Question 1

What is the present value of the following cash flow stream at a rate of 12.0%?

Accepted Answer

A)   $9,699
B)   $10,210
C)   $10,747
D)   $11,284
E)   $11,849F) A) and D)
G) B) and C)

Question 2

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 3

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) A) and B)
G) C) and E)

Question 4

How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

Accepted Answer

A)   $1,067.95
B)   $1,124.16
C)   $1,183.33
D)   $1,245.61
E)   $1,311.17F) A) and C)
G) A) and E)

Question 5

You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

Accepted Answer

A)   $20,993
B)   $22,098
C)   $23,261
D)   $24,424
E)   $25,645F) All of the above
G) A) and E)

Question 6

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Accepted Answer

A)   8.24%
B)   8.45%
C)   8.66%
D)   8.88%
E)   9.10%F) A) and D)
G) D) and E)

Question 7

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 to equal 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) B) and E)
G) B) and D)

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   The cash flows for an ordinary (or deferred)  annuity all occur at the beginning of the periods.
B)   If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
C)   The cash flows for an annuity due must all occur at the beginning of the periods.
D)   The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.E) All of the above
F) C) and D)

Question 10

You have a chance to buy an annuity that pays $2,500 at the end 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)   $5,493.71
B)   $5,782.85
C)   $6,087.21
D)   $6,407.59
E)   $6,744.83F) B) and E)
G) C) and D)

Question 11

Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?

Accepted Answer

A)   $574,924
B)   $605,183
C)   $635,442
D)   $667,214
E)   $700,575F) A) and B)
G) None of the above

Question 12

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 13

Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings, which is invested to earn a guaranteed 5% rate of return. If inflation averages 2% per year, how much can she withdraw (to the nearest dollar)  at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

Accepted Answer

A)   $65,632
B)   $72,925
C)   $81,027
D)   $89,130
E)   $98,043F) A) and B)
G) A) and C)

Question 14

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

Question 15

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 16

Suppose you are buying your first condo for $145,000, and you will make a $15,000 down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?

Accepted Answer

A)   $741.57
B)   $780.60
C)   $821.69
D)   $862.77
E)   $905.91F) B) and E)
G) B) and C)

Question 17

You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Accepted Answer

A)   $50,753
B)   $53,424
C)   $56,236
D)   $59,195
E)   $62,311F) A) and E)
G) None of the above

Question 18

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 19

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Accepted Answer

A)   23
B)   27
C)   32
D)   38E) All of the above
F) A) and B)

Question 20

Your child's orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?

Accepted Answer

A)   12.31%
B)   12.96%
C)   13.64%
D)   14.36%
E)   15.08%F) C) and D)
G) A) and E)

Exam 4: Time Value of Money

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

Correct Answer
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Correct Answer
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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
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You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

Correct Answer
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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
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You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Correct Answer
verified

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Correct Answer
verified

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

You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

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

Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

Correct Answer
verified

You have a chance to buy an annuity that pays $2,500 at the end 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 Answer
verified

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Correct Answer
verified

Suppose you are buying your first condo for $145,000, and you will make a $15,000 down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?

Correct Answer
verified

What is the present value of the following cash flow stream at a rate of 12.0%?

Correct Answer
verified

Exam 4: Time Value of Money

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

Correct AnswerverifiedShow Answer

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

You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

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

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Correct AnswerverifiedShow Answer

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Correct AnswerverifiedShow Answer

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

You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

Correct AnswerverifiedShow Answer

You have a chance to buy an annuity that pays $2,500 at the end 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

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the present value of the following cash flow stream at a rate of 12.0%?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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