Question 1

You have purchased a U.S.Treasury 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 will you earn on this bond?

Accepted Answer

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

Question 2

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is CORRECT?

Accepted Answer

A)  The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity. 
B)  The periodic interest rate is greater than 3%. 
C)  The periodic rate is less than 3%. 
D)  The present value would be greater if the lump sum were discounted back for more periods. 
E)  The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

Question 3

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 greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. 
B)  The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
C)  If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
D)  The cash flows for an annuity due must all occur at the ends of the periods. 
E)  The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

Question 5

Your uncle just won the weekly lottery,receiving $375,000,which he invested at a 7.5% annual rate.He now has decided to retire,and he wants to withdraw $35,000 at the end of each year,starting at the end of this year.What is the maximum number of whole payments that can be withdrawn before the account is exhausted,i.e.,before the account balance would become negative? (Hint: Round down to the nearest whole number.)

Accepted Answer

A)  22 
B)  23 
C)  24 
D)  25 
E)  26

Question 6

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year,how large (in millions)will they be 5 years later?

Accepted Answer

A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96

Question 7

Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%,simple interest,with interest paid quarterly.An offer to lend you the $50,000 also comes from Community Bank,but it will charge 6.0%,simple interest,with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?

Accepted Answer

A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72%

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
B)  The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. 
C)  If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%. 
D)  If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
E)  The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

Question 9

Brockman Corporation's earnings per share were $3.50 last year,and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained,how many years would it take for Brockman's EPS to triple?

Accepted Answer

A)  9.29 
B)  10.33 
C)  11.47 
D)  12.75 
E)  14.02

Question 10

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

A)  $16,806 
B)  $17,690 
C)  $18,621 
D)  $19,601 
E)  $20,633

Question 11

Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Accepted Answer

A)  $5,493.71 
B)  $5,782.85 
C)  $6,087.21 
D)  $6,407.59 
E)  $6,744.83

Question 12

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Accepted Answer

A)  15.27% 
B)  16.08% 
C)  16.88% 
D)  17.72% 
E)  18.61%

Question 13

When a loan is amortized,a relatively high percentage of the payment goes to reduce the outstanding principal in the early years,and the principal repayment's percentage declines in the loan's later years.

Accepted Answer

A) True 
 B)False

Question 14

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 15

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is CORRECT?

Accepted Answer

A)  The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity. 
B)  The periodic interest rate is greater than 3%. 
C)  The periodic rate is less than 3%. 
D)  The present value would be greater if the lump sum were discounted back for more periods. 
E)  The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.

Question 16

Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Accepted Answer

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

Question 17

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A)  8.24% 
B)  8.45% 
C)  8.66% 
D)  8.88% 
E)  9.10%

Question 18

You would like to travel in South America 5 years from now,and you can save $3,100 per year,beginning one year from today.You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.Under these conditions,how much would you have just after you make the 5th deposit,5 years from now?

Accepted Answer

A)  $18,369 
B)  $19,287 
C)  $20,251 
D)  $21,264 
E)  $22,327

Question 19

Which of the following bank accounts has the lowest effective annual return?

Accepted Answer

A)  An account that pays 8% nominal interest with daily (365-day) compounding. 
B)  An account that pays 8% nominal interest with monthly compounding. 
C)  An account that pays 8% nominal interest with annual compounding. 
D)  An account that pays 7% nominal interest with daily (365-day) compounding. 
E)  An account that pays 7% nominal interest with monthly compounding.

Question 20

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Accepted Answer

A)  $16,576 
B)  $17,449 
C)  $18,367 
D)  $19,334 
E)  $20,352

Exam 4: Time Value of Money

You have purchased a U.S.Treasury 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 will you earn on this bond?

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is CORRECT?

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 greater the present value of a given lump sum to be received at some future date.

Which of the following statements is CORRECT?

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year,how large (in millions) will they be 5 years later?

Which of the following statements is CORRECT?

Brockman Corporation's earnings per share were $3.50 last year,and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained,how many years would it take for Brockman's EPS to triple?

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

When a loan is amortized,a relatively high percentage of the payment goes to reduce the outstanding principal in the early years,and the principal repayment's percentage declines in the loan's later years.

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?

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is CORRECT?

Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Which of the following bank accounts has the lowest effective annual return?

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?