Introduction to Corporate Finance What Companies Do, 3rd Edition by John Graham – Test Bank
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Sample Test
Chapter 3—The Time Value of Money
MULTIPLE CHOICE
1. Which
of the following cannot be calculated?
2. Present
value of an annuity.
3. Future
value of an annuity.
4. Present
value of a perpetuity.
5. Future
value of a perpetuity.
ANS:
D
PTS:
1
DIF: E
REF: 3.6 Present Value of
Cash Flow Streams
NAT: Reflective thinking
LOC: understand the time
value of money
2. You
have the choice between two investments that have the same maturity and the
same nominal return. Investment A pays SIMPLE interest, investment B pays
compounded interest. Which one should you pick?
3. A,
because it has a higher effective annual return.
4. A and
B offer the same return, thus they are equally as good.
5. B,
because it has higher effective annual return.
6. Not
enough information.
ANS:
C
PTS:
1
DIF: M
REF: 3.7 Advanced
Applications of Time
Value
NAT: Reflective thinking
LOC: understand the time
value of money
3. For a
positive r,
4. future
value will always exceed present value.
5. future
and present will always be the same.
6. present
value will always exceed future value.
7. None
of the above is true.
ANS:
A
PTS:
1
DIF: M
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Reflective thinking
LOC: understand the time
value of money
4. Which
of the following statements is TRUE?
5. In an
annuity due payments occur at the end of the period.
6. In an
ordinary annuity payments occur at the end of the period.
7. A
perpetuity will mature at some point in the future.
8. One
cannot calculate the present value of a perpetuity.
ANS:
B
PTS:
1
DIF: E
REF: 3.6 Present Value of
Cash Flow Streams
NAT: Reflective thinking
LOC: understand the time
value of money
5. The
Springfield Crusaders just signed their quarterback to a 10 year $50 million
contract. Is this contract really worth $50 million? (assume r >0)
6. Yes,
because the payments over time add up to $50 million.
7. No,
it is worth more because he can invest the money.
8. No,
it would only be worth $50 million if it were all paid out today.
9. Yes,
because his agent told him so.
ANS:
C
PTS:
1
DIF: M
REF: 3.6 Present Value of
Cash Flow
Streams
NAT: Reflective thinking
LOC: understand the time
value of money
6. Last
national bank offers a CD paying 7% interest (compounded annually). If you
invest $1,000 how much will you have at the end of year 5.
7. $712.99
8. $1,402.55
9. $1,350.00
10.
$1,000
ANS: B
PV: 1000 PMT:0 I/Y:7 N:5 FV:1402.55
PTS:
1
DIF:
E
REF: 3.2 Future Value of a Lump Sum
Received Today
NAT: Analytic
skills
LOC: understand the time value of money
7. You
want to buy a house in 4 years and expect to need $25,000 for a down payment.
If you have $15,000 to invest, how much interest do you have to earn
(compounded annually) to reach your goal?
8. 16.67%
9. 13.62%
10.
25.74%
11.
21.53%
ANS: B
FV:25000 PV:15000 N:4 PMT:0 I/Y:
PTS:
1
DIF:
E
REF: 3.2 Future Value of a Lump Sum
Received Today
NAT: Analytic
skills
LOC: understand the time value of money
8. You
want to buy your dream car, but you are $5,000 short. If you could invest your
entire savings of $2,350 at an annual interest of 12%, how long would you have
to wait until you have accumulated enough money to buy the car?
9. 9.40
years
10.
3.48 years
11.
7.24 years
12.
6.66 years
ANS: D
FV:5000 PMT:0 PV:2350 I/Y:12 N:6.66
PTS:
1
DIF:
E
REF: 3.2 Future Value of a Lump Sum
Received Today
NAT: Analytic
skills
LOC: understand the time value of money
9. How
much do you have to invest today at an annual rate of 8%, if you need to have
$5,000 six years from today?
10.
$3,150.85
11.
$4,236.75
12.
$7,934.37
13.
$2,938.48
ANS: A
FV: 5000 PMT: 0 I/Y:8 N:6 PV: 3150.85
PTS:
1
DIF: E
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Analytic skills
LOC: understand the time
value of money
10.
If you can earn 5% (compounded annually) on an investment, how
long does it take for your money to triple?
11.
14.40 years
12.
22.52 years
13.
19.48 years
14.
29.29 years
ANS: B
PV: 1 FV: 3 PMT: 0 I/Y: 5 N: 22.52
PTS:
1
DIF: M
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Analytic skills
LOC: understand the time
value of money
11.
As a result of an injury settlement with your insurance you have
the choice between
(1)
receiving $5,000 today or
(2) $6,500
in three years.
If you could invest your money at 8% compounded annually, which
option should you pick?
1. (1),
because it has a higher PV.
2. You
are indifferent between the two choices.
3. (2),
because it has a higher PV.
4. You
do not have enough information to make that decision.
ANS: C
FV: 6500 PMT: 0 I/Y: 8 N: 3 PV: 5159.91
PTS:
1
DIF: E
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Analytic skills
LOC: understand the time
value of money
12.
What is the future value of cash flows 1-5 AT THE END YEAR 5,
assuming a 6% interest rate (compounded annually)?
End of year Cash
flow
1
$2,500
2
3,000
3
1,250
4
3,500
5
1,250
6
4,530
7
2,350
879.
$13,879.36
880.
$13,093.74
881.
$9,7844.40
882.
$11,548.48
ANS: B
2500(1.06)^4+3000(1.06)^3+1250(1.06)^2+3500(1.06)+1250 =
13093.74
PTS:
1
DIF:
E
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
13.
What is the present value of these cash flows, if the discount
rate is 10% annually?
End of year Cash
flow
1
$2,500
2
3,000
3
1,250
4
3,500
5
1,250
6
4,530
7
2,350
380.
$18,380.00
381.
$12,620.90
382.
$22,358.69
383.
$14,765.52
ANS: B
CF0:0 CF1:2500 CF2:3000 CF3:1250 CF4:3500 CF5:1250 CF6:4530
CF7:2350
I/Y:10
NPV: 12620.90
PTS:
1
DIF:
E
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
14.
You are planning your retirement and you come to the conclusion
that you need to have saved $1,250,000 in 30 years. You can invest into an
retirement account that guarantees you a 5% annual return. How much do you have
to put into your account at the end of each year to reach your retirement goal?
15.
$81,314.29
16.
$18,814.30
17.
$23,346.59
18.
$12,382.37
ANS: B
FV:1250000 PV:0 I/Y:5 N: 30 PMT: 18814.30
PTS:
1
DIF:
E
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
15.
You set up a college fund in which you pay $2,000 each year at
the end of the year. How much money will you have accumulated in the fund after
18 years, if your fund earns 7% compounded annually?
16.
$72,757.93
17.
$67,998.07
18.
$20,118.17
19.
$28,339.25
ANS: B
PV:0 PMT: 2000 I/Y: 7 N: 18 FV: 67998.07
PTS:
1
DIF:
E
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic skills
LOC: understand the time value of money
16.
You set up a college fund in which you pay $2,000 each year at
the BEGINNING of the year. How much money will you have accumulated in the fund
after 18 years, if your fund earns 7% compounded annually?
17.
$72,757.93
18.
$67,998.07
19.
$20,118.17
20.
$28,339.25
ANS: A
PV: 0 PMT(beg): 2000 I/Y:7 N:18 FV: 72757.93
PTS:
1
DIF:
E
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
17.
When you retire you expect to live for another 30 years. During
those 30 years you want to be able to withdraw $45,000 at the BEGINNING of each
year for living expenses. How much money do you have to have in your retirement
account to make this happen. Assume that you can earn 8% on your investments.
18.
$1,350,000.00
19.
$506,600.25
20.
$547,128.27
21.
$723,745.49
ANS: C
FV:0 PMT:45000 I/Y:8 N:30 PV: 547128.27
PTS:
1
DIF:
M
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
18.
You are offered a security that will pay you $2,500 at the end
of the year forever. If your discount rate is 8%, what is the most you are
willing to pay for this security?
19.
$26,686
20.
$62,500
21.
$50,000
22.
$31,250
ANS: D
2500/.08 = 31250
PTS:
1
DIF:
E
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
19.
What is the effective annual rate of 12% compounded monthly?
20.
12%
21.
11.45%
22.
12.68%
23.
12.25%
ANS: C
NOM: 12
C/Y: 12
EFF: 12.68
PTS:
1
DIF:
E
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
20.
Florida considers any loan of more than an APR compounded
monthly to be usurious. What is the usurious effective annual rate?
18.
18.00%
19.
19.25%
20.
19.56%
21.
22.25%
ANS: C
EAR=(1 + .18/12)12-1=19.56%
PTS:
1
DIF: E
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
21.
If you invested $2,000 in an account that pays 12% interest,
compounded continuously, how much would be in the account in 5 years?
22.
$3,524.68
23.
$3,644.24
24.
$3,581.70
25.
$3,200.00
ANS: B
2000e^(.12´5) = 3644.24
PTS:
1
DIF:
E
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
22.
You want to buy a new plasma television in 3 years, when you
think prices will have gone down to a more reasonable level. You anticipate
that the television will cost you $2,500. If you can invest your money at 8%
compounded monthly, how much do you need to put aside today?
23.
$1,895.37
24.
$1,968.14
25.
$1,984.58
26.
$2,158.42
ANS: B
FV: 2500 PMT: 0 I/Y: 8/12 N:3*12 PV: 1968.14
PTS:
1
DIF:
E
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
23.
You found your dream house. It will cost you $175,000 and you
will put down $35,000 as a down payment. For the rest you get a 30-year 6.25%
mortgage. What will be your monthly mortgage payment (assume no early
repayment)?
24.
$729
25.
$862
26.
$389
27.
$605
ANS: B
PV: 175000-35000
FV: 0
I/Y: 6.25/12
N: 30*12
PMT: 862
PTS:
1
DIF:
E
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
24.
You want to buy a new car. The car you picked will cost you
$32,000 and you decide to go with the dealer’s financing offer of 5.9%
compounded monthly for 60 months. Unfortunately, you can only afford monthly
loan payments of $300. However, the dealer allows you to pay off the rest of
the loan in a one time lump sum payment at the end of the loan. How much do you
have to pay to the dealer when the lump sum is due?
25.
$14,000.00
26.
$21,890.43
27.
$25,455.37
28.
$22,071.75
ANS: D
PMT: 300
FV:0
I/Y: 5.9/12
N: 60
PV: 15555
lump sum: (32000-15555)(1+.059/12)^60 = 22071.75
PTS:
1
DIF:
H
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
25.
You are planning your retirement and you come to the conclusion
that you need to have saved $1,250,000 in 30 years. You can invest into an
retirement account that guarantees you a 5% return. How much do you have to put
into your account at the end of every month to reach your retirement goal?
26.
$1567.86
27.
$1,501.94
28.
$3,472.22
29.
$2,526.27
ANS: B
FV: 1250000
PV: 0
I/Y: 5/12
N: 12*30
PMT: 1501.94
PTS:
1
DIF:
M
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
26.
When you retire you expect to live for another 30 years. During
those 30 years you want to be able to withdraw $4,000 at the BEGINNING of every
month for living expenses. How much money do you have to have in your
retirement account to make this happen. Assume that you can earn 8% on your
investments.
27.
$545,133.98
28.
$1,440,000.00
29.
$548,768.20
30.
$673,625.34
ANS: C
FV: 0
PMT: 4000
I/Y: 8/12
N: 30*12
PV: 548768.2
PTS:
1
DIF:
M
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
27.
If you were to invest $120 for two years, while earning 8%
compound interest, what is the TOTAL AMOUNT OF INTEREST that you will earn?
28.
$139.97
29.
$139.20
30.
$19.20
31.
$19.97
ANS: D
{[(1.08)^2] ´ 120}- 120 = 19.97
PTS:
1
DIF:
M
REF: 3.2 Future Value of a Lump Sum
Received Today
NAT: Analytic
skills
LOC: understand the time value of money
28.
If you were to invest $120 for two years, while earning 8%
SIMPLE interest, what is the TOTAL AMOUNT OF INTEREST that you will earn?
29.
$139.97
30.
$139.20
31.
$19.20
32.
$19.97
ANS: C
120 ´ [.08 ´ 2] = 19.20
PTS:
1
DIF:
M
REF: 3.2 Future Value of a Lump Sum
Received Today
NAT: Analytic
skills
LOC: understand the time value of money
29.
If the rate of interest that investors can earn on a 2-year
investment is zero then
30.
you will repay the same amount of money at the conclusion of a
loan that you borrowed at the beginning of the 2 year loan.
31.
the “cost” of using money for 2 years is zero.
32.
you will receive the same amount of money at maturity that you
invested at the beginning of a 2 year investment.
33.
all of the above.
ANS:
D
PTS:
1
DIF: H
REF: 3.2 Future Value of a
Lump Sum Received Today
NAT: Reflective thinking
LOC: understand the time
value of money
30.
In the equation below, the exponent “3” represents
$133.10 = $100 ´ (1 + .1)3
1. the
future value of an investment.
2. the
present value of an investment.
3. the
annual rate of interest paid.
4. the
number of periods that the present value is left on deposit.
ANS:
D
PTS:
1
DIF: E
REF: 3.2 Future Value of a
Lump Sum Received Today
NAT: Reflective thinking
LOC: understand the time
value of money
31.
You are asked to choose between a 4-year investment that pays
10% compound interest and a similar investment that pays 11.5% SIMPLE interest.
Which investment will you choose?
32.
the 10% compound interest investment
33.
the 11.5% simple interest investment
34.
you are indifferent between the investment choices
35.
there is not enough information to answer the question
ANS: A
Assume a $10 investment:
compound interest value is: $10 ´ (1.1)4= $14.64
simple interest value is: $10 * (1 + [.115 ´ 4]) = $14.60
====> select the compound interest investment.
PTS:
1
DIF:
M
REF: 3.2 Future Value of a Lump Sum
Received Today
NAT: Analytic
skills
LOC: understand the time value of money
32.
The amount that someone is willing to pay today, for a single
cash flow in the future is
33.
the future value of the cash flow.
34.
the future value of the stream of cash flows.
35.
the present value of the cash flow.
36.
the present value of the annuity of cash flows
ANS:
C
PTS:
1
DIF: E
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Reflective thinking
LOC: understand the time
value of money
33.
Pam is in need of cash right now and wants to sell the rights to
a $1,000 cash flow that she will receive 5 years from today. If the discount
rate for such a cash flow is 9.5%, then what is the fair price that someone
should be willing to pay Pam today for rights to that future cash flow?
34.
$1,574.24
35.
$635.23
36.
$260.44
37.
$913.24
ANS: B
1,000/(1.095)5 = 635.23
PTS: 1
DIF: M
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Analytic skills
LOC: understand the time
value of money
34.
Your father’s pension recently vested and he is told that if he
never works another day in his life, he will receive a lump sum of $1,500,000
on his 65th birthday (exactly 15 years from today). Assume that your father
needs to permanently retire today. What could he sell the rights to his lump
sum for, today, if the correct discount rate for such a calculation is 6%?
35.
$625,897.59
36.
$1,415,094.34
37.
$154,444.15
38.
none of the above
ANS: A
1,500,000/[1.06]15 = 625,897.59
PTS:
1
DIF: M
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Analytic skills
LOC: understand the time
value of money
35.
Your parents set up a trust for you that you will not have
access to until your 30th birthday, which is exactly 9 years from today. By
prior arrangement, the trust will be worth exactly $200,000 on your 30th
birthday. You need cash today and are willing to sell the rights to that trust
today for a set amount. If the discount rate for such a cash flow is 12%, what
is the maximum amount that someone should be willing to pay you today for the
rights to the trust on your 30th birthday?
36.
$72,122.01
37.
$178,571.43
38.
$224,000.00
39.
$225,000.00
ANS: A
200,000/(1.12)9 = 72,122.00
PTS:
1
DIF: M
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Analytic skills
LOC: understand the time
value of money
36.
In the equation below, the number “100” represents
$75.13 = $100 / (1 + .1)3
1. the
present value a cash flow to be received at a later date.
2. the
future value a cash flow to be received at a later date.
3. the
discount rate for the future cash flow.
4. the
number of periods before the cash flow is to be received.
ANS:
B
PTS:
1
DIF: E
REF: 3.3 Present Value of a
Lump Sum Rec. in the Future
NAT: Reflective thinking
LOC: understand the time
value of money
37.
You will receive a stream of payments BEGINNING at the end of
year 1 and the amount will increase by $10 each year until the final payment at
the end of year 5. If the first payment is $50, what amount will you have at
the end of year 5 if you can invest all amounts at a 7% interest rate?
38.
$350.00
39.
$374.50
40.
$394.79
41.
$422.43
ANS: C
50 ´ (1.07)4 + 60 ´ (1.07)3 +70 ´ (1.07)2 +80 ´ (1.07)1 +90 ´
(1.07)0 = 394.79
PTS:
1
DIF:
H
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
38.
You will receive a stream of $50 payments BEGINNING at the end
of year 1 until the final payment at the end of year 5. What amount will you
have at the end of year 5 if you can invest all amounts at a 9% interest rate?
39.
$194.48
40.
$200.00
41.
$228.67
42.
$299.24
ANS: D
50 ´ [{(1.09)5 – 1}/.09] = 299.24
PTS:
1
DIF:
M
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
39.
You will receive a stream of annual $70 payments to begin at the
end of year 0 until the final payment at the end of year 5. What amount will
you have at the end of year 5 if you can invest all amounts at a 11% interest
rate?
40.
$350.00
41.
$420.00
42.
$553.90
43.
$614.83
ANS: C
70 ´ {[{[(1.11)5 – 1]/.11} ´ 1.11]+1} = 553.90
PTS:
1
DIF:
H
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
40.
You will receive a stream of annual $70 payments to begin at the
end of year 0 until the final payment at the BEGINNING of year 5. What amount
will you have at the end of year 5 if you can invest all amounts at an 11%
interest rate?
41.
$350.00
42.
$435.95
43.
$483.90
44.
$614.83
ANS: C
70 ´ [{[(1.11)5 – 1]/.11} ´ 1.11] = 483.90
PTS:
1
DIF:
M
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
41.
You are trying to prepare a budget based upon the amount of cash
flow that you will have available 5 years from now. You are initially promised
a regular annuity of $50 with the first payment to be made 1 year from now and
the last payment 5 years from now. However, you are actually going to receive
an annuity due with the same number of payments but where the first payment is
to begin immediately. How much (or less) cash will you have 5 years from now
based upon that error if the rate to invest funds is 10%?
42.
$50.00
43.
$38.58
44.
$30.52
45.
($30.52)
ANS: C
50 ´ { [(1.1)5 – 1]/.1} – (50 ´ { [(1.1)5 – 1]/.1} ´ 1.1)
PTS:
1
DIF:
H
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
42.
An annuity can best be described as
43.
a set of payments to be received during a period of time.
44.
a stream of payments to be received at a common interval over
the life of the payments.
45.
an even stream of payments to be received at a common interval
over the life of the payments.
46.
the present value of a set of payments to be received during a
future period of time.
ANS:
C
PTS:
1
DIF: M
REF: 3.5 Future Value of
Cash Flow
Streams
NAT: Reflective thinking
LOC: understand the time
value of money
43.
Which of the following should have the greatest value if the
discount rate applying to the cash flows is a positive value?
44.
the present value of a $5 payment of to be received one year
from today.
45.
the future value of a $5 payment received today but invested for
one year.
46.
the present value of a stream of $5 payments to be received at
the end of the next two years.
47.
the future value of a stream of $5 payments to be received at
the end of the next two years.
ANS:
D
PTS:
1
DIF: E
REF: 3.6 Present Value of
Cash Flow
Streams
NAT: Reflective thinking
LOC: understand the time
value of money
44.
What is the present value of $25 to be received at the end of
each year for the next 6 years if the discount rate is 12%?
45.
$125.00
46.
$113.06
47.
$102.79
48.
none of the above
ANS: C
(25/.12) ´ (1 – (1.12)-6) = 102.79
PTS:
1
DIF:
E
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
45.
What is the present value of $25 to be received at the BEGINNING
of each year for the next 6 years if the discount rate is 12%?
46.
$125.00
47.
$126.63
48.
$115.12
49.
none of the above
ANS: C
((25/.12) ´ (1 – (1.12)-6)) ´ 1.12 = 115.12
PTS:
1
DIF:
E
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
46.
Forever Insurance Company has offered to pay you or your heirs
$100 per year at the end of each year forever. If the correct discount rate for
such a cash flow is 13%, what the amount that you would be willing to pay
Forever Insurance for this set of cash flows?
47.
$1,000.00
48.
$869.23
49.
$769.23
50.
$100
ANS: C
100/.13 = 769.23
PTS:
1
DIF:
E
REF: 3.6 Present Value of Cash Flow
Streamsity
NAT: Analytic
skills
LOC: understand the time value of money
47.
You would like to have $1,000 one year (365 days) from now and
you find that the bank is paying 7% compounded daily. How much will you have to
deposit with the bank today to be able to have the $1,000?
48.
$934.58
49.
$933.51
50.
$932.40
51.
none of the above
ANS: C
1,000 / [1 + (.07/365)]365 = 932.40
PTS:
1
DIF:
M
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
48.
By increasing the number of compounding periods in a year, while
holding the annual percentage rate constant, you will
49.
decrease the annual percentage yield.
50.
increase the annual percentage yield.
51.
not effect the annual percentage yield.
52.
increase the dollar return on an investment but will decrease
the annual percentage yield.
ANS:
B
PTS:
1
DIF: M
REF: 3.7 Advanced
Applications of Time
Value
NAT: Reflective thinking
LOC: understand the time
value of money
49.
The ratio of interest to principal repayment on an amortizing
loan
50.
increases as the loan gets older.
51.
decreases as the loan gets older.
52.
remains constant over the life of the loan.
53.
changes according to the level of market interest rates during
the life of the loan.
ANS:
B
PTS:
1
DIF: M
REF: 3.7 Advanced
Applications of Time
Value
NAT: Reflective thinking
LOC: understand the time
value of money
50.
You are trying to accumulate $2,000 at the end of 5 years by
contributing a fixed amount at the end of each year. You initially decide to
contribute $300 per year but find that you are coming up short of the $2,000
goal. What could you do to increase the value of the investment at the end of
year 5?
51.
invest in an investment that has a lower rate of return.
52.
invest in an investment that has a higher rate of return.
53.
make a sixth year contribution.
54.
contribute a smaller amount each year.
ANS:
B
PTS:
1
DIF: M
REF: 3.5 Future Value of
Cash Flow
Streams
NAT: Reflective thinking
LOC: understand the time
value of money
51.
If you hold the annual percentage rate constant while increasing
the number of compounding periods per year, then
52.
the effective interest rate will increase.
53.
the effective interest rate will decrease.
54.
the effective interest rate will not change.
55.
none of the above.
ANS: A
PTS:
1
DIF: M
REF: 3.7 Advanced
Applications of Time
Value
NAT: Reflective thinking
LOC: understand the time
value of money
52.
A young couple buys their dream house. After paying their down
payment and closing costs, the couple has borrowed $400,000 from the bank. The
terms of the mortgage are 30 years of monthly payments at an APR of 6% with
monthly compounding. What is the monthly payment for the couple?
53.
$2,398.20
54.
$2,421.63
55.
$2,697.98
56.
$2,700.00
ANS: A
n=360, r=.5%, PV=$400,000, FV=0, PMT=?=$2,398.20
PTS:
1
DIF:
M
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
53.
A young couple buys their dream house. After paying their down
payment and closing costs, the couple has borrowed $400,000 from the bank. The
terms of the mortgage are 30 years of monthly payments at an APR of 6% with
monthly compounding. Suppose the couple wants to pay off their mortgage early,
and will make extra payments to accomplish this goal. Specifically, the couple
will pay an EXTRA $2,000 every 12 months (this extra amount is in ADDITION to
the regular scheduled mortgage payment). The first extra $2,000 will be paid
after month 12. What will be the balance of the loan after the first year of
the mortgage?
54.
$392,940.44
55.
$393,087.95
56.
$394,090.84
57.
$397,601.80
ANS: B
n=360, r=.5%, PV=$400,000, FV=0, PMT=?=$2,398.20
Balance after 12 payments = use AMORT Table
For TI BA II Plus, P1=1, P2=12, BALANCE = $395,087.95
New Balance = $395,087.95-$2,000=$393,087.95
PTS:
1
DIF:
H
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
54.
Uncle Fester puts $50,000 into a bank account earning 6%. You
can’t withdraw the money until the balance has doubled. How long will you have
to leave the money in the account?
55.
9 years
56.
10 years
57.
11 years
58.
12 years
ANS: D
PV=-$50,0000, FV=$100,000, r=6%, PMT=$0, n=?=11.99 years
PTS:
1
DIF:
E
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
55.
Which of the following statements are TRUE?
Statement I: As you increase
the interest rate, the future value of an investment increases.
Statement II: As you increase the length
of the investment (to receive some lump sum), the present value of the
investment increases.
Statement III: The present value of an
ordinary annuity is larger than the present value of an annuity due. (all else
equal)
1. Statement
I only
2. Statements
I and II
3. Statement
II only
4. Statements
I and III only
ANS:
A
PTS:
1
DIF: M
REF: 3.6 Present Value of
Cash Flow
Streams
NAT: Reflective thinking
LOC: understand the time
value of money
56.
Consider the following set of cashflows to be received over the
next 3 years:
Year
1
2
3
Cashflow
$100 $225
$300
If the discount rate is 10%, how would we write the formula to
find the Future Value of this set of cash flows at year 3?
1.
2. $100
(1.10) + $225 (1.10) + $300 (1.10)
3. $100
(1.10)3 + $225 (1.10)2 + $300 (1.10)
4. $100
(1.10)2 + $225 (1.10) + $300
ANS:
D
PTS:
1
DIF: E
REF: 3.5 Future Value of
Cash Flow
Streams
NAT: Reflective thinking
LOC: understand the time
value of money
57.
Which is NOT correct regarding an ordinary annuity and annuity
due?
58.
An annuity is a series of equal payments.
59.
The present value of an ordinary annuity is less than the
present value of an annuity due (assuming interest rate is positive).
60.
As the interest rate increases, the present value of an annuity
decreases.
61.
As the length of the annuity increases, the future value of the
annuity decreases.
ANS:
D
PTS:
1
DIF: H
REF: 3.5 Future Value of
Cash Flow
Streams
NAT: Reflective thinking
LOC: understand the time
value of money
58.
After graduating from college with a finance degree, you begin
an ambitious plan to retire in 25 years. To build up your retirement fund, you
will make quarterly payments into a mutual fund that on average will pay 12%
APR compounded quarterly. To get you started, a relative gives you a graduation
gift of $5,000. Once retired, you plan on moving your investment to a money
market fund that will pay 6% APR with monthly compounding. As a young retiree, you
believe you will live for 30 more years and will make monthly withdrawals of
$10,000. To meet your retirement needs, what quarterly payment should you make?
59.
$2,221.45
60.
$2,588.27
61.
$2,746.50
62.
$2,904.73
ANS: B
PV of RETIREMENT WITHDRAWALS = FV of RETIREMENT SAVINGS
PV of RETIREMENT WITHDRAWALS:
n=360, r=.5%, PV=?, PMT=$10,000, FV=$0
PV = $1,667,916.14 = FV of savings
PAYMENT:
n=100, r=3%, PV= -$5,000, PMT=?, FV=$1,667,916.14
PMT = $2588.26
PTS:
1
DIF: H
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
59.
A bank account has a rate of 12% APR with quarterly compounding.
What is the EAR for the account?
60.
3.00%
61.
12.00%
62.
12.36%
63.
12.55%
ANS: D
=(1+.12/4)^4-1
PTS:
1
DIF:
H
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
60.
An investor puts $200 in a money market account TODAY that
returns 3% per year with monthly compounding. The investor plans to keep his
money in the account for 2 years. What is the future value of his investment
when he closes the account two years from today?
61.
$215.00
62.
$212.35
63.
$206.08
64.
$188.37
ANS: B
n=2, r=3%, PV= -$200, PMT = 0, FV = $212.35
PTS:
1
DIF:
E
REF: 3.2 Future Value of a Lump Sum Received
Today
NAT: Analytic
skills
LOC: understand the time value of money
61.
Suppose you take out a loan from the local mob boss for $10,000.
Being a generous banker, the mob boss offers you an APR of 60% with monthly
compounding. The length of the loan is 3 years with monthly payments. However,
you want to get out of this arrangement as quickly as possible. You decide to
pay off whatever balance remains after the first year of payments. What is your
remaining balance after one year?
62.
$8,124.46
63.
$8,339.13
64.
$9,233.06
65.
$9,342.47
ANS: B
n=36, r=60%/12=5%, PV=$10,000, FV=0, PMT=$604.34
Use AMORT:
P1=1, P2=12, BALANCE = $8339.13
PTS:
1
DIF:
H
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
62.
Suppose you are ready to buy your first house. To buy the house,
you will take out a $140,000 mortgage from the bank. The bank offers you the
mortgage for 30 years at an APR of 6.0% with interest compounded monthly. For
your tenth monthly payment, what is the reduction in principal?
63.
$145.77
64.
$156.18
65.
$327.24
66.
$359.64
ANS: A
n=360, r=0.5%, PV= $140,000, PMT=?, FV=0
PMT = $839.37
Use AMORT:
P1=10, P2=10….Principal reduction=$145.77
PTS:
1
DIF:
H
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
63.
What is the future value of a 5-year ordinary annuity with
annual payments of $250, evaluated at a 15 percent interest rate?
64.
$670.44
65.
$838.04
66.
$1,250
67.
$1,685.60
ANS: D
n=5, r=15%, PV=0, PMT= $250, FV=?=$1685.60
PTS:
1
DIF:
M
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
64.
The present value of an ordinary annuity is $2,000. The annuity
features monthly payments from an account that pays 12% APR (with monthly
compounding). If this was an annuity due, what would be the present value?
(assume that same interest rate and same payments)
65.
$1,785.71
66.
$1,980.20
67.
$2,020.00
68.
$2,080.00
ANS: C
PV of annuity due = PV of ordinary annuity * (1+r’)
PTS:
1
DIF:
H
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic skills
LOC: understand the time value of money
65.
Suppose that Hoosier Farms offers an investment that will pay
$10 per year forever. How much is this offer worth if you need a 8% return on
your investment?
66.
$8
67.
$80
68.
$100
69.
$125
ANS: D
PV = $10/.08 = $125
PTS:
1
DIF:
E
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
66.
Suppose a professional sports team convinces a former player to
come out of retirement and play for three seasons. They offer the player $2
million in year 1, $3 million in year 2, and $4 million in year 3. Assuming end
of year payments of the salary, how would we find the value of his contract
today if the player has a discount rate of 12%?
67.
PV =
68.
PV =
69.
PV =
70.
PV =
ANS:
C
PTS:
1
DIF: E
REF: 3.6 Present Value of
Cash Flow Streams
NAT: Reflective thinking
LOC: understand the time
value of money
67.
Which statement is FALSE concerning the time value of money?
68.
The greater the compound frequency, the greater the EAR.
69.
The EAR is always greater than the APR.
70.
An account that pays simple interest will have a lower FV than
an account that pays compound interest.
71.
The stated interest rate is also referred to as the APR.
ANS:
B
PTS:
1
DIF: M
REF: 3.7 Advanced
Applications of Time
Value
NAT: Reflective thinking
LOC: understand the time
value of money
68.
Suppose you made a $10,000 investment ten years ago in a
speculative stock fund. Your investment today is worth $100,000. What annual
compounded return did you earn over the ten year period?
69.
10%
70.
15%
71.
25.89%
72.
27.54%
ANS: C
n=10, r=?, PV= -$10,000, PMT = $0, FV = $100,000
r=25.89%
PTS:
1
DIF: E
REF: 3.7 Advanced Applications
of Time Value Techniques
NAT: Analytic skills
LOC: understand the time
value of money
69.
An athlete was offered the following contract for the next three
years:
Year
1
2
3
Cashflow
$5 million
$7
million
$9 million
The athlete would rather have his salary in equal amounts at the
END of each of the three years. If the discount rate for the athlete is 10%,
what yearly amount would she consider EQUIVALENT to the offered contract?
5. $5.37
million per year
6. $5.70
million per year
7. $6.71
million per year
8. $6.87
million per year
ANS: D
PV = $5/(1.10)+$7/(1.10)^2+$9/(1.10)^3 = $17.09
Annuity:
n=3, r=10%, PV=$17.09, PMT=?, FV=0
PMT = $6.87
PTS: 1
DIF:
M
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
70.
Which of the following investment opportunities has the highest
present value if the discount rate is 10%?
Investment A Investment
B Investment C
Year 0
$200
$300 $400
Year 1
$300
$350 $350
Year 2
$400
$400 $300
Year 3
$400
$350 $250
Year 4
$400
$300 $200
1. Investment
A
2. Investment
B
3. Investment
C
4. The
present value of Investments A and C are equal and higher than the present
value of Investment B.
ANS: B
INV A: $200 + $300/1.10 + $400/(1.10)^2 + $400/(1.10)^3 +
$400/(1.10)^4= $1377
INV B: $300 + $350/1.10 + $400/(1.10)^2 + $350/(1.10)^3 +
$300/(1.10)^4= $1416
INV C: $400 + $350/1.10 + $300/(1.10)^2 + $250/(1.10)^3 +
$200/(1.10)^4=$1291
PTS:
1
DIF:
E
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
71.
A bank is offering a new savings account that pays 8% per year.
Which formula below shows the calculation for determining how long it will take
a $100 investment to double?
72.
n =
73.
n = 1.08ln(2)
74.
n = 2ln(1.08)
75.
n =
ANS: D
$200 = $100 * (1.08)^n
ln 2 = n ln (1.08)
n = ln 2/ ln (1.08)
PTS:
1
DIF:
M
REF: 3.7 Advanced Applications of Time
Value
NAT: Reflective
thinking
LOC: understand the time value of money
72.
In five years, you plan on starting graduate school to earn your
MBA. You know that graduate school can be expensive and you expect you will
need $15,000 per year for tuition and other school expenses. These payments
will be made at the BEGINNING of the school year. To have enough money to
attend graduate school, you decide to start saving TODAY by investing in a
money market fund that pays 4% APR with monthly compounding. You will make
monthly deposits into the account starting TODAY for the next five years. How
much will you need to deposit each month to have enough savings for graduate
school? (Assume that money that is not withdrawn remains in the account during
graduate school and the MBA will take two years to complete.)
73.
$438.15
74.
$440.26
75.
$442.16
76.
$443.64
ANS: C
VALUE OF TUITION PAYMENTS:
PV = $15,000 + $15,000/(1+.040742)= $29,412.80
SAVINGS: (set calculator to BEGIN)
n=60, r=4%/12, PV = 0, PMT = ?, FV = $29,412.80
PTS:
1
DIF:
H
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
73.
As a young graduate, you have plans on buying your dream car in
three years. You believe the car will cost $50,000. You have two sources of
money to reach your goal of $50,000. First, you will save money for the next
three years in a money market fund that will return 8% annually. You plan on
making $5,000 annual payments to this fund. You will make yearly investments at
the BEGINNING of the year. The second source of money will be a car loan that
you will take out on the day you buy the car. You anticipate the car dealer to
offer you a 6% APR loan with monthly compounding for a term of 60 months. To
buy your dream car, what monthly car payment will you anticipate?
74.
$483.99
75.
$540.15
76.
$627.73
77.
$652.83
ANS: C
VALUE OF CAR = FV of SAVINGS + PV of LOAN
SAVINGS: Set calculator to begin
n = 3, r = 8%, PV = $0, PMT = $5,000, FV = $17,530.56
Car loan = $50,000 – $17,530.56 = $32,469.44
LOAN:
n= 60, r=.5%, PV= $32,469.44, FV = $0, PMT = $627.73
PTS: 1
DIF:
H
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
74.
Which of the following investments would have the highest future
value (in year 5) if the discount rate is 12%?
75.
A five year ordinary annuity of $100 per year.
76.
A five year annuity due of $100 per year.
77.
$700 to be received at year 5
78.
$500 to be received TODAY (year 0)
ANS: D
Choice B > Choice A
FV of B: (set calc to begin), n=5, r=12%, PV=$0, PMT = $100,
FV=$711.52
Choice B> Choice C
FV of D: n=5, r=12%, PV=$500, PMT = $0, FV=$881.17
PTS:
1
DIF:
E
REF: 3.2 Future Value of a Lump Sum
Received Today
NAT: Analytic
skills
LOC: understand the time value of money
75.
Cozmo Costanza just took out a $24,000 bank loan to help
purchase his dream car. The bank offered a 5-year loan at a 6% APR. The loan
will feature monthly payments and monthly compounding of interest. What is the
monthly payment for this car loan?
76.
$400.00
77.
$463.99
78.
$470.25
79.
$474.79
ANS: B
n= 60, r=.5%, PV = $24,000, FV = $0, PMT = $463.99
PTS:
1
DIF: M
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
76.
A young graduate invests $10,000 in a mutual fund that pays 8%
interest per year. What is the future value of this investment in 12 years?
77.
$12,000
78.
$19,600
79.
$22,000
80.
$25,182
ANS: D
n=12, r=8%, PV = -$10,000, PMT = $0, FV = $25182
PTS:
1
DIF:
E
REF: 3.2 Future Value of a Lump Sum Received
Today
NAT: Analytic
skills
LOC: understand the time value of money
77.
An electric company has offered the following perpetuity to
investors to raise capital for the firm. The perpetuity will pay $1 next year,
and it is promised to grow at 5% per year thereafter. If you can earn 10% on
invested money, how much would you pay today for this perpetuity?
78.
$100
79.
$50
80.
$40
81.
$20
ANS: D
= $1/(.1-.05) = $20
PTS:
1
DIF:
E
REF: 3.6 Present Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
78.
Cozmo Costanza just took out a $24,000 bank loan to help
purchase his dream car. The bank offered a 5-year loan at a 6% APR. The loan
will feature monthly payments and monthly compounding of interest. Suppose that
Cozmo would like to pay off the remaining balance on his car loan at the end of
the second year (24 payments). What is the remaining balance on the car loan
after the second year?
79.
$10,469
80.
$12,171
81.
$14,400
82.
$15,252
ANS: D
n= 60, r=.5%, PV = $24,000, FV = $0, PMT = $463.99
Balance after 2 years: Use AMORT
P1= 1, P2 = 24, BALANCE = $15,251.73
PTS: 1
DIF:
M
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
79.
A $100 investment yields $112.55 in one year. The interest on
the investment was compounded quarterly. From this information, what was the
stated rate or APR of the investment?
80.
12.55%
81.
12.25%
82.
12.15%
83.
12.00%
ANS: D
n= 4, r= ?, PV = -$100, PMT = 0, FV= $112.55
r=3%, APR = 4*3% = 12%
PTS:
1
DIF:
M
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
80.
What is the future value at year 3 of the following set of cash
flows if the discount rate is 11%?
Year
0
1
2
3
Cash
flow
$100
$125
$200 $225
1. $738
2. $761
3. $789
4. $812
ANS: A
= $100 * (1.11)^3+ $125*(1.11)^2 + $200*(1.11)^1 +$225
PTS:
1
DIF:
E
REF: 3.5 Future Value of Cash Flow Streams
NAT: Analytic
skills
LOC: understand the time value of money
81.
A $200 investment in an account that pays 7% continuous interest
would be worth how much in twenty years?
82.
$774
83.
$792
84.
$811
85.
$819
ANS: C
= $200 *e^(.07*20)
PTS:
1
DIF:
M
REF: 3.7 Advanced Applications of Time
Value
NAT: Analytic
skills
LOC: understand the time value of money
82.
If you invest $5,000 in a mutual fund with a total annual return
(interest rate) of 8% and you re-invest the proceeds each year, what will be
the value of your investment after five years?
83.
$3,402.92
84.
$6,597.08
85.
$7,000.00
86.
$7,346.64
ANS: D
PV = 5,000
N = 5
I/YR = 8
FV = ? = 7,346.64
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