Question 1

What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly?

Accepted Answer

A)  $353,818 
B)  $389,200 
C)  $424,581 
D)  $459,963 
A)  $353,818 
B)  $389,200 
C)  $424,581 
D)  $459,963

Question 2

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 3

What is the effective annual rate (EAR)?

Accepted Answer

A)  It is the interest rate that would earn the same interest with annual compounding. 
B)  It is the ratio of the number of the annual percentage rate to the number of compounding periods per year. 
C)  It is the interest rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction). 
D)  It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year. 
A)  It is the interest rate that would earn the same interest with annual compounding. 
B)  It is the ratio of the number of the annual percentage rate to the number of compounding periods per year. 
C)  It is the interest rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction). 
D)  It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.

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

The real interest rate is the rate of growth of one's purchasing power due to money invested.

Accepted Answer

A) True 
 B)False

Question 6

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 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

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 9

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 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________.

Accepted Answer

A)  $14,000 
B)  $12,727 
C)  $15,273 
D)  $17,818 
A)  $14,000 
B)  $12,727 
C)  $15,273 
D)  $17,818

Question 10

Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)?

Accepted Answer

A)  $314,366 
B)  $471,549 
C)  $392,957 
D)  $432,000 
A)  $314,366 
B)  $471,549 
C)  $392,957 
D)  $432,000

Question 11

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 12

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

Accepted Answer

NPV = -$2,500 + $1,0

Question 13

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 14

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 15

Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000. He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan?

Accepted Answer

A)  $244,965 
B)  $428,689 
C)  $306,206 
D)  $612,412 
A)  $244,965 
B)  $428,689 
C)  $306,206 
D)  $612,412

Question 16

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 17

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

Question 18

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 $350,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firm's borrowings is closest to ________.

Accepted Answer

A)  9.00% 
B)  7.45% 
C)  11.17% 
D)  9.31% 
A)  9.00% 
B)  7.45% 
C)  11.17% 
D)  9.31%

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

In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009?

Accepted Answer

A)  -2.6% 
B)  2.6% 
C)  -2.8% 
D)  2.8% 
A)  -2.6% 
B)  2.6% 
C)  -2.8% 
D)  2.8%

Exam 5: Interest Rates

What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly?

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?

What is the effective annual rate (EAR)?

Which of the following accounts has the highest EAR?

The real interest rate is the rate of growth of one's purchasing power due to money invested.

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.

The yield curve is typically ________.

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?

Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)?

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?

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

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

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?

Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000. He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan?

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?

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?

Which of the following statements is FALSE about interest rates?

In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009?

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