Question 1

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

Question 2

Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

Accepted Answer

A)   3.44%
B)   3.79%
C)   4.17%
D)   4.58%
E)   5.04%F) A) and B)
G) A) and C)

Question 3

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) None of the above
G) B) and C)

Question 4

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

Question 5

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

Question 6

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 7

Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS)  over the 10-year period?

Accepted Answer

A)   15.17%
B)   15.97%
C)   16.77%
D)   17.61%
E)   18.49%F) D) and E)
G) C) and D)

Question 8

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Accepted Answer

A) True 
 B)False

Question 9

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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) C) and D)
G) B) and E)

Question 12

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 13

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD)  that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

A)   $3,754.27
B)   $3,941.99
C)   $4,139.09
D)   $4,346.04
E)   $4,563.34F) C) and E)
G) B) and D)

Question 14

How much would $1, growing at 3.5% per year, be worth after 75 years?

Accepted Answer

A)   $12.54
B)   $13.20
C)   $13.86
D)   $14.55
E)   $15.28F) A) and B)
G) A) and C)

Question 15

Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 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)   $1,063,968
B)   $1,119,966
C)   $1,178,912
D)   $1,240,960
E)   $1,303,008F) A) and B)
G) D) and E)

Question 16

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 17

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 ends of the periods.
D)   The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
E)   If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.F) C) and D)
G) A) and D)

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
B)   If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
C)   If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
D)   The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
E)   An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.F) B) and C)
G) A) and C)

Question 19

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Accepted Answer

A)   $284,595
B)   $299,574
C)   $314,553
D)   $330,281
E)   $346,795F) D) and E)
G) B) and E)

Question 20

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 eyear for the next 10 years (a total of 10 payments) .
B)   Investment B pays $125 at the end of e6-month period for the next 10 years (a total of 20 payments) .
C)   Investment C pays $125 at the beginning of e6-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 eyear for the next 10 years (a total of 10 payments) .F) B) and E)
G) All of the above

Exam 5: Time Value of Money

Which of the following statements is CORRECT?

Correct Answer
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Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

Correct Answer
verified

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
verified

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Correct Answer
verified

Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

Correct Answer
verified

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Correct Answer
verified

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

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

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

Correct Answer
verified

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
verified

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
verified

Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

Correct Answer
verified

Correct Answer
verified

Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

How much would $1, growing at 3.5% per year, be worth after 75 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

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
verified

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Correct Answer
verified

Exam 5: Time Value of Money

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

Correct AnswerverifiedShow Answer

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

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Correct AnswerverifiedShow Answer

Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

Correct AnswerverifiedShow Answer

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

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

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

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

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

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

Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

How much would $1, growing at 3.5% per year, be worth after 75 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

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

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

Correct AnswerverifiedShow Answer

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