Question 1

Which of the following statements is FALSE?

Accepted Answer

A)  The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. 
B)  Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. 
C)  The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. 
D)  For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term. 
A)  The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. 
B)  Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. 
C)  The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. 
D)  For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term. D

Question 2

A house costs $148,000. It is to be paid off in exactly ten years, with monthly payments of $1737.54. What is the APR of this loan?

Accepted Answer

A)  6.25% 
B)  5.25% 
C)  7.25% 
D)  8.25% 
A)  6.25% 
B)  5.25% 
C)  7.25% 
D)  8.25% C

Question 3

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  False

Question 4

Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. Joe has taken out an amortizing loan.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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 7

A bank offers a loan that will requires you to pay 7% interest compounded monthly. Which of the following is closest to the EAR charged by the bank?

Accepted Answer

A)  5.78% 
B)  8.68% 
C)  7.23% 
D)  14.46% 
A)  5.78% 
B)  8.68% 
C)  7.23% 
D)  14.46%

Question 8

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 9

You are considering purchasing a new automobile with the upfront cost of $25,000 or leasing it from the dealer for a period of 60 months. The dealer offers you 4.00% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $25,000 through the dealer, your monthly payments will be closest to ________.

Accepted Answer

A)  $368 
B)  $460 
C)  $552 
D)  $645 
A)  $368 
B)  $460 
C)  $552 
D)  $645

Question 10

Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000. If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense?

Accepted Answer

A)  $200,503 
B)  $150,377 
C)  $50,126 
D)  $100,251 
A)  $200,503 
B)  $150,377 
C)  $50,126 
D)  $100,251

Question 11

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 12

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 13

Which of the following best describes the annual percentage rate?

Accepted Answer

A)  the quoted interest rate which, considered with the compounding period, gives the effective interest rate 
B)  the effective annual rate, after compounding is taken into account 
C)  the discount rate, when compounded more than once a year or less than once a year 
D)  the discount rate, when effective annual rate is divided by the number of times it is compounded in a year 
A)  the quoted interest rate which, considered with the compounding period, gives the effective interest rate 
B)  the effective annual rate, after compounding is taken into account 
C)  the discount rate, when compounded more than once a year or less than once a year 
D)  the discount rate, when effective annual rate is divided by the number of times it is compounded in a year

Question 14

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 $300,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to ________.

Accepted Answer

A)  0.5298% 
B)  0.7947% 
C)  0.6623% 
D)  0.6667% 
A)  0.5298% 
B)  0.7947% 
C)  0.6623% 
D)  0.6667%

Question 15

Elinore is asked to invest $5100 in a friend's business with the promise that the friend will repay $5610 in one year. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case?

Accepted Answer

A)  7% 
B)  8% 
C)  9% 
D)  10% 
A)  7% 
B)  8% 
C)  9% 
D)  10%

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

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

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 19

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

Accepted Answer

A) True 
 B)False

Question 20

The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years?

Accepted Answer

A)  $18,111 
B)  $27,167 
C)  $31,695 
D)  $22,639 
A)  $18,111 
B)  $27,167 
C)  $31,695 
D)  $22,639

Exam 5: Interest Rates

Which of the following statements is FALSE?

A house costs $148,000. It is to be paid off in exactly ten years, with monthly payments of $1737.54. What is the APR of this loan?

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.

Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. Joe has taken out an amortizing loan.

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

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

A bank offers a loan that will requires you to pay 7% interest compounded monthly. Which of the following is closest to the EAR charged by the bank?

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

Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000. If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense?

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

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?

Which of the following best describes the annual percentage rate?

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?

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

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?

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years?

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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