Question 1

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 $4,100.What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A)   2.38%
B)   3.55%
C)   3.17%
D)   3.20%
E)   3.27%F) All of the above
G) A) and C)

Question 2

Suppose an Exxon Corporation bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 7.00%,how much is the bond worth today?

Accepted Answer

A)   $1,807.18
B)   $2,287.57
C)   $2,630.71
D)   $1,921.56
E)   $2,562.08F) A) and E)
G) A) and C)

Question 3

What is the present value of the following cash flow stream at a rate of 10.0%?   Years: 0123 CFs: $750$2,450$3,175$4,400\begin{array} { l c c c c } 	ext { Years: } & 0 & 1 & 2 & 3 \\hline 	ext { CFs: } & \$ 750 & \$ 2,450 & \$ 3,175 & \$ 4,400\end{array} Years:  CFs: ​0$750​1$2,450​2$3,175​3$4,400​​ 
?

Accepted Answer

A)   $8,283.53
B)   $10,777.50
C)   $7,749.11
D)   $10,866.57
E)   $8,907.02 F) A) and D)
G) A) and E)

Question 4

Suppose your credit card issuer states that it charges a 24.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Accepted Answer

A)   21.19%
B)   26.29%
C)   26.82%
D)   29.51%
E)   31.12%F) C) and D)
G) D) and E)

Question 5

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 can 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 cannot 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 B)
G) A) and C)

Question 6

Which of the following investments would have the lowest present value? 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 end 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 beginning of every year for the next 10 years (a total of 10 payments) .F) B) and E)
G) None of the above

Question 7

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 8

Last year Rocco Corporation's sales were $700 million.If sales grow at 6% per year,how large (in millions) will they be 5 years later?

Accepted Answer

A)   $974.23
B)   $749.41
C)   $1,133.48
D)   $1,096.01
E)   $936.76F) B) and C)
G) A) and E)

Question 9

A time line is meaningful even if all cash flows do not occur annually.

Accepted Answer

A) True 
 B)False

Question 10

You deposit $500 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 40 years?

Accepted Answer

A)   $6,274.29
B)   $5,091.43
C)   $3,857.14
D)   $5,760.00
E)   $5,142.86F) B) and E)
G) A) and D)

Question 11

Suppose you borrowed $15,000 at a rate of 11.1% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Accepted Answer

A)   $1,248.75
B)   $1,481.85
C)   $1,615.05
D)   $1,665.00
E)   $1,714.95F) B) and C)
G) A) and D)

Question 12

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 13

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

Question 14

Suppose you borrowed $37,000 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)   $8,908.18
B)   $11,420.74
C)   $9,136.59
D)   $10,735.50
E)   $9,707.63F) None of the above
G) B) and C)

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 E)
G) A) and E)

Question 16

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 17

Your uncle has $260,000 invested at 7.5%,and he now wants to retire.He wants to withdraw $35,000 at the end of each year,starting at the end of this year.He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account.For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?

Accepted Answer

A)   9.59
B)   11.98
C)   13.90
D)   14.26
E)   12.58F) B) and C)
G) None of the above

Question 18

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 increase over time.
B)   A larger proportion of the first monthly payment will be interest,and a smaller proportion will be principal,than for the last monthly payment.
C)   The total dollar amount of interest being paid off each month gets larger 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.F) D) and E)
G) A) and B)

Question 19

Your father is about to retire,and he wants to buy an annuity that will provide him with $84,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Accepted Answer

A)   $1,471,632.01
B)   $981,088.00
C)   $1,348,996.01
D)   $1,226,360.01
E)   $1,508,422.81F) A) and D)
G) None of the above

Question 20

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $340.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A)   14.31%
B)   16.46%
C)   17.31%
D)   15.88%
E)   15.02%F) B) and D)
G) B) and E)

Exam 5: Time Value of Money

You deposit $500 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 40 years?

Correct Answer
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Correct Answer
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A time line is meaningful even if all cash flows do not occur annually.

Correct Answer
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Suppose an Exxon Corporation bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 7.00%,how much is the bond worth today?

Correct Answer
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Last year Rocco Corporation's sales were $700 million.If sales grow at 6% per year,how large (in millions) will they be 5 years later?

Correct Answer
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Suppose your credit card issuer states that it charges a 24.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Correct Answer
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What is the present value of the following cash flow stream at a rate of 10.0%? $\begin{array} { l c c c c } \text { Years: } & 0 & 1 & 2 & 3 \\\hline \text { CFs: } & \$ 750 & \$ 2,450 & \$ 3,175 & \$ 4,400\end{array}$ ?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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 Answer
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Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Correct Answer
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Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $340.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Correct Answer
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Correct Answer
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Suppose you borrowed $15,000 at a rate of 11.1% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

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

Correct Answer
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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 $4,100.What interest rate would you earn if you bought this bond at the offer price?

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

Correct Answer
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Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct Answer
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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 Answer
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Your father is about to retire,and he wants to buy an annuity that will provide him with $84,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Correct Answer
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Suppose you borrowed $37,000 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
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Exam 5: Time Value of Money

You deposit $500 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 40 years?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A time line is meaningful even if all cash flows do not occur annually.

Correct AnswerverifiedShow Answer

Suppose an Exxon Corporation bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 7.00%,how much is the bond worth today?

Correct AnswerverifiedShow Answer

Last year Rocco Corporation's sales were $700 million.If sales grow at 6% per year,how large (in millions) will they be 5 years later?

Correct AnswerverifiedShow Answer

Suppose your credit card issuer states that it charges a 24.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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 AnswerverifiedShow Answer

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Correct AnswerverifiedShow Answer

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $340.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose you borrowed $15,000 at a rate of 11.1% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Correct AnswerverifiedShow Answer

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

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 $4,100.What interest rate would you earn if you bought this bond at the offer price?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

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

Your father is about to retire,and he wants to buy an annuity that will provide him with $84,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Correct AnswerverifiedShow Answer

Suppose you borrowed $37,000 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

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