Question 1

The effective annual rate (EAR)for a loan with a stated APR of 11% compounded quarterly is closest to ________.

Accepted Answer

A) 12.61% 
B) 13.75% 
C) 11.46% 
D) 14.90% 
A) 12.61% 
B) 13.75% 
C) 11.46% 
D) 14.90%

Question 2

Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE?

Accepted Answer

A) The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments. 
B) The total amount paid (principal and interest)will increase with $1,000 monthly payment compared to $900 monthly payments. 
C) The total interest expense will increase with $1,000 monthly payment compared to $900 monthly payments. 
D) The total principal paid will decrease with $1,000 monthly payment compared to $900 monthly payments. 
A) The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments. 
B) The total amount paid (principal and interest)will increase with $1,000 monthly payment compared to $900 monthly payments. 
C) The total interest expense will increase with $1,000 monthly payment compared to $900 monthly payments. 
D) The total principal paid will decrease with $1,000 monthly payment compared to $900 monthly payments.

Question 3

The effective annual rate (EAR)for a loan with a stated APR of 8% compounded monthly is closest to ________.

Accepted Answer

A) 8.30% 
B) 9.13% 
C) 9.96% 
D) 10.79% 
A) 8.30% 
B) 9.13% 
C) 9.96% 
D) 10.79%

Question 4

What, typically, is used to calculate the opportunity cost of capital on a risk-free investment?

Accepted Answer

A) the best expected return offered in any investment available in the market 
B) the interest rate on U.S. Treasury securities with the same term 
C) the interest rate of any investments alternatives that are available 
D) the best rate of return offered by U.S. Treasury securities 
A) the best expected return offered in any investment available in the market 
B) the interest rate on U.S. Treasury securities with the same term 
C) the interest rate of any investments alternatives that are available 
D) the best rate of return offered by U.S. Treasury securities

Question 5

The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in two years' time, what is the present value (PV)of that cash flow?

Accepted Answer

A) $76,518 
B) $114,777 
C) $133,906 
D) $95,647 
A) $76,518 
B) $114,777 
C) $133,906 
D) $95,647

Question 6

Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282. Which of the following loans offers monthly payments closest to $282?

Accepted Answer

A) 7.8% APR for 36 months 
B) 7.8% APR for 48 months 
C) 7.8% APR for 60 months 
D) 7.8% APR for 72 months 
A) 7.8% APR for 36 months 
B) 7.8% APR for 48 months 
C) 7.8% APR for 60 months 
D) 7.8% APR for 72 months

Question 7

The yield curve is typically ________.

Accepted Answer

A) downward sloping 
B) upward sloping 
C) flat 
D) inverted 
A) downward sloping 
B) upward sloping 
C) flat 
D) inverted

Question 8

Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by?

Accepted Answer

A) The monthly payment will increase by $104.79. 
B) The monthly payment will decrease by $104.79 
C) The monthly payment will increase by $343.12. 
D) The monthly payment will decrease by $343.12. 
A) The monthly payment will increase by $104.79. 
B) The monthly payment will decrease by $104.79 
C) The monthly payment will increase by $343.12. 
D) The monthly payment will decrease by $343.12.

Question 9

What is the general relationship between the absolute values of APR and EAR for an investment?

Accepted Answer

The APR of a project will eith

Question 10

You are in the process of purchasing a new automobile that will cost you $25,000. The dealership is offering you either a $1,000 rebate (applied toward the purchase price)or 3.9% financing for 60 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 7.5% for 60 months. Should you take the $1,000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3.9% APR?

Accepted Answer

Financing through credit union:
First we

Question 11

Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt?

Accepted Answer

A) 112 months 
B) 113 months 
C) 120 months 
D) 122 months 
A) 112 months 
B) 113 months 
C) 120 months 
D) 122 months

Question 12

Consider the following investment alternatives:   The lowest effective rate of return you could earn on any of these investments is closest to ________.

Accepted Answer

A) 6.3830% 
B) 6.4080% 
C) 6.4330% 
D) 6.4580% 
A) 6.3830% 
B) 6.4080% 
C) 6.4330% 
D) 6.4580%

Question 13

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 i

Question 14

Historically, why were high inflation rates associated with high nominal interest rates?

Accepted Answer

A) Individuals will spend more when they expect their investments to increase in value. 
B) Growth in investment and savings is encouraged when consumers are judged to be overspending. 
C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. 
D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present. 
A) Individuals will spend more when they expect their investments to increase in value. 
B) Growth in investment and savings is encouraged when consumers are judged to be overspending. 
C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. 
D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.

Question 15

A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan?

Accepted Answer

A) $57,933 
B) $86,899 
C) $72,416 
D) $101,382 
A) $57,933 
B) $86,899 
C) $72,416 
D) $101,382

Question 16

You are purchasing a new home and need to borrow $380,000 from a mortgage lender. The mortgage lender quotes you a rate of 5.75% 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 5.45% 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 $7600 to cover points you are paying the lender. Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then your monthly mortgage payment (with payments made at the end of the month)will be closest to ________.

Accepted Answer

A) $2439 
B) $2661 
C) $2218 
D) $3105 
A) $2439 
B) $2661 
C) $2218 
D) $3105

Question 17

Suppose the term structure of interest rates is shown below:   The present value (PV)of receiving $1100 per year with certainty at the end of the next three years is closest to ________.

Accepted Answer

A) $3010 
B) $2408 
C) $3612 
D) $4214 
A) $3010 
B) $2408 
C) $3612 
D) $4214

Question 18

An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525. How much cash will the investor have from the sale, once the mortgage is paid off?

Accepted Answer

A) $57,216 
B) $100,129 
C) $71,521 
D) $143,041 
A) $57,216 
B) $100,129 
C) $71,521 
D) $143,041

Question 19

When the costs of an investment come before that investment's benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors?

Accepted Answer

A) It will make it more attractive, since it will increase the investment's net present value (NPV). 
B) It will make it more attractive, since it will decrease the investment's net present value (NPV). 
C) It will make it less attractive, since it will increase the investment's net present value (NPV). 
D) It will make it less attractive, since it will decrease the investment's net present value (NPV). 
A) It will make it more attractive, since it will increase the investment's net present value (NPV). 
B) It will make it more attractive, since it will decrease the investment's net present value (NPV). 
C) It will make it less attractive, since it will increase the investment's net present value (NPV). 
D) It will make it less attractive, since it will decrease the investment's net present value (NPV).

Question 20

When computing a present value, which of the following is TRUE?

Accepted Answer

A) You should adjust the discount rate to match the interval between cash flows. 
B) You should adjust the future value to match the present value. 
C) You should adjust the time period to match the present value. 
D) You should adjust the cash flows to match the time period of the discount rate. 
A) You should adjust the discount rate to match the interval between cash flows. 
B) You should adjust the future value to match the present value. 
C) You should adjust the time period to match the present value. 
D) You should adjust the cash flows to match the time period of the discount rate.

Exam 5: Interest Rates

The effective annual rate (EAR)for a loan with a stated APR of 11% compounded quarterly is closest to ________.

Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE?

The effective annual rate (EAR)for a loan with a stated APR of 8% compounded monthly is closest to ________.

What, typically, is used to calculate the opportunity cost of capital on a risk-free investment?

The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in two years' time, what is the present value (PV)of that cash flow?

Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282. Which of the following loans offers monthly payments closest to $282?

The yield curve is typically ________.

Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by?

What is the general relationship between the absolute values of APR and EAR for an investment?

Consider the following investment alternatives: 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?

Historically, why were high inflation rates associated with high nominal interest rates?

A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan?

Suppose the term structure of interest rates is shown below: The present value (PV)of receiving $1100 per year with certainty at the end of the next three years is closest to ________.

An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525. How much cash will the investor have from the sale, once the mortgage is paid off?

When the costs of an investment come before that investment's benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors?

When computing a present value, which of the following is TRUE?

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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