FINC 409 Exam 2

What is the present value of a $500 payment made in four years when the discount rate is 8 percent?

$367.51

What is the future value of a $1000 annuity payment over 4 years if the interest rates are 8 percent?

$4,506.11

What is the future value of $700 deposited for one year earning 4 percent interest rate annually?

$728

Determine the interest rate earned on a $1,500 deposit when $1680 is paid back in one year.

12.00 percent

Which of the following would you prefer?

A.) five hundred dollars to be received in 10 years when rates are 8 percent. B.) Three hundred dollars today. C.) Six hundred dollars to be received in 12 years when rates are 8 percent. D.) Seven hundred dollars to be received in 12 years when rates are 7 percent.

Bank A charges a 7.50 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 6.95 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?

Bank A: 7.5 percent, Bank B: 7.18 percent.

Bank A charges a 7.75 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 7 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?

Bank A: 7.75 percent, Bank B: 7.23 percent.

We call the process of earning interest on both the original deposit and on the earlier interest payments.

Compounding

You are evaluating an investment that requires $1,000 upfront, and pays $100 at the end of each of the first 2 years, and an additional lump-sum of $2,000 at the end of year 2. What would happen to the IRR if the annual payments at the end of each of the first 2 years go down from $100 to $50

IRR decreases

What would happen to a project's NPV if its cash inflows are pushed closer to the present?

NPV increases

Which of the following is the equivalent of $300 received today?

Seven hundred ninety-five dollars ninety-nine cents to be received in 20 years in the future assuming a 5 percent annual interest rate.

How are future values affected by changes in interest rates?

The higher the interest rate, the larger the future vale will be