percentage rate indicates the amount of interest including the effect of compounding. 
A)  Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows. 
B)  The effective annual rate indicates the amount of interest that will be earned at the end of one year. 
C)  The annual percentage rate indicates the amount of simple interest earned in one year. 
D)  The annual percentage rate indicates the amount of interest including the effect of compounding.

Question 2

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
  
-What is the NPV of an investment that costs $2,500 and pays $1,000 certain at the end of one,three,and five years ?

Accepted Answer

NPV = -2,500 + 1,000

Question 3

Use the information for the question(s) below.
You are purchasing a new home and need to borrow $250,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.25% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay 2 points, they can offer you a lower rate of 6.0% 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 $5,000 to cover points you are paying the lender.
-Assuming you don't pay the points and borrow from the mortgage lender at 6.25%,then your monthly mortgage payment (with payments made at the end of the month)will be closest to:

Accepted Answer

A)  $1,570 
B)  $1,530 
C)  $1,540 
D)  $1,500 
A)  $1,570 
B)  $1,530 
C)  $1,540 
D)  $1,500

Question 4

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
  
-The present value of receiving $1,000 per year with certainty at the end of the next three years is closest to:

Accepted Answer

A)  $2,737 
B)  $2,723 
C)  $2,733 
D)  $2,744 
A)  $2,737 
B)  $2,723 
C)  $2,733 
D)  $2,744

Question 5

An effective annual rate (EAR)is normally compounded

Accepted Answer

A)  monthly. 
B)  quarterly. 
C)  semiannually. 
D)  annually. 
A)  monthly. 
B)  quarterly. 
C)  semiannually. 
D)  annually.

Question 6

Which of the following formulas is incorrect?

Accepted Answer

A)  i =   - 1 
B)  1 + rr =   
C)  rr ≈ i - r 
D)  rr =   
A)  i =   - 1 
B)  1 + rr =   
C)  rr ≈ i - r 
D)  rr =

Question 7

The lowest effective rate of return you could earn on any of these investments is closest to:

Accepted Answer

A)  6.250% 
B)  6.267% 
C)  6.100% 
D)  6.300% 
A)  6.250% 
B)  6.267% 
C)  6.100% 
D)  6.300%

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

Which of the following statements is false?

Accepted Answer

A)  An inverted yield curve generally signals an expected decline in future interest rates. 
B)  An inverted yield curve is often interpreted as a positive forecast for economic growth. 
C)  All the formulas for computing present values of annuities and perpetuities are based upon discounting all of the cash flows at the same rate. 
D)  The rate of growth of your purchasing power is determined by the real interest rate. 
A)  An inverted yield curve generally signals an expected decline in future interest rates. 
B)  An inverted yield curve is often interpreted as a positive forecast for economic growth. 
C)  All the formulas for computing present values of annuities and perpetuities are based upon discounting all of the cash flows at the same rate. 
D)  The rate of growth of your purchasing power is determined by the real interest rate.

Question 10

Use the information for the question(s) below.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4,000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly compounding.
-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 1 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 the point 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 1 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 11

Use the information for the question(s) below.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4,000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly compounding.
-Should you purchase the delivery truck or lease it? Why?

Accepted Answer

First we need to calculate the monthly d

Question 12

The target range of annual inflation rates established by the Bank of Canada and the federal government currently extends

Accepted Answer

A)  from 10 to 12 percent. 
B)  from 5 to 8 percent. 
C)  from 0 to 1 percent. 
D)  from 1 to 3 percent. 
A)  from 10 to 12 percent. 
B)  from 5 to 8 percent. 
C)  from 0 to 1 percent. 
D)  from 1 to 3 percent.

Question 13

In Canada,by regulation,how many times is a mortgage rate allowed to compound in a year if the rate is fixed with a closed term?

Accepted Answer

A)  Monthly 
B)  Semiannually 
C)  Annually 
D)  Quarterly 
A)  Monthly 
B)  Semiannually 
C)  Annually 
D)  Quarterly

Question 14

Use the information for the question(s) below.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4,000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly compounding.
-The effective annual rate on your firm's borrowings is closest to:

Accepted Answer

A)  6.00% 
B)  6.24% 
C)  6.17% 
D)  6.14% 
A)  6.00% 
B)  6.24% 
C)  6.17% 
D)  6.14%

Question 15

You are considering purchasing a new truck that will cost you $34,000.The dealer offers you 1.9% APR financing for 48 months (with payments made at the end of the month).Assuming you finance the entire $34,000 and finance through the dealer,your monthly payments will be closest to:

Accepted Answer

A)  $708 
B)  $594 
C)  $736 
D)  $1,086 
A)  $708 
B)  $594 
C)  $736 
D)  $1,086

Question 16

Which of the following statements is false?

Accepted Answer

A)  The equivalent after-tax interest rate is r - (τ × r). 
B)  Interest rates vary based on the identity of the borrower. 
C)  The ability to deduct the interest expense increases the effective after-tax interest rate paid on the loan. 
D)  For loans to borrowers other than the Government of Canada the stated interest rate is the maximum amount that investors will receive. 
A)  The equivalent after-tax interest rate is r - (τ × r). 
B)  Interest rates vary based on the identity of the borrower. 
C)  The ability to deduct the interest expense increases the effective after-tax interest rate paid on the loan. 
D)  For loans to borrowers other than the Government of Canada the stated interest rate is the maximum amount that investors will receive.

Question 17

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 18

Which of the following equations is incorrect?

Accepted Answer

A)    - 1= APR 
B)  Equivalent n - Period Discount Rate = (1 + r)n - 1 
C)  1 + EAR =   
D)  Interest Rate per Compounding Period =   
A)    - 1= APR 
B)  Equivalent n - Period Discount Rate = (1 + r)n - 1 
C)  1 + EAR =   
D)  Interest Rate per Compounding Period =

Question 19

Use the information for the question(s) below.
You are in the process of purchasing a new automobile that will cost you $27,500. The dealership is offering you either a $2,500 rebate (applied toward the purchase price) or 1.9% financing for 48 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 6.5% for 48 months.
-If you take the $2,500 rebate and finance your new car through your credit union your monthly payments will be closest to:

Accepted Answer

A)  $595 
B)  $652 
C)  $593 
D)  $541 
A)  $595 
B)  $652 
C)  $593 
D)  $541

Question 20

Which of the following statements is false?

Accepted Answer

A)  The actual return kept by an investor will depend on how the interest is taxed. 
B)  The equivalent after-tax interest rate is r(1 - τ). 
C)  The highest interest rate for a given horizon is the rate paid on Treasury Bills of the Government of Canada. 
D)  It is important to use a discount rate that matches both the horizon and the risk of the cash flows. 
A)  The actual return kept by an investor will depend on how the interest is taxed. 
B)  The equivalent after-tax interest rate is r(1 - τ). 
C)  The highest interest rate for a given horizon is the rate paid on Treasury Bills of the Government of Canada. 
D)  It is important to use a discount rate that matches both the horizon and the risk of the cash flows.

Exam 5: Interest Rates

Which of the following statements is false?

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -What is the NPV of an investment that costs $2,500 and pays $1,000 certain at the end of one,three,and five years ?

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -The present value of receiving $1,000 per year with certainty at the end of the next three years is closest to:

An effective annual rate (EAR)is normally compounded

Which of the following formulas is incorrect?

The lowest effective rate of return you could earn on any of these investments is closest to:

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?

Which of the following statements is false?

The target range of annual inflation rates established by the Bank of Canada and the federal government currently extends

In Canada,by regulation,how many times is a mortgage rate allowed to compound in a year if the rate is fixed with a closed term?

You are considering purchasing a new truck that will cost you $34,000.The dealer offers you 1.9% APR financing for 48 months (with payments made at the end of the month).Assuming you finance the entire $34,000 and finance through the dealer,your monthly payments will be closest to:

Which of the following statements is false?

Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.

Which of the following equations is incorrect?

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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