Question 1

You deposit $1,475 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 25 years?

Accepted Answer

A)   $5,760.76
B)   $7,026.87
C)   $7,216.78
D)   $6,330.51
E)   $6,203.90F) C) and D)
G) D) and E)

Question 2

How much would $100,growing at 5% per year,be worth after 70 years?

Accepted Answer

A)   $2,616.67
B)   $2,799.23
C)   $3,042.64
D)   $3,499.04
E)   $3,073.07F) C) and D)
G) A) and B)

Question 3

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

Accepted Answer

A) True 
 B)False  True

Question 4

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) A) and E)
G) A) and D)

Question 5

Your bank account pays a 6% 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 1.5% and the effective rate of interest is 3%.
B)   The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
C)   The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
D)   The periodic rate of interest is 3% and the effective rate of interest is 6%.
E)   The periodic rate of interest is 6% and the effective rate of interest is also 6%.F) B) and D)
G) All of the above

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   If you have a series of cash flows,each of which is positive,you can solve for I,where the solution value of I causes the PV of the cash flows will be more than the cash flow at Time 0.
B)   If you have a series of cash flows,and CF0 is negative but each of the following CFs is positive,you can solve for I,but only if the sum of the undiscounted cash flows exceeds the cost.
C)   To solve for I,one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs.This is,essentially,a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
D)   If you solve for I and get a negative number,then you must have made a mistake.
E)   If CF0 is positive and all the other CFs are negative,then you cannot solve for I.F) A) and D)
G) A) and C)

Question 7

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 8

Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $11,500 at the end of the 5th year.What is the expected rate of return on this investment?

Accepted Answer

A)   9.96%
B)   5.19%
C)   12.11%
D)   10.42%
E)   10.86%F) All of the above
G) A) and B)

Question 9

What's the present value of a perpetuity that pays $3,900 per year if the appropriate interest rate is 5%?

Accepted Answer

A)   $78,000.00
B)   $95,940.00
C)   $96,720.00
D)   $83,460.00
E)   $86,580.00F) D) and E)
G) All of the above

Question 10

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 11

You have a chance to buy an annuity that pays $3,300 at the beginning of each year for 3 years.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)   $9,392.86
B)   $7,420.36
C)   $7,138.57
D)   $10,426.07
E)   $10,801.78F) All of the above
G) A) and B)

Question 12

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

Question 13

Midway through the life of an amortized loan,the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

Accepted Answer

A) True 
 B)False

Question 14

Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)   Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments) .
B)   Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments) .
C)   Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments) .
D)   Investment D pays $2,500 at the end of 10 years (just one payment) .
E)   Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments) .F) B) and D)
G) B) and C)

Question 16

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 19.25%,with interest paid monthly,what is the card's EFF%?

Accepted Answer

A)   21.04%
B)   19.57%
C)   20.20%
D)   17.68%
E)   23.15%F) None of the above
G) A) and B)

Question 17

Starting to invest early for retirement reduces the benefits of compound interest.

Accepted Answer

A) True 
 B)False  False

Question 18

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 smaller the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False  False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 5: Time Value of Money

You deposit $1,475 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 25 years?

Correct AnswerverifiedShow Answer

How much would $100,growing at 5% per year,be worth after 70 years?

Correct AnswerverifiedShow Answer

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

Correct AnswerverifiedTrue

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

Your bank account pays a 6% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $11,500 at the end of the 5th year.What is the expected rate of return on this investment?

Correct AnswerverifiedShow Answer

What's the present value of a perpetuity that pays $3,900 per year if the appropriate interest rate is 5%?

Correct AnswerverifiedShow Answer

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

Correct AnswerverifiedShow Answer

You have a chance to buy an annuity that pays $3,300 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Midway through the life of an amortized loan,the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

Correct AnswerverifiedShow Answer

Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

Correct AnswerverifiedShow Answer

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct AnswerverifiedShow Answer

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 19.25%,with interest paid monthly,what is the card's EFF%?

Correct AnswerverifiedShow Answer

Starting to invest early for retirement reduces the benefits of compound interest.

Correct AnswerverifiedFalse

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 smaller the percentage of the payment that will be a repayment of principal.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedFalse

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

Correct AnswerverifiedShow Answer

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