Question 1

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 2

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%F) A) and B)
G) None of the above

Question 3

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)   $1,994.49
B)   $2,099.46
C)   $2,209.96
D)   $2,326.27
E)   $2,442.59F) B) and C)
G) C) and E)

Question 4

At a rate of 6.5%, what is the future value of the following cash flow stream?

Accepted Answer

A)   $526.01
B)   $553.69
C)   $582.83
D)   $613.51
E)   $645.80F) B) and E)
G) B) and D)

Question 5

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)   $34,502.10F) B) and C)
G) A) and D)

Question 6

Pace Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?

Accepted Answer

A)   $120.83
B)   $126.88
C)   $133.22
D)   $139.88
E)   $146.87F) A) and B)
G) None of the above

Question 7

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Accepted Answer

A) True 
 B)False

Question 8

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Accepted Answer

A)   The periodic rate of interest is 2% and the effective rate of interest is 4%.
B)   The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
C)   The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
D)   The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
E)   The periodic rate of interest is 8% and the effective rate of interest is also 8%.F) A) and D)
G) None of the above

Question 9

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?

Accepted Answer

A)   The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
B)   The discount rate decreases.
C)   The riskiness of the investment's cash flows increases.
D)   The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.
E)   The discount rate increases.F) D) and E)
G) B) and E)

Question 10

A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

Accepted Answer

A)   The annual payments would be larger if the interest rate were lower.
B)   If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.
C)   The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.
D)   The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
E)   The proportion of interest versus principal repayment would be the same for each of the 7 payments.F) All of the above
G) A) and B)

Question 11

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 12

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

Accepted Answer

A)   $3,704.02
B)   $3,889.23
C)   $4,083.69
D)   $4,287.87
E)   $4,502.26F) A) and C)
G) B) and C)

Question 13

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 14

Your grandmother just died and left you $100,000 in a trust fund that pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

Accepted Answer

A)   $24,736
B)   $26,038
C)   $27,409
D)   $28,779
E)   $30,218F) D) and E)
G) C) and D)

Question 15

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)   $438.03
B)   $461.08
C)   $485.35
D)   $510.89
E)   $537.78F) D) and E)
G) A) and B)

Question 16

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   A time line is not meaningful unless all cash flows occur annually.
B)   Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C)   Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
D)   Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.
E)   Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.F) A) and E)
G) C) and E)

Question 18

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 19

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A)   $8,509
B)   $8,957
C)   $9,428
D)   $9,924
E)   $10,446F) C) and D)
G) B) and D)

Question 20

Last year Rocco Corporation's sales were $225 million. 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)   $331.96F) C) and E)
G) A) and D)

Exam 5: Time Value of Money

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

Correct Answer
verified

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Correct Answer
verified

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.

Correct Answer
verified

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?

Correct Answer
verified

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.

Correct Answer
verified

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Correct Answer
verified

Pace Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?

Correct Answer
verified

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

Correct Answer
verified

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Correct Answer
verified

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?

Correct Answer
verified

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Correct Answer
verified

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Correct Answer
verified

A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

Correct Answer
verified

At a rate of 6.5%, what is the future value of the following cash flow stream?

Correct Answer
verified

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Correct Answer
verified

Exam 5: Time Value of Money

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

Correct AnswerverifiedShow Answer

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Correct AnswerverifiedShow Answer

Pace Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Correct AnswerverifiedShow Answer

A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

Correct AnswerverifiedShow Answer

At a rate of 6.5%, what is the future value of the following cash flow stream?

Correct AnswerverifiedShow Answer

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Correct AnswerverifiedShow Answer

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