Question 1

You inherited an oil well that will pay you $12,000 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)   $178,306.55
B)   $171,116.77
C)   $135,167.87
D)   $143,795.60
E)   $175,430.63F) B) and D)
G) A) and D)

Question 2

Your father is about to retire,and he wants to buy an annuity that will provide him with $74,000 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)   $853,488.17
B)   $950,721.00
C)   $1,047,953.82
D)   $1,080,364.77
E)   $1,026,346.53F) A) and D)
G) A) and E)

Question 3

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Accepted Answer

A) True 
 B)False

Question 4

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 5

Last year Thomson Inc's earnings per share were $3.50,and its growth rate during the prior 5 years was 9.6% per year.If that growth rate were maintained,how many years would it take for Thomson's EPS to triple?

Accepted Answer

A)   12.94
B)   10.67
C)   11.98
D)   10.55
E)   13.06F) A) and B)
G) D) and E)

Question 6

Your girlfriend just won the Florida lottery.She has the choice of $15,900,000 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? Disregard taxes.

Accepted Answer

A)   3.23%
B)   2.84%
C)   2.16%
D)   2.81%
E)   2.28%F) A) and B)
G) A) and C)

Question 7

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 24.25%,with interest paid monthly,what is the card's EFF%?

Accepted Answer

A)   27.14%
B)   20.35%
C)   33.11%
D)   21.44%
E)   23.34%F) C) and D)
G) C) and E)

Question 8

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) All of the above
G) B) and E)

Question 9

What is the PV of an ordinary annuity with 5 payments of $6,200 if the appropriate interest rate is 4.5%?

Accepted Answer

A)   $30,484.00
B)   $22,863.00
C)   $30,211.82
D)   $27,217.86
E)   $21,502.11F) B) and D)
G) B) and C)

Question 10

Charter Bank pays a 5.00% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%) does the bank pay?

Accepted Answer

A)   5.12%
B)   6.40%
C)   4.96%
D)   5.01%
E)   5.32%F) A) and C)
G) None of the above

Question 11

Your uncle has $955,000 and wants to retire.He expects to live for another 25 years,and he also expects to earn 7.5% on his invested funds.How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)   $79,696.46
B)   $77,305.56
C)   $74,914.67
D)   $90,057.00
E)   $61,366.27F) A) and C)
G) D) and E)

Question 12

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 13

Ten years ago,Lucas Inc.earned $0.50 per share.Its earnings this year were $3.60.What was the growth rate in earnings per share (EPS) over the 10-year period?

Accepted Answer

A)   18.77%
B)   16.80%
C)   21.82%
D)   26.19%
E)   23.57%F) All of the above
G) A) and E)

Question 14

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Accepted Answer

A)   A rational investor would be willing to pay more for DUE than for ORD,so their market prices should differ.
B)   The present value of DUE exceeds the present value of ORD,while the future value of DUE is less than the future value of ORD.
C)   The present value of ORD exceeds the present value of DUE,and the future value of ORD also exceeds the future value of DUE.
D)   The present value of ORD exceeds the present value of DUE,while the future value of DUE exceeds the future value of ORD.
E)   If the going rate of interest decreases from 10% to 0%,the difference between the present value of ORD and the present value of DUE would remain constant.F) All of the above
G) C) and D)

Question 15

You plan to invest in securities that pay 7.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

Accepted Answer

A)   9.01
B)   10.79
C)   6.78
D)   9.63
E)   8.92F) B) and D)
G) D) and E)

Question 16

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

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Suppose a U.S.treasury bond will pay $1,700 five years from now.If the going interest rate on 5-year treasury bonds is 4.25%,how much is the bond worth today?

Accepted Answer

A)   $1,380.60
B)   $1,035.45
C)   $1,698.14
D)   $1,090.68
E)   $1,711.95F) A) and E)
G) B) and E)

Question 19

How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

Accepted Answer

A)   $1,101.38
B)   $1,311.17
C)   $983.38
D)   $1,232.50
E)   $1,166.94F) D) and E)
G) A) and E)

Question 20

You want to buy a new sports car 3 years from now,and you plan to save $2,700 per year,beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit,3 years from now?

Accepted Answer

A)   $8,357.93
B)   $9,807.78
C)   $9,296.07
D)   $8,528.50
E)   $7,846.22F) B) and E)
G) A) and B)

Exam 5: Time Value of Money

How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

Correct AnswerverifiedShow Answer

You inherited an oil well that will pay you $12,000 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

Your girlfriend just won the Florida lottery.She has the choice of $15,900,000 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? Disregard taxes.

Correct AnswerverifiedShow Answer

Suppose a U.S.treasury bond will pay $1,700 five years from now.If the going interest rate on 5-year treasury bonds is 4.25%,how much is the bond worth today?

Correct AnswerverifiedShow Answer

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Correct AnswerverifiedShow Answer

Last year Thomson Inc's earnings per share were $3.50,and its growth rate during the prior 5 years was 9.6% per year.If that growth rate were maintained,how many years would it take for Thomson's EPS to triple?

Correct AnswerverifiedShow Answer

Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 24.25%,with interest paid monthly,what is the card's EFF%?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Charter Bank pays a 5.00% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%) does the bank pay?

Correct AnswerverifiedShow Answer

You want to buy a new sports car 3 years from now,and you plan to save $2,700 per year,beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit,3 years from now?

Correct AnswerverifiedShow Answer

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Correct AnswerverifiedShow Answer

You plan to invest in securities that pay 7.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

Correct AnswerverifiedShow Answer

Ten years ago,Lucas Inc.earned $0.50 per share.Its earnings this year were $3.60.What was the growth rate in earnings per share (EPS) over the 10-year period?

Correct AnswerverifiedShow Answer

Your uncle has $955,000 and wants to retire.He expects to live for another 25 years,and he also expects to earn 7.5% on his invested funds.How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Correct AnswerverifiedShow Answer

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Correct AnswerverifiedShow Answer

Your father is about to retire,and he wants to buy an annuity that will provide him with $74,000 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

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

What is the PV of an ordinary annuity with 5 payments of $6,200 if the appropriate interest rate is 4.5%?

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

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

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