Question 1

A time line is not meaningful unless all cash flows occur annually.

Accepted Answer

A) True 
 B)False

Question 2

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much would you still owe at the end of the first year, after you have made the first payment?

Accepted Answer

A)  $10,155.68 
B)  $10,690.19 
C)  $11,252.83 
D)  $11,845.09 
E)  $12,468.51

Question 3

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)  $1,537.69 
B)  $1,618.62 
C)  $1,699.55 
D)  $1,784.53 
E)  $1,873.76

Question 4

You want to buy a new sports car 3 years from now, and you plan to save
$4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

Accepted Answer

A)  $11,973 
B)  $12,603 
C)  $13,267 
D)  $13,930 
E)  $14,626

Question 5

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?

Accepted Answer

A)  73.67% 
B)  77.55% 
C)  81.63% 
D)  85.93% 
E)  90.45%

Question 6

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next
25 years and end up with zero in the account?

Accepted Answer

A)  $28,243.21 
B)  $29,729.70 
C)  $31,294.42 
D)  $32,859.14 
E)  $34,502.10

Question 7

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to
$150,000?

Accepted Answer

A)  39.60 
B)  44.00 
C)  48.40 
D)  53.24 
E)  58.57

Question 8

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Accepted Answer

A)  The monthly payments will decline over time. 
B)  A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
C)  The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. 
D)  The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. 
E)  Exactly 10% of the first monthly payment represents interest.

Question 9

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

Accepted Answer

A)  The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
B)  If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
C)  The cash flows for an annuity due must all occur at the beginning of the periods. 
D)  The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.

Question 10

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 11

Your girlfriend just won the Florida lottery. She has the choice of
$15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

Accepted Answer

A)  3.44% 
B)  3.79% 
C)  4.17% 
D)  4.58% 
E)  5.04%

Question 12

Your sister turned 35 today, and she is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's expected to provide a return of 7.5% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year.

Accepted Answer

A)  $58,601 
B)  $61,686 
C)  $64,932 
D)  $68,179 
E)  $71,588

Question 13

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Accepted Answer

A)  $1,819 
B)  $1,915 
C)  $2,016 
D)  $2,117 
E)  $2,223

Question 14

Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

Accepted Answer

A) True 
 B)False

Question 15

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 16

Five years ago, Greenery Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

Accepted Answer

A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94%

Question 17

Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 18

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 19

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A)  3.82% 
B)  4.25% 
C)  4.72% 
D)  5.24% 
E)  5.77%

Exam 4: Time Value of Money

A time line is not meaningful unless all cash flows occur annually.

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much would you still owe at the end of the first year, after you have made the first payment?

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.

Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

Five years ago, Greenery Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?