Question 1

In 2007, interest rates were about 4.5% and inflation was about 2.8%. What was the real interest rate in
2007?

Accepted Answer

A)  1.58% 
B)  1.61% 
C)  1.62% 
D)  1.65% 
A)  1.58% 
B)  1.61% 
C)  1.62% 
D)  1.65%

Question 2

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

Question 3

The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR?

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 4

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 5

Which of the following situations would result in lowering of interest rates by the banking authority of a country?

Accepted Answer

A)  The economy is slowing down. 
B)  Inflation is rising rapidly. 
C)  The level of investment is quite high. 
D)  The rate of savings is quite low. 
A)  The economy is slowing down. 
B)  Inflation is rising rapidly. 
C)  The level of investment is quite high. 
D)  The rate of savings is quite low.

Question 6

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 7

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 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

Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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

Question 12

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 $240,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4800 (paid at the end of each month). Your firm can borrow at 7.80% APR with quarterly compounding.
The present value (PV) of the lease payments for the delivery truck is closest to ________.

Accepted Answer

A)  $190,506 
B)  $238,132 
C)  $285,758 
D)  $333,385 
A)  $190,506 
B)  $238,132 
C)  $285,758 
D)  $333,385

Question 13

How do we handle a situation when both compounding period and cash flow interval are given to us but both are less than a year and not equal to each other?

Accepted Answer

Additional care should be taken when the

Question 14

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 15

A pottery factory purchases a continuous belt conveyor kiln for $68,000. A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22, over what term is this loan being paid?

Accepted Answer

A)  8 years 
B)  9 years 
C)  10 years 
D)  11 years 
A)  8 years 
B)  9 years 
C)  10 years 
D)  11 years

Question 16

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 17

A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan?

Accepted Answer

A)  $1663.45 
B)  $1814.67 
C)  $1965.89 
D)  $1512.22 
A)  $1663.45 
B)  $1814.67 
C)  $1965.89 
D)  $1512.22

Question 18

A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten years' time. How much greater is the present value (PV) of this payment if the interest rate is 9% rather than 8%?

Accepted Answer

A)  $7178 
B)  $5742 
C)  $8613 
D)  $10,049 
A)  $7178 
B)  $5742 
C)  $8613 
D)  $10,049

Question 19

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 20

You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer you a lower rate of 6.25% 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 $3,250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?

Accepted Answer

Pay the points!
Points (6.25% APR)
First

Exam 5: Interest Rates

In 2007, interest rates were about 4.5% and inflation was about 2.8%. What was the real interest rate in 2007?

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.

The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR?

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

Which of the following situations would result in lowering of interest rates by the banking authority of a country?

Which of the following statements is FALSE about interest rates?

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?

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?

Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it.

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 ________.

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?

How do we handle a situation when both compounding period and cash flow interval are given to us but both are less than a year and not equal to each other?

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?

A pottery factory purchases a continuous belt conveyor kiln for $68,000. A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22, over what term is this loan being paid?

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?

A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan?

A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten years' time. How much greater is the present value (PV) of this payment if the interest rate is 9% rather than 8%?

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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