Question 1

What is the real interest rate given a nominal rate of 8.9% and an inflation rate of 1.9%?

Accepted Answer

A) 6.9% 
B) 8.2% 
C) 9.6% 
D) 11.0% 
A) 6.9% 
B) 8.2% 
C) 9.6% 
D) 11.0%

Question 2

Use the table for the question(s)below.
Suppose the term structure of interest rates is shown below:  
-What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV)of an annuity?

Accepted Answer

The built-in functions for pre

Question 3

Suppose the term structure of interest rates is shown below:   The net present value (NPV)of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________.

Accepted Answer

A) $91.37 
B) $137.05 
C) $114.21 
D) -$114.21 
A) $91.37 
B) $137.05 
C) $114.21 
D) -$114.21

Question 4

A pottery factory purchases a continuous belt conveyor kiln for $68,000. A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22, over what term is this loan being paid?

Accepted Answer

A) 8 years 
B) 9 years 
C) 10 years 
D) 11 years 
A) 8 years 
B) 9 years 
C) 10 years 
D) 11 years

Question 5

You are purchasing a new home and need to borrow $260,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.80% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 6.50% 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 $5200 to cover points you are paying the lender. Assuming you pay the points and borrow from the mortgage lender at 6.50%, then your monthly mortgage payment (with payments made at the end of the month)will be closest to ________.

Accepted Answer

A) $1844 
B) $1676 
C) $2011 
D) $2347 
A) $1844 
B) $1676 
C) $2011 
D) $2347

Question 6

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

Question 7

A 10% APR with quarterly compounding is equivalent to an EAR of ________.

Accepted Answer

A) 10.00% 
B) 10.47% 
C) 10.38% 
D) 9.81% 
A) 10.00% 
B) 10.47% 
C) 10.38% 
D) 9.81%

Question 8

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 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________.

Accepted Answer

A) $22,000 
B) $20,000 
C) $24,000 
D) $28,000 
A) $22,000 
B) $20,000 
C) $24,000 
D) $28,000

Question 9

Everything else remaining same, under what situation will APR and EAR be equal?

Accepted Answer

An APR will equal EA

Question 10

Inflation is calculated as the rate of change in the _______.

Accepted Answer

A) unemployment rate 
B) Gross Domestic Product 
C) Consumer Price Index 
D) risk-free rate 
A) unemployment rate 
B) Gross Domestic Product 
C) Consumer Price Index 
D) risk-free rate

Question 11

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 U.S. Treasury securities. 
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 U.S. Treasury securities. 
D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows.

Question 12

In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe?

Accepted Answer

A) Long-term interest rates will tend to be higher than short-term interest rates. 
B) Long-term interest rates will be about the same as short-term interest rates. 
C) Both long- and short-term interest rates would be expected to fall sharply. 
D) No relative change in short and long term interest rates could be predicted. 
A) Long-term interest rates will tend to be higher than short-term interest rates. 
B) Long-term interest rates will be about the same as short-term interest rates. 
C) Both long- and short-term interest rates would be expected to fall sharply. 
D) No relative change in short and long term interest rates could be predicted.

Question 13

A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan?

Accepted Answer

A) $1663.45 
B) $1814.67 
C) $1965.89 
D) $1512.22 
A) $1663.45 
B) $1814.67 
C) $1965.89 
D) $1512.22

Question 14

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

Question 15

Use the table for the question(s)below.
Suppose the term structure of interest rates is shown below:  
-What is the implied assumption about interest rates when the equation to calculate the present value (PV)of perpetuity is used?

Accepted Answer

The equation for computation o

Question 16

Joseph buys a Hummer for $59,000, financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions?

Accepted Answer

A) 59.57 months 
B) 57.07 months 
C) 54.57 months 
D) 60.57 months 
A) 59.57 months 
B) 57.07 months 
C) 54.57 months 
D) 60.57 months

Question 17

Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770. How much was the loan amount for this extension?

Accepted Answer

A) $33,436 
B) $40,123 
C) $46,810 
D) $53,497 
A) $33,436 
B) $40,123 
C) $46,810 
D) $53,497

Question 18

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 $3,250 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 19

Which of the following statements is FALSE about interest rates?

Accepted Answer

A) As 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 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) As 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 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 20

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

Exam 5: Interest Rates

What is the real interest rate given a nominal rate of 8.9% and an inflation rate of 1.9%?

Use the table for the question(s)below. Suppose the term structure of interest rates is shown below: -What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV)of an annuity?

Suppose the term structure of interest rates is shown below: The net present value (NPV)of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________.

A pottery factory purchases a continuous belt conveyor kiln for $68,000. A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22, over what term is this loan being paid?

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)?

A 10% APR with quarterly compounding is equivalent to an EAR of ________.

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 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________.

Everything else remaining same, under what situation will APR and EAR be equal?

Inflation is calculated as the rate of change in the _______.

Which of the following statements is FALSE?

In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe?

A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan?

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

Use the table for the question(s)below. Suppose the term structure of interest rates is shown below: -What is the implied assumption about interest rates when the equation to calculate the present value (PV)of perpetuity is used?

Joseph buys a Hummer for $59,000, financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions?

Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770. How much was the loan amount for this extension?

Which of the following statements is FALSE about interest rates?

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

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

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