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

Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it?

Accepted Answer

A)  Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. 
B)  Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven. 
C)  Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven. 
D)  Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven. 
A)  Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. 
B)  Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven. 
C)  Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven. 
D)  Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven. D

Question 3

A(n) 12% APR with monthly compounding is closest to ________.

Accepted Answer

A)  an EAR of 10.14% 
B)  an EAR of 15.22% 
C)  an EAR of 12.68% 
D)  an EAR of 25.36% 
A)  an EAR of 10.14% 
B)  an EAR of 15.22% 
C)  an EAR of 12.68% 
D)  an EAR of 25.36% C

Question 4

A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60% APR. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?

Accepted Answer

A)  5.5 years 
B)  8.6 years 
C)  10.2 years 
D)  12.8 years 
A)  5.5 years 
B)  8.6 years 
C)  10.2 years 
D)  12.8 years

Question 5

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 6

How are interest and return of principal handled in an amortizing loan payment?

Accepted Answer

The amount of periodic payments, general

Question 7

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%

Question 8

An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright?

Accepted Answer

A)  Leasing costs $116 more than buying. 
B)  Leasing costs $174 more than buying. 
C)  Leasing costs $145 more than buying. 
D)  Leasing costs $289 more than buying. 
A)  Leasing costs $116 more than buying. 
B)  Leasing costs $174 more than buying. 
C)  Leasing costs $145 more than buying. 
D)  Leasing costs $289 more than buying.

Question 9

A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?

Accepted Answer

A)  weekly compounding 
B)  monthly compounding 
C)  semiannual compounding 
D)  annual compounding 
A)  weekly compounding 
B)  monthly compounding 
C)  semiannual compounding 
D)  annual compounding

Question 10

A 12% APR with bimonthly compounding is equivalent to an EAR of ________.

Accepted Answer

A)  11.98% 
B)  12.50% 
C)  12.00% 
D)  12.62% 
A)  11.98% 
B)  12.50% 
C)  12.00% 
D)  12.62%

Question 11

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 12

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 13

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 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

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 16

Michael has a credit card debt of $60,000 that has a 10% 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 9% 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)  298 months 
B)  299 months 
C)  306 months 
D)  308 months 
A)  298 months 
B)  299 months 
C)  306 months 
D)  308 months

Question 17

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 18

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 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

Which of the following is/are TRUE?
I. The EAR can never exceed the APR.
II. The APR can never exceed the EAR.
III. The APR and EAR can never be equal.

Accepted Answer

A)  Only I is true. 
B)  Only II.is true. 
C)  Only II & III are true. 
D)  Only I & III are true. 
A)  Only I is true. 
B)  Only II.is true. 
C)  Only II & III are true. 
D)  Only I & III are true.

Exam 5: Interest Rates

Which of the following statements is FALSE?

A(n) 12% APR with monthly compounding is closest to ________.

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

How are interest and return of principal handled in an amortizing loan payment?

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

A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?

A 12% APR with bimonthly compounding is equivalent to an EAR of ________.

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

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

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

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 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?

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?

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

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.

Which of the following is/are TRUE? I. The EAR can never exceed the APR. II. The APR can never exceed the EAR. III. The APR and EAR can never be equal.

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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