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Which of the following statements is CORRECT?


A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
D) Time lines can only be constructed for annuities where the payments occur at the end of the periods,i.e. ,for ordinary annuities.
E) Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

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

Correct Answer

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Charter Bank pays a 4.30% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%) does the bank pay?


A) 4.39%
B) 5.09%
C) 5.04%
D) 4.74%
E) 5.44%

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

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Suppose you borrowed $25,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?


A) $5,804.89
B) $5,572.70
C) $4,469.77
D) $5,920.99
E) $5,108.30

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

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How much would $5,000 due in 20 years be worth today if the discount rate were 5.5%?


A) $2,004.96
B) $1,713.64
C) $2,039.24
D) $2,073.51
E) $1,353.78

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

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B

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $2,400 at the end of Year 4 if the interest rate is 5%?


A) $7,464.66
B) $9,952.87
C) $8,858.06
D) $12,341.56
E) $10,848.63

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

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What is the present value of the following cash flow stream at a rate of 12.00%?  Years: 01234 CFs: $0$75$225$0$300\begin{array} { l c c c c c } \text { Years: } & 0 & 1 & 2 & 3 & 4 \\\hline \text { CFs: } & \$ 0 & \$ 75 & \$ 225 & \$ 0 & \$ 300\end{array} ?


A) $546.24
B) $402.03
C) $436.99
D) $511.28
E) $441.36

F) C) and E)
G) C) and D)

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

A) True
B) False

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True

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

A) True
B) False

Correct Answer

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A time line is not meaningful unless all cash flows occur annually.

A) True
B) False

Correct Answer

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The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the smaller the percentage of the payment that will be a repayment of principal.

A) True
B) False

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False

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $128,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?


A) 8.36%
B) 6.77%
C) 5.73%
D) 6.91%
E) 5.32%

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

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Your child's orthodontist offers you two alternative payment plans.The first plan requires a $4,000 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?


A) 17.81%
B) 14.50%
C) 14.36%
D) 13.50%
E) 11.34%

F) C) and E)
G) C) and D)

Correct Answer

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


A) $3,602.30
B) $4,178.66
C) $4,070.59
D) $4,358.78
E) $3,566.27

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

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The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the greater the present value of a given lump sum to be received at some future date.

A) True
B) False

Correct Answer

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Ten years ago,Lucas Inc.earned $0.50 per share.Its earnings this year were $5.00.What was the growth rate in earnings per share (EPS) over the 10-year period?


A) 19.42%
B) 21.75%
C) 25.89%
D) 32.11%
E) 29.78%

F) None of the above
G) D) and E)

Correct Answer

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Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

A) True
B) False

Correct Answer

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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.

A) True
B) False

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You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?


A) The cash flows are in the form of a deferred annuity,and they total to $100,000.You learn that the annuity lasts for only 5 rather than 10 years,hence that each payment is for $20,000 rather than for $10,000.
B) The discount rate increases.
C) The riskiness of the investment's cash flows decreases.
D) The total amount of cash flows remains the same,but more of the cash flows are received in the earlier years and less are received in the later years.
E) The discount rate decreases.

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

Correct Answer

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Suppose you have $850 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?


A) $837.91
B) $1,009.53
C) $888.39
D) $858.10
E) $777.34

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

Correct Answer

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You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?


A) The cash flows are in the form of a deferred annuity,and they total to $100,000.You learn that the annuity lasts for 10 years rather than 5 years,hence that each payment is for $10,000 rather than for $20,000.
B) The discount rate decreases.
C) The riskiness of the investment's cash flows increases.
D) The total amount of cash flows remains the same,but more of the cash flows are received in the later years and less are received in the earlier years.
E) The discount rate increases.

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

Correct Answer

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