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You have just taken out a 30-year, $120,000 mortgage on your new home.This mortgage is to be repaid in 360 equal end-of-month installments.If each of the monthly installments is $1,500, what is the effective annual interest rate on this mortgage?


A) 15.87%
B) 14.75%
C) 13.38%
D) 16.25%
E) 16.49%

F) C) and D)
G) A) and B)

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Which of the following statements is correct?


A) If a bank uses quarterly compounding for saving accounts, the simple rate will be greater than the effective annual rate.
B) The present value of a future sum increases as the simple interest rate increases or the number of discount periods per year decreases.
C) The present value of a future sum increases as either the simple interest rate or the number of discount periods per year increases.
D) The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases.
E) All of the above statements are false.

F) D) and E)
G) B) and E)

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A recent advertisement in the financial section of a magazine carried the following claim: "Invest your money with us at 14 percent, compounded annually, and we guarantee to double your money sooner than you imagine." Ignoring taxes, how long would it take to double your money at a simple rate of 14 percent, compounded annually?


A) Approximately 3.5 years
B) Approximately 5 years
C) Exactly 7 years
D) Approximately 10 years
E) Exactly 14 years

F) A) and C)
G) A) and E)

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You will receive a $100 annual perpetuity, the first payment to be received now, at Year 0, a $300 annual perpetuity payable starting at the end of Year 5, and a $200 semiannual (2 payments per year) perpetuity payable starting midway through Year 10.If you require an effective annual interest rate of 14.49 percent, what is the present value of all three perpetuities together at Year 0? (Hint: The semiannual annuity can be thought of as two annual annuities.)


A) $2,091.86
B) $2,785.14
C) $4,213.51
D) Infinite; the present value of any perpetuity is infinite.
E) Cannot determine the value since some payments are annually and some semiannually.

F) C) and E)
G) B) and C)

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The effective annual rate of 5% compounded monthly is approximately 5.12%.

A) True
B) False

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We can think of inflation occurring over time as a type of discounting process where the present value of a sum today is diminished by reverse compounding over time.

A) True
B) False

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The importance of capital budgeting decisions is due to all of the following factors except for:


A) the impact of a capital budgeting decision is long term; the firm loses some decision-making flexibility when capital projects are purchased.
B) effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased.
C) the acquisition of fixed assets typically involves substantial expenditures, and before a firm spends a large amount of money, it must have the funds available.
D) capital budgeting techniques overcome the problems with error in forecasts for asset requirements and projected sales, we will still be able to determine if we should fund the project.
E) all of the above are factors that make capital budgeting important.

F) B) and C)
G) A) and D)

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The present value of a future cash flow is the amount of money if invested today at particular interest would turn into the future value at maturity.

A) True
B) False

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The post-audit two main purposes are to improve forecasts and to improve operations.

A) True
B) False

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Express Airlines is considering the purchase of an aircraft to supplement its current fleet.In estimating the impact of adding this aircraft to the fleet, management has developed the following expected cash flows: Express Airlines is considering the purchase of an aircraft to supplement its current fleet.In estimating the impact of adding this aircraft to the fleet, management has developed the following expected cash flows: If the discount rate is 10 percent, what is the present value of these estimated flows? A) $379,080 B) $224,211 C) $189,760 D) $154,869 E) $199,000 If the discount rate is 10 percent, what is the present value of these estimated flows?


A) $379,080
B) $224,211
C) $189,760
D) $154,869
E) $199,000

F) B) and E)
G) B) and C)

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Assume that you can invest to earn a stated annual rate of return of 12 percent, but where interest is compounded semiannually.If you make 20 consecutive semiannual deposits of $500 each, with the first deposit being made today, what will your balance be at the end of Year 20?


A) $52,821.19
B) $57,900.83
C) $58,988.19
D) $62,527.47
E) $64,131.50

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

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Suppose the present value of a 2-year ordinary annuity is $100.If the discount rate is 10 percent, what must be the annual cash flow?


A) $65.45
B) $82.64
C) $57.62
D) $53.78
E) $79.22

F) B) and E)
G) A) and E)

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The savings rate of individuals in the U.S.has trended higher since the 1980s and it is now higher than the savings rate of most other developed countries.

A) True
B) False

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If a 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment?


A) $240.42
B) $263.80
C) $300.20
D) $315.38
E) $346.87

F) A) and B)
G) B) and E)

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Which of the following statements is false?


A) If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
B) To increase present consumption beyond present income normally requires either the payment of interest or else an opportunity cost of interest foregone.
C) Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value.
D) Disregarding risk, if the present value of a sum is equal to its future value, either r = 0 or t = 0.
E) Each of the above statements is true.

F) B) and E)
G) A) and E)

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A bank pays a quoted annual (simple) interest rate of 8 percent.However, it pays interest (compounds) daily using a 365-day year.What is the effective annual rate of return?


A) 7.86%
B) 7.54%
C) 8.57%
D) 8.33%
E) 9.21%

F) B) and E)
G) A) and B)

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Which of the following statements is correct?


A) Other things held constant, an increase in the number of discounting periods per year increases the present value of a given annual annuity.
B) Other things held constant, an increase in the number of discounting periods per year increases the present value of a lump sum to be received in the future.
C) The payment made each period under an amortized loan is constant, and it consists of some interest and some principal.The later we are is the loan's life, the smaller the interest portion of the payment.
D) There is an inverse relationship between the present value interest factor of an annuity and the future value interest factor of an annuity, (i.e., one is the reciprocal of the other) .
E) Each of the above statements is true.

F) All of the above
G) C) and D)

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The Desai Company just borrowed $1,000,000 for 3 years at a quoted rate of 8 percent, quarterly compounding.The loan is to be amortized in end-of-quarter payments over its 3-year life.How much interest (in dollars) will your company have to pay during the second quarter?


A) $15,675.19
B) $18,508.81
C) $21,205.33
D) $24,678.89
E) $28,111.66

F) C) and D)
G) A) and B)

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All other factors held constant, the present value of a given annual annuity decreases as the number of discounting periods per year increases.

A) True
B) False

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What were the ratios of workers paying into Social Security to retirees receiving benefits for 1950 and 2009, respectively?


A) 1950: 16.5 to 1 2009: 3 to 1
B) 1950: 10.5 to 1 2009: 6 to 1
C) 1950: 8.5 to 1 2009: 8 to 1
D) 1950: 6.5 to 1 2009: 10 to 1
E) 1950: 3.5 to 1 2009: 16 to 1

F) None of the above
G) All of the above

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