Question 1

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) None of the above
G) A) and D)

Question 2

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 3

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) A) and C)

Question 4

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

Accepted Answer

A)   4.93%
B)   5.19%
C)   5.46%
D)   5.75%
E)   6.05%F) A) and B)
G) A) and C)

Question 5

Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A)   4.37%
B)   4.86%
C)   5.40%
D)   6.00%
E)   6.60%F) A) and D)
G) A) and C)

Question 6

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)   $651.60
B)   $684.18
C)   $718.39
D)   $754.31
E)   $792.02F) A) and E)
G) A) and C)

Question 7

Your Aunt Ruth has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero?

Accepted Answer

A)   18.62
B)   19.60
C)   20.63
D)   21.71
E)   22.86F) D) and E)
G) B) and D)

Question 8

You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

Accepted Answer

A)   $1,122.54
B)   $1,181.62
C)   $1,240.70
D)   $1,302.74
E)   $1,367.88F) A) and D)
G) None of the above

Question 9

Your uncle has $300,000 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)   14.21
B)   14.96
C)   15.71
D)   16.49
E)   17.32F) All of the above
G) B) and E)

Question 10

After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6)  and $15,000 annually for the following 6 years (t = 7 through t = 12) . The first deposit will be made a year from today. In addition, your grandfather just gave you a $25,000 graduation gift which you will deposit immediately (t = 0) . If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

Accepted Answer

A)   $238,176
B)   $250,712
C)   $263,907
D)   $277,797
E)   $291,687F) C) and D)
G) A) and D)

Question 11

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 useful for visualizing complex problems prior to doing actual calculations.
C)   Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
D)   Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.
E)   Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.F) All of the above
G) A) and D)

Question 12

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 13

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) C) and D)

Question 14

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 15

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%F) A) and D)
G) A) and E)

Question 16

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 $10,000 at the end of the 5th year. What is the expected rate of return on this investment?

Accepted Answer

A)   6.77%
B)   7.13%
C)   7.50%
D)   7.88%
E)   8.27%F) None of the above
G) D) and E)

Question 17

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

A)   The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
B)   A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
C)   A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
D)   If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
E)   Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.F) A) and B)
G) C) and D)

Question 18

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)   $20,352F) C) and E)
G) None of the above

Question 19

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 20

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

Accepted Answer

A) True 
 B)False

Exam 5: Time Value of Money

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

Correct Answer
verified

You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

Correct Answer
verified

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 $10,000 at the end of the 5th year. What is the expected rate of return on this investment?

Correct Answer
verified

Your Aunt Ruth has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero?

Correct Answer
verified

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?

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

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

Correct Answer
verified

Correct Answer
verified

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Correct Answer
verified

Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

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

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

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct Answer
verified

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Correct Answer
verified

Exam 5: Time Value of Money

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

Correct AnswerverifiedShow Answer

You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 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 $10,000 at the end of the 5th year. What is the expected rate of return on this investment?

Correct AnswerverifiedShow Answer

Your Aunt Ruth has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero?

Correct AnswerverifiedShow Answer

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?

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Correct AnswerverifiedShow Answer

Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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

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

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct AnswerverifiedShow Answer

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Correct AnswerverifiedShow Answer

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