Question 1

An interest rate expressed as if it were compounded once per year is called the

Accepted Answer

A) periodic interest rate. 
B) compound interest rate. 
C) stated annual rate. 
D) daily interest rate. 
E) effective annual rate.

Question 2

In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?

Accepted Answer

A) Pure discount loan 
B) Both pure discount and interest-only loans 
C) Amortized loan 
D) Both interest-only and amortized loans 
E) Interest-only loan

Question 3

Which one of these statements related to the time value of money is correct? Assume a positive rate of interest.

Accepted Answer

A) A dollar increases in value the further into the future it is received. 
B) The future value of an invested dollar is inversely related to the rate of interest. 
C) The present value of a dollar to be received in 1 year is directly related to the interest rate. 
D) A dollar received today is more valuable than a dollar received next month. 
E) A dollar invested today will increase in value in a linear manner if interest earned is reinvested.

Question 4

An annuity stream where the payments occur forever is called a(n)

Accepted Answer

A) annuity due. 
B) indemnity. 
C) perpetuity. 
D) amortized cash flow stream. 
E) ordinary annuity.

Question 5

A project is expected to produce cash flows of $12,800,$15,900,and $18,000 over the next 3 years,respectively.After 3 years,the project will be discontinued.What is this project worth today at a discount rate of 12.5 percent?

Accepted Answer

A) $35,201.76 
B) $34,435.74 
C) $36,582.72 
D) $36,808.17 
E) $35,758.00

Question 6

What is the effective annual rate on a loan with an APR of 10.6 percent if interest is compounded daily? Assume a 365-day year.

Accepted Answer

A) 10.08% 
B) 11.02% 
C) 10.72% 
D) 10.16% 
E) 11.18%

Question 7

The net present value of an investment is best defined as the

Accepted Answer

A) current cost if the investment is made today. 
B) net value received at the end of the investment period. 
C) present value of the investment's future cash flows minus the investment's cost. 
D) net decrease in value caused by waiting to receive the cash benefit from the investment. 
E) value received at the end of the investment period minus the investment's cost.

Question 8

You are the recipient of an inheritance that will pay you and your heirs $13,000 a year forever.What is this inheritance worth today at a discount rate of 5.85 percent?

Accepted Answer

A) $222,222.22 
B) $239,250.00 
C) $211,953.94 
D) $241,141.41 
E) $236,004.98

Question 9

Given a positive rate of return and multiple time periods,compound interest

Accepted Answer

A) increases in an exponential manner. 
B) increases in a linear manner. 
C) produces the same future values as simple interest. 
D) provides future values that are less than those provided by simple interest. 
E) increases at a decreasing rate.

Question 10

What is the annual percentage rate on a loan with a stated rate of 2.109 percent per quarter?

Accepted Answer

A) 8)717% 
B) 9)174% 
C) 8)036% 
D) 8)707% 
E) 8)436%

Question 11

Keane just borrowed $38,700 for 5 years at an interest rate of 5.9 percent,compounded monthly.What is the amount of each monthly loan payment?

Accepted Answer

A) $627.62 
B) $721.60 
C) $630.62 
D) $746.38 
E) $693.04

Question 12

You will be receiving $11,500 one year from now.What is the present value of this amount at a discount rate of 7.83 percent?

Accepted Answer

A) $10,664.94 
B) $9,747.41 
C) $11,201.16 
D) $11,414.32 
E) $10,015.89

Question 13

Your credit card company quotes you a rate of 17.9 percent,compounded daily.What actual rate of interest you are paying? Assume a 365-day year.

Accepted Answer

A) 18.97% 
B) 19.81% 
C) 18.48% 
D) 19.60% 
E) 18.79%

Question 14

The interest rate charged per period multiplied by the number of periods per year is called the

Accepted Answer

A) effective annual rate. 
B) compound interest rate. 
C) periodic interest rate. 
D) annual percentage rate. 
E) daily interest rate.

Question 15

Which one of the following will increase the present value of a finite stream of even cash flows? Assume a positive rate of return.

Accepted Answer

A) Moving every cash flow one time period further into the future 
B) Decreasing the amount of each cash flow 
C) Increasing the Time 2 cash flow by $100 and lowering the Time 3 cash flow by $100 
D) Moving the Time 1 cash inflow to Time 2 
E) Increasing the discount rate

Question 16

Jensen's Shipping is expected to produce an annual cash flow of $218,900 next year.Thereafter,this cash flow is expected to decrease by 1.6 percent per year indefinitely.What is this firm worth today at a discount rate of 18 percent?

Accepted Answer

A) $1,116,836.74 
B) $1,424,350.00 
C) $1,394,210.53 
D) $1,334,756.10 
E) $1,221,400.00

Question 17

Given a firm with positive annual cash flows,which one of the following will increase the current value of that firm?

Accepted Answer

A) Increasing the annual growth rate of the cash flows 
B) Increasing the discount rate 
C) Decreasing the amount of each cash flow 
D) Decreasing the life of the firm 
E) Increasing either the growth rate of the cash flows or the discount rate

Question 18

Which one of the following would have the greatest value assuming each has a Year 0 cash flow of zero and a Year 1 annual cash flow of $100? Assume a discount rate of 8 percent,compounded annually.Also,assume any growth rate is positive.

Accepted Answer

A) Perpetuity 
B) Annuity 
C) Growing perpetuity 
D) Growing annuity 
E) Growing perpetuity or growing annuity,as they would have equal values

Question 19

A 10-year,$600 annuity pays its first payment at Date 3.If you compute the present value of this annuity,the computed value will be as of Date

Accepted Answer

A) 0 
B) 1 
C) 2 
D) 3 
E) 4

Question 20

The effective annual rate (EAR)of a loan will increase if

Accepted Answer

A) the frequency of the interest rate compounding is decreased. 
B) the interest is changed from compound to simple interest at the same annual percentage rate (APR). 
C) the annual percentage rate (APR)is decreased. 
D) either the annual percentage rate (APR)or the compounding frequency is increased. 
E) the compounding of interest is changed from continuous compounding to daily compounding.

Exam 4: Discounted Cash Flow Valuation