Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Question 3

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Accepted Answer

A)   $3,089
B)   $3,251
C)   $3,422
D)   $3,602
E)   $3,782F) A) and C)
G) B) and E)

Question 4

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 5

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 6

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

Question 7

Your bank account pays a 6% 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 1.5% and the effective rate of interest is 3%.
B)   The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
C)   The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
D)   The periodic rate of interest is 3% and the effective rate of interest is 6%.
E)   The periodic rate of interest is 6% and the effective rate of interest is also 6%.F) A) and D)
G) A) and E)

Question 8

You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

Accepted Answer

A)   $15,260
B)   $16,063
C)   $16,908
D)   $17,754
E)   $18,642F) A) and E)
G) A) and D)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 every year for the next 10 years (a total of 10 payments) .
B)   Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments) .
C)   Investment C pays $125 at the beginning of every 6-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 every year for the next 10 years (a total of 10 payments) .F) B) and C)
G) A) and E)

Question 11

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 E)
G) None of the above

Question 12

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)   $1,537.69
B)   $1,618.62
C)   $1,699.55
D)   $1,784.53
E)   $1,873.76F) All of the above
G) A) and B)

Question 13

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 14

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

Question 15

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

Question 16

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

Accepted Answer

A)   The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
B)   Because the outstanding balance declines over time, the monthly payments will also decline over time.
C)   Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
D)   The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.
E)   The outstanding balance declines at a faster rate in the later years of the loan's life.F) A) and D)
G) A) and C)

Question 17

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

Question 18

Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

Accepted Answer

A)   23.99
B)   25.26
C)   26.58
D)   27.98
E)   29.46F) A) and B)
G) A) and E)

Question 19

You are negotiating to make a 7-year loan of $25,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. Breck is essentially riskless, so you are confident the payments will be made. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?

Accepted Answer

A)   $4,271.67
B)   $4,496.49
C)   $4,733.15
D)   $4,969.81
E)   $5,218.30F) A) and C)
G) A) and E)

Question 20

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

Exam 5: The Value of Money

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

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

Which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

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

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

Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

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

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

You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

Correct Answer
verified

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Correct Answer
verified

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

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

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 statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct Answer
verified

Correct Answer
verified

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

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

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Correct Answer
verified

Exam 5: The Value of Money

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

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

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

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

Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

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

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

You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

Correct AnswerverifiedShow Answer

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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

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 statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

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

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Correct AnswerverifiedShow Answer

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