Question 1

Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?

Accepted Answer

Yes, in real world cash flows may be bet

Question 2

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?

Accepted Answer

A)  The number of borrowers seeking funds is low. 
B)  The expected inflation rate is expected to be low. 
C)  The borrower is judged to have a low degree of risk. 
D)  The loan will be for a long period of time. 
A)  The number of borrowers seeking funds is low. 
B)  The expected inflation rate is expected to be low. 
C)  The borrower is judged to have a low degree of risk. 
D)  The loan will be for a long period of time.

Question 3

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 4

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 5

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 6

The effective annual rate (EAR) for a savings account with a stated APR of 5% compounded daily is closest to ________.

Accepted Answer

A)  5.64% 
B)  6.15% 
C)  5.13% 
D)  6.66% 
A)  5.64% 
B)  6.15% 
C)  5.13% 
D)  6.66%

Question 7

A small foundry agrees to pay $220,000 two years from now to a supplier for a given amount of coking coal. The foundry plans to deposit a fixed amount in a bank account every three months, starting three months from now, so that at the end of two years the account holds $220,000. If the account pays 12.5% APR compounded monthly, how much must be deposited every three months?

Accepted Answer

A)  $24,602 
B)  $27,063 
C)  $29,523 
D)  $31,983 
A)  $24,602 
B)  $27,063 
C)  $29,523 
D)  $31,983

Question 8

Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon?

Accepted Answer

A)  Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities. 
B)  The return from U.S. Treasury securities generally attracts less tax than the returns from other investments. 
C)  The opportunity cost of capital for a given horizon is generally based on U.S. Treasury securities with that same horizon. 
D)  U.S. Treasury securities are generally considered to be the best alternative to most investments. 
A)  Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities. 
B)  The return from U.S. Treasury securities generally attracts less tax than the returns from other investments. 
C)  The opportunity cost of capital for a given horizon is generally based on U.S. Treasury securities with that same horizon. 
D)  U.S. Treasury securities are generally considered to be the best alternative to most investments.

Question 9

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 10

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 11

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 12

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 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

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 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

A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments?

Accepted Answer

A)  $109 
B)  $218 
C)  $164 
D)  $55 
A)  $109 
B)  $218 
C)  $164 
D)  $55

Question 17

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 18

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 19

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 20

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

Exam 5: Interest Rates

Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?

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

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?

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

The effective annual rate (EAR) for a savings account with a stated APR of 5% compounded daily is closest to ________.

Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon?

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?

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?

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?

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?

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

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 ________.

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?

A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments?

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?

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

Which of the following best describes the annual percentage rate?

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