Finance Exam 1 Chapter 3

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.

$1,402.55

For a positive r,

future value will always exceed present value.

If the rate of interest that investors can earn on a 2 year investment is zero then

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. b. the "cost" of using money for 2 years is zero. c. you will receive the same amount of money at maturity that you invested at the beginning of a 2 year investment.

In the equation below, the exponent "3" represents $133.10 = $100 × (1 + .1)3 a. the future value of an investment. b. the present value of an investment. c. the annual rate of interest paid. d. the number of periods that the present value is left on deposit.

d

If you could invest your money at 8% compounded annually, which option should you pick?

(2), because it has a higher PV.

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?

B, because it has higher effective annual return.

Which of the following statements is true?

In an ordinary annuity payments occur at the end of the period

The Springfield Crusaders just signed their quarterback to a 10 year $50 million contract. Is this contract really worth $50 million? (assume r >0)

No, it would only be worth $50 million if it were all paid out today.

If you hold the annual percentage rate constant while increasing the number of compounding periods per year, then a. the effective interest rate will increase. b. the effective interest rate will decrese. c. the effective interest rate will not change.

a

By increasing the number of compounding periods in a year, while holding the annual percentage rate constant, you will a. decrease the annual percentage yield. b. increase the annual percentage yield. c. not effect the annual percentage yield. d. increase the dollar return on an investment but will decrease the annual percentage yield.

b

In the equation below, the number "100" represents $75.13 = $100 / (1 + .1)3 the present value a cash flow to be received at a later date. b. the future value a cash flow to be received at a later date. c. the discount rate for the future cash flow. d. the number of periods before the cash flow is to be received.

b

The ratio of interest to principal repayment on an amortizing loan a. increases as the loan gets older. b. decreases as the loan gets older. c. remains constant over the life of the loan. d. changes according to the level of market interest rates during the life of the loan.

b

Which statement is FALSE concerning the time value of money? a. The greater the compound frequency, the greater the EAR. b. The EAR is always greater than the APR. c. An account that pays simple interest will have a lower FV than an account that pays compound interest. d. The stated interest rate is also referred to as the APR.

b

An annuity can best be described as a. a set of payments to be received during a period of time. b. a stream of payments to be recieved at a common interval over the life of the payments. c. an even stream of payments to be recieved at a common interval over the life of the payments. d. the present value of a set of payments to be received during a future period of time.

c

The amount that someone is willing to pay today, for a single cash flow in the future is a. the future value of the cash flow. b. the future value of the stream of cash flows. c. the present value of the cash flow. d. the present value of the annuity of cash flows

c

Which is NOT correct regarding an ordinary annuity and annuity due? a. An annuity is a series of equal payments. b. The present value of an ordinary annuity is less than the present value of an annuity due (assuming interest rate is positive). c. As the interest rate increases, the present value of an annuity decreases. d. As the length of the annuity increases, the future value of the annuity decreases.

d

Which of the following investments would have the highest future value (in year 5) if the discount rate is 12%? a. A five year ordinary annuity of $100 per year. b. A five year annuity due of $100 per year. c. $700 to be received at year 5 d. $500 to be received TODAY (year 0)

d

Which of the following should have the greatest value if the discount rate applying to the cash flows is a positive value? a. the present value of a $5 payment of to be received one year from today. b. the future value of a $5 payment received today but invested for one year. c. the present value of a stream of $5 payments to be received at the end of the next two years. d. the future value of a stream of $5 payments to be received at the end of the next two years.

d

You've just won $1 million dollars in a lottery. For your prize, you may except a $1 million lump sum paid immediately, a constant perpetuity of $80,000 per year (with the first payment arriving in one year), or a stream of cash flows that starts at $45,000 next year and grows at 3.5% per year in perpetuity. If the interest rate is 8%, wish of these choices has a higher present value? a. a $1 million lump sum b. a constant stream of $80,000 per year in perpetuity c. a stream that begins at $45,000 and grows at 3.5% in perpetuity d. all three choices have the same present value

d

Which of the following cannot be calculated?

uture value of a perpetuity.