Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan. 
B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. 
C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. 
D) Fundamentally, interest rates are determined by the Federal Reserve. 
A) The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan. 
B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. 
C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. 
D) Fundamentally, interest rates are determined by the Federal Reserve.

Question 2

Consider the following investment alternatives:   Which alternative offers you the highest effective rate of return?

Accepted Answer

A) Investment A 
B) Investment B 
C) Investment C 
D) Investment D 
A) Investment A 
B) Investment B 
C) Investment C 
D) Investment D

Question 3

How do we decide on opportunity cost when we have several opportunities that need to be foregone?

Accepted Answer

We rank all the foregone opportunities,

Question 4

Which of the following accounts has the highest EAR?

Accepted Answer

A) one that pays 5.4% every six months 
B) one that pays 1.0% per month 
C) one that pays 9.6% per year 
D) one that pays 2.4% every three months 
A) one that pays 5.4% every six months 
B) one that pays 1.0% per month 
C) one that pays 9.6% per year 
D) one that pays 2.4% every three months

Question 5

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 $240,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4800 (paid at the end of each month). Your firm can borrow at 7.80% APR with quarterly compounding. The present value (PV)of the lease payments for the delivery truck is closest to ________.

Accepted Answer

A) $190,506 
B) $238,132 
C) $285,758 
D) $333,385 
A) $190,506 
B) $238,132 
C) $285,758 
D) $333,385

Question 6

If the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9%, then the real rate of interest on your investment is closest to ________.

Accepted Answer

A) 8.5% 
B) 9.9% 
C) 11.3% 
D) 7.0% 
A) 8.5% 
B) 9.9% 
C) 11.3% 
D) 7.0%

Question 7

If the current inflation rate is 2.0%, then the nominal rate necessary for you to earn a(n)7.3% real interest rate on your investment is closest to ________.

Accepted Answer

A) 11.3% 
B) 9.4% 
C) 13.2% 
D) 15.1% 
A) 11.3% 
B) 9.4% 
C) 13.2% 
D) 15.1%

Question 8

A bank pays interest semiannually with an EAR of 13%. What is the periodic interest rate applicable semiannually?

Accepted Answer

A) 5.04% 
B) 7.56% 
C) 6.30% 
D) 12.60% 
A) 5.04% 
B) 7.56% 
C) 6.30% 
D) 12.60%

Question 9

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 inflation may fall 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. 
A) There is a greater chance that inflation may fall 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.

Question 10

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?

Accepted Answer

A) The number of borrowers seeking funds is low. 
B) The expected inflation rate is expected to be low. 
C) The borrower is judged to have a low degree of risk. 
D) The loan will be for a long period of time. 
A) The number of borrowers seeking funds is low. 
B) The expected inflation rate is expected to be low. 
C) The borrower is judged to have a low degree of risk. 
D) The loan will be for a long period of time.

Question 11

Consider the following investment alternatives:   Which alternative offers you the lowest effective rate of return?

Accepted Answer

A) Investment A 
B) Investment B 
C) Investment C 
D) Investment D 
A) Investment A 
B) Investment B 
C) Investment C 
D) Investment D

Question 12

When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high.

Accepted Answer

A) True 
 B)False

Question 13

A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month?

Accepted Answer

A) 0.56% 
B) 5.63% 
C) 0.51% 
D) 0.61% 
E) 0.66% 
A) 0.56% 
B) 5.63% 
C) 0.51% 
D) 0.61% 
E) 0.66%

Question 14

For a free-risk investment, the opportunity cost of capital will generally be more than the interest rate offered by U.S. Treasury securities with a similar term.

Accepted Answer

A) True 
 B)False

Question 15

Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered 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. 
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.

Question 16

A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan?

Accepted Answer

A) $1448.36 
B) $1580.03 
C) $1316.69 
D) $1711.70 
A) $1448.36 
B) $1580.03 
C) $1316.69 
D) $1711.70

Question 17

A home buyer buys a house for $2,155,000. She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment?

Accepted Answer

A) $11,342.47 
B) $10,311.34 
C) $12,373.61 
D) $8249.07 
A) $11,342.47 
B) $10,311.34 
C) $12,373.61 
D) $8249.07

Question 18

Which of the following yield curves would most likely predict a downturn in the economy?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 19

In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r)+ C2/(1 + r)2 + . . . . + Cn/(1 + r)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 
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

Question 20

A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?

Accepted Answer

A) $19,433 
B) $15,546 
C) $23,319 
D) $27,206 
A) $19,433 
B) $15,546 
C) $23,319 
D) $27,206

Exam 5: Interest Rates

Which of the following statements is FALSE?

Consider the following investment alternatives: Which alternative offers you the highest effective rate of return?

How do we decide on opportunity cost when we have several opportunities that need to be foregone?

Which of the following accounts has the highest EAR?

If the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9%, then the real rate of interest on your investment is closest to ________.

If the current inflation rate is 2.0%, then the nominal rate necessary for you to earn a(n)7.3% real interest rate on your investment is closest to ________.

A bank pays interest semiannually with an EAR of 13%. What is the periodic interest rate applicable semiannually?

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

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?

Consider the following investment alternatives: Which alternative offers you the lowest effective rate of return?

When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high.

A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month?

For a free-risk investment, the opportunity cost of capital will generally be more than the interest rate offered by U.S. Treasury securities with a similar term.

Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct?

A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan?

A home buyer buys a house for $2,155,000. She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment?

Which of the following yield curves would most likely predict a downturn in the economy?

In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r)+ C2/(1 + r)2 + . . . . + Cn/(1 + r)n When determining the present value (PV)of a cash flow stream?

A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

In which of the following situations would it not be appropriate to use the following formula: PV = C₀ + C₁/(1 + r)+ C₂/(1 + r)² + . . . . + C_n/(1 + r)ⁿ When determining the present value (PV)of a cash flow stream?