Question 1

An investment promises the following cash flow stream: $750 at Time 0; $2,450 at the end of Year 1 (or at t = 1) ; $3,175 at the end of Year 2; and $4,400 at the end of Year 3. At a discount rate of 8.0%, what is the present value of the cash flow stream?

Accepted Answer

A)   $7,916.51
B)   $8,333.17
C)   $8,771.76
D)   $9,233.43E) C) and D)
F) B) and D)

Question 2

One potential benefit from starting to invest early for retirement is that the investor can expect greater benefits from the compounding of interest.

Accepted Answer

A) True 
 B)False

Question 3

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning 1 year from today. You plan to deposit the funds in a mutual fund that you expect to return 8.5% per year. Under these conditions, how much will you have just after you make the fifth deposit, 5 years from now?

Accepted Answer

A)   $18,368.66
B)   $19,287.09
C)   $20,251.44
D)   $21,264.02E) B) and D)
F) A) and C)

Question 4

You have a chance to buy an annuity that pays $1,200 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)   $2,775.77
B)   $2,921.86
C)   $3,075.64
D)   $3,237.52E) C) and D)
F) A) and B)

Question 5

You plan to invest in securities that pay 9.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment account to grow to $9,140.20?

Accepted Answer

A)   4.59
B)   5.10
C)   6.30
D)   7.00E) B) and D)
F) B) and C)

Question 6

Which of the following statements regarding a 15-year (180-month)  $125,000 fixed-rate mortgage is INCORRECT? (Ignore all taxes and transactions costs.)

Accepted Answer

A)   The remaining balance after 3 years will be $125,000 less the total amount of interest paid during the first 36 months.
B)   Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments)  are constant.
C)   The proportion of the monthly payment that goes toward repayment of principal will be higher 10 years from now than it will be the first year.
D)   The outstanding balance gets paid off at a faster rate in the later years of a loan's life.E) All of the above
F) B) and C)

Question 7

You deposit $1,000 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)   $2,245.08
B)   $2,363.24
C)   $2,481.41
D)   $2,605.48E) None of the above
F) C) and D)

Question 8

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

Accepted Answer

A)   15.97%
B)   16.77%
C)   17.61%
D)   18.49%E) A) and D)
F) None of the above

Question 9

You are considering investing 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 will it take for your account to grow to $250,000? Round fractional years up.

Accepted Answer

A)   23
B)   27
C)   32
D)   38E) A) and B)
F) A) and C)

Question 10

Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years. By how much would you reduce the amount you owe in the first year?

Accepted Answer

A)   $2,492.82
B)   $2,624.02
C)   $2,755.23
D)   $2,892.99E) A) and D)
F) None of the above

Question 11

A Canada government bond promises to pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is correct?

Accepted Answer

A)   The periodic interest rate is greater than 3%.
B)   The periodic rate is less than 3%.
C)   The present value would be greater if the lump sum were discounted back for more periods.
D)   The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.E) A) and C)
F) A) and D)

Question 12

At a rate of 6.5%, what is the future value of the following cash flow stream: $0 at Time 0; $75 at the end of Year 1; $225 at the end of Year 2; $0 at the end of Year 3; and $300 at the end of Year 4?

Accepted Answer

A)   $526.01
B)   $553.69
C)   $613.51
D)   $645.80E) C) and D)
F) B) and C)

Question 13

An investment costs $725 and is expected to produce cash flows of $75 at the end of Year 1, $100 at the end of Year 2, $85 at the end of Year 3, and $625 at the end of Year 4. What rate of return would you earn if you bought this investment?

Accepted Answer

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

Question 14

You plan to borrow $30,000 at a 7% annual interest rate. The terms require you to amortize the loan with six equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)   $1,548.79
B)   $1,630.30
C)   $1,716.11
D)   $1,806.43E) B) and D)
F) A) and C)

Question 15

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 16

A $50,000 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 lower if the interest rate were lower.
D)   The last payment would have a higher proportion of interest than the first payment.E) All of the above
F) B) and C)

Question 17

How much would $5,000 due in 50 years be worth today if the discount rate were 7.5%?

Accepted Answer

A)   $109.51
B)   $115.27
C)   $127.72
D)   $134.45E) None of the above
F) B) and C)

Question 18

You plan to make annual deposits into a bank account that pays a 5.00% nominal annual rate. You think inflation will amount to 2.50% per year. What is the expected annual real rate at which your money will grow?

Accepted Answer

A)   1.98%
B)   2.20%
C)   2.44%
D)   2.68%E) A) and D)
F) A) and C)

Question 19

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD)  that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

A)   $1,781.53
B)   $1,870.61
C)   $1,964.14
D)   $2,062.34E) A) and B)
F) A) and C)

Question 20

Merchants Bank offers to lend you $30,000 at a nominal rate of 6.0%, simple interest, with interest paid quarterly. Gold Coast Bank offers to lend you the $30,000, but it will charge 7.0%, simple interest, with interest paid at the end of the year. What's the DIFFERENCE in the effective annual rates charged by the two banks?

Accepted Answer

A)   1.49%
B)   1.24%
C)   1.04%
D)   0.86%E) A) and B)
F) B) and D)

Exam 4: Time Value of Money

You plan to make annual deposits into a bank account that pays a 5.00% nominal annual rate. You think inflation will amount to 2.50% per year. What is the expected annual real rate at which your money will grow?

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

You are considering investing 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 will it take for your account to grow to $250,000? Round fractional years up.

Correct Answer
verified

Correct Answer
verified

An investment costs $725 and is expected to produce cash flows of $75 at the end of Year 1, $100 at the end of Year 2, $85 at the end of Year 3, and $625 at the end of Year 4. What rate of return would you earn if you bought this investment?

Correct Answer
verified

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning 1 year from today. You plan to deposit the funds in a mutual fund that you expect to return 8.5% per year. Under these conditions, how much will you have just after you make the fifth deposit, 5 years from now?

Correct Answer
verified

An investment promises the following cash flow stream: $750 at Time 0; $2,450 at the end of Year 1 (or at t = 1) ; $3,175 at the end of Year 2; and $4,400 at the end of Year 3. At a discount rate of 8.0%, what is the present value of the cash flow stream?

Correct Answer
verified

Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years. By how much would you reduce the amount you owe in the first year?

Correct Answer
verified

A Canada government bond promises to pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is correct?

Correct Answer
verified

At a rate of 6.5%, what is the future value of the following cash flow stream: $0 at Time 0; $75 at the end of Year 1; $225 at the end of Year 2; $0 at the end of Year 3; and $300 at the end of Year 4?

Correct Answer
verified

Which of the following statements regarding a 15-year (180-month) $125,000 fixed-rate mortgage is INCORRECT? (Ignore all taxes and transactions costs.)

Correct Answer
verified

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

Correct Answer
verified

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is correct?

Correct Answer
verified

You plan to invest in securities that pay 9.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment account to grow to $9,140.20?

Correct Answer
verified

One potential benefit from starting to invest early for retirement is that the investor can expect greater benefits from the compounding of interest.

Correct Answer
verified

You deposit $1,000 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

You have a chance to buy an annuity that pays $1,200 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

How much would $5,000 due in 50 years be worth today if the discount rate were 7.5%?

Correct Answer
verified

You plan to borrow $30,000 at a 7% annual interest rate. The terms require you to amortize the loan with six equal end-of-year payments. How much interest would you be paying in Year 2?

Correct Answer
verified

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Correct Answer
verified

Exam 4: Time Value of Money

You plan to make annual deposits into a bank account that pays a 5.00% nominal annual rate. You think inflation will amount to 2.50% per year. What is the expected annual real rate at which your money will grow?

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

You are considering investing 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 will it take for your account to grow to $250,000? Round fractional years up.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An investment costs $725 and is expected to produce cash flows of $75 at the end of Year 1, $100 at the end of Year 2, $85 at the end of Year 3, and $625 at the end of Year 4. What rate of return would you earn if you bought this investment?

Correct AnswerverifiedShow Answer

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning 1 year from today. You plan to deposit the funds in a mutual fund that you expect to return 8.5% per year. Under these conditions, how much will you have just after you make the fifth deposit, 5 years from now?

Correct AnswerverifiedShow Answer

An investment promises the following cash flow stream: $750 at Time 0; $2,450 at the end of Year 1 (or at t = 1) ; $3,175 at the end of Year 2; and $4,400 at the end of Year 3. At a discount rate of 8.0%, what is the present value of the cash flow stream?

Correct AnswerverifiedShow Answer

Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years. By how much would you reduce the amount you owe in the first year?

Correct AnswerverifiedShow Answer

A Canada government bond promises to pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

At a rate of 6.5%, what is the future value of the following cash flow stream: $0 at Time 0; $75 at the end of Year 1; $225 at the end of Year 2; $0 at the end of Year 3; and $300 at the end of Year 4?

Correct AnswerverifiedShow Answer

Which of the following statements regarding a 15-year (180-month) $125,000 fixed-rate mortgage is INCORRECT? (Ignore all taxes and transactions costs.)

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is correct?

Correct AnswerverifiedShow Answer

You plan to invest in securities that pay 9.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment account to grow to $9,140.20?

Correct AnswerverifiedShow Answer

One potential benefit from starting to invest early for retirement is that the investor can expect greater benefits from the compounding of interest.

Correct AnswerverifiedShow Answer

You deposit $1,000 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

You have a chance to buy an annuity that pays $1,200 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

How much would $5,000 due in 50 years be worth today if the discount rate were 7.5%?

Correct AnswerverifiedShow Answer

You plan to borrow $30,000 at a 7% annual interest rate. The terms require you to amortize the loan with six equal end-of-year payments. How much interest would you be paying in Year 2?

Correct AnswerverifiedShow Answer

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Correct AnswerverifiedShow Answer

Correct Answer
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