chapter 3,4,5 finance 3715
In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer? A) $744,000 B) $1,240,000 C) $992,000 D) $1,488,000
$1,240,000
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________. A) $722,766 B) $1,445,531 C) $1,011,872 D) $1,590,084
$1,445,531
A home buyer buys a house for $2,155,000 . She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment? A) $11,342.47 B) $10,311.34 C) $12,373.61 D) $8249.07
$10,311.34
You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________. A) $100,000 B) $500,000 C) $250,000 D) This problem cannot be solved.
$100,000
Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000 . If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense? A) $200,503 B) $150,377 C) $50,126 D) $100,251
$100,251
A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments? A) $109 B) $218 C) $164 D) $55
$109
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________. A) $110,793 B) $55,397 C) $77,555 D) $132,952
$110,793
You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to ________. A) $12,500 B) $12,000 C) $13,000 D) $10,000
$12,000
You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years? A) $7291.00 B) $14,582.00 C) $17,012.34 D) $12,151.67
$12,151.67
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________. A) $14,000 B) $12,727 C) $15,273 D) $17,818
$12,727
A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year? A) $15,888.95 B) $18,537.11 C) $21,185.26 D) $13,240.79
$13,240.79
Country Abalone Cost Exchange Rate: $1 U.S. = Australia AUD 93,500 1.1 AUD Chile CLP 50,990,000 585 CLP Iceland ISK 5,400,000 61 ISK New Zealand NZD 104,000 1.3 NZD South Afri ZAR 640,00 7.8 ZAR Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make? A) $12,333 B) $14,333 C) $14,833 D) $13,333
$13,333
A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan? A) $1448.36 B) $1580.03 C) $1316.69 D) $1711.70
$1316.69
A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan? A) $1663.45 B) $1814.67 C) $1965.89 D) $1512.22
$1512.22
8) You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years? A) $10,062.20 B) $20,124.40 C) $16,770.33 D) $23,478.46
$16,770.33
Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________. A) $80,232 B) $160,463 C) $112,324 D) $176,509
$160,463
You are purchasing a new home and need to borrow $260,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.80% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 6.50% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $5200 to cover points you are paying the lender. Assuming you pay the points and borrow from the mortgage lender at 6.50%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________. A) $1844 B) $1676 C) $2011 D) $2347
$1676
Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make? A) $18,653.76 B) $22,384.51 C) $26,115.26 D) $29,846.02
$18,653.76
A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan? A) $19,433 B) $15,546 C) $23,319 D) $27,206
$19,433
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________. A) $22,000 B) $20,000 C) $24,000 D) $28,000
$20,000
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years? A) $18,111 B) $27,167 C) $31,695 D) $22,639
$22,639
Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pays interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four yearsʹ time? A) $176 B) $308 C) $220 D) $352
$220
You are purchasing a new home and need to borrow $380,000 from a mortgage lender. The mortgage lender quotes you a rate of 5.75% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 5.45% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $7600 to cover points you are paying the lender. Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________. A) $2439 B) $2661 C) $2218 D) $3105
$2218
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $240,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4800 (paid at the end of each month). Your firm can borrow at 7.80% APR with quarterly compounding. The present value (PV) of the lease payments for the delivery truck is closest to ________. A) $190,506 B) $238,132 C) $285,758 D) $333,385
$238,132
A small foundry agrees to pay $220,000 two years from now to a supplier for a given amount of coking coal. The foundry plans to deposit a fixed amount in a bank account every three months, starting three months from now, so that at the end of two years the account holds $220,000 . If the account pays 12.5% APR compounded monthly, how much must be deposited every three months? A) $24,602 B) $27,063 C) $29,523 D) $31,983
$24,602
The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________. A) $3010 B) $2408 C) $3612
$3010
Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000 . He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan? A) $244,965 B) $428,689 C) $306,206 D) $612,412
$306,206
A truck costing $111,000 is paid off in monthly installments over four years with 8.10% APR. After three years the owner wishes to sell the truck. What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck? A) $24,956 B) $37,434 C) $31,195 D) $43,673
$31,195
Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%? A) -$3189.80 B) -$5907.57 C) 5907.57 D) $3189.80
$3189.80
Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770 . How much was the loan amount for this extension? A) $33,436 B) $40,123 C) $46,810 D) $53,497
$33,436
What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly? A) $353,818 B) $389,200 C) $424,581 D) $459,963
$353,818
Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)? A) $314,366 B) $471,549 C) $392,957 D) $432,000
$392,957
What is the present value (PV) of an investment that will pay $500 in one yearʹs time, and $500 every year after that, when the interest rate is 10%? A) $2500 B) $4000 C) $3000 D) $5000
$5000
A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%? A) $2695 B) $4312 C) $5390 D) $3234
$5390
A business promises to pay the investor of $6000 today for a payment of $1500 in one yearʹs time, $3000 in two yearsʹ time, and $3000 in three yearsʹ time. What is the present value of this business opportunity if the interest rate is 6% per year? A) $603.94 B) $301.97 C) $724.73 D) $966.30
$603.94
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________. A) $61,303 B) $30,652 C) $42,912 D) $67,433
$61,303
A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is 11 %? A) $3,840,628.87 B) $5,376,880.42 C) $6,913,131.97 D) $7,681,257.74
$7,681,257.74
An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525 . How much cash will the investor have from the sale, once the mortgage is paid off? A) $57,216 B) $100,129 C) $71,521 D) $143,041
$71,521
A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten yearsʹ time. How much greater is the present value (PV) of this payment if the interest rate is 9% rather than 8%? A) $7178 B) $5742 C) $8613 D) $10,049
$7178
A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan? A) $57,933 B) $86,899 C) $72,416 D) $101,382
$72,416
An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year? A) $39,614 B) $63,382 C) $79,228 D) $95,074
$79,228
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in two yearsʹ time, what is the present value (PV) of that cash flow? A) $76,518 B) $114,777 C) $133,906 D) $95,647
$95,647
You are considering purchasing a new automobile with the upfront cost of $26,000 or leasing it from the dealer for a period of 48 months. The dealer offers you 2.80% APR financing for 48 months (with payments made at the end of the month). Assuming you finance the entire $26,000 through the dealer, your monthly payments will be closest to ________. A) $459 B) $688 C) $573 D) $802
%573
On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B? A) -$1.33 B) -$0.67 C) $1.06 D) $1.60
-$1.33
The net present value (NPV) of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________. A) $91.37 B) $137.05 C) $114.21 D) -$114.21
-114.21
In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009? A) -2.6% B) 2.6% C) -2.8% D) 2.8%
-2.6%
A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month? A) 0.56% B) 5.63% C) 0.51% D) 0.61% E) 0.66%
.56%
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $300,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to ________. A) 0.5298 % B) 0.7947 % C) 0.6623 % D) 0.6667 %
.6623%
If the interest rate is 9%, the one-year discount factor is equal to ________. A) 0.090 B) 1.090 C) 0.917 D) 0.981
0.917
A pottery factory purchases a continuous belt conveyor kiln for $68,000 . A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22 , over what term is this loan being paid? A) 8 years B) 9 years C) 10 years D) 11 years
10 years
Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt? A) 112 months B) 113 months C) 120 months D) 122 months
122 months
Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31 , then the four year risk-free interest rate is closest to ________. A) 4.01% B) 3.51% C) 5.01% D) 4.51%
4.51%
What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time? A) 37% B) 44% C) 43% D) 40%
40%
Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ? A) 4.3 years B) 6.3 years C) 5.3 years D) 7.3 years
5.3 years
A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60% APR. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage? A) 5.5 years B) 8.6 years C) 10.2 years D) 12.8 years
5.5 years
Joseph buys a Hummer for $59,000 , financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions? A) 59.57 months B) 57.07 months C) 54.57 months D) 60.57 months
57.07 months
A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton? A) 3010 U.S. dollars per ton B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR
5888 Brazilian reals per ton, with $0.507 U.S = 1 BRL
If the one-year discount factor is equal to 0.94340, the interest must be equal to ________, A) 3.0% B) 4.8% C) 5.5% D) 6.0%
6%
You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________. A) 5.0% B) 7.1% C) 6.0% D) 8.2%
6.0%
Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282 . Which of the following loans offers monthly payments closest to $282 ? A) 7.8% APR for 36 months B) 7.8% APR for 48 months C) 7.8% APR for 60 months D) 7.8% APR for 72 months
7..8% APR for 72 months
A house costs $148,000 . It is to be paid off in exactly ten years, with monthly payments of $1737.54 . What is the APR of this loan? A) 6.25% B) 5.25% C) 7.25% D) 8.25%
7.25%
Elinore is asked to invest $5100 in a friendʹs business with the promise that the friend will repay $5610 in one year. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case? A) 7% B) 8% C) 9% D) 10%
8%
if money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment? A) 7 years B) 8 years C) 9 years D) 11 years
9 years
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firmʹs borrowings is closest to ________. A) 9.00% B) 7.45% C) 11.17% D) 9.31%
9.31%
Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it? A) Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. B) Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven. C) Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven. D) Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.
Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.
Which of the following statements is FALSE? A) The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.
For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.
A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now? A) He will earn $1,980,000 less if he releases the wine now. B) He will earn $328,972 more if he releases the wine now. C) He will earn $328,972 less if he releases the wine now. D) He will earn $356,400 more if he releases the wine now.
He will earn $328,972 more if he releases the wine now.
Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct? A) The purchasing power of investors in these bonds grew over the course of the year. B) The real interest rate for investors in these bonds was greater than the rate of inflation. C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. D) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.
Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.
What is the effective annual rate (EAR)? A) It is the interest rate that would earn the same interest with annual compounding. B) It is the ratio of the number of the annual percentage rate to the number of compounding periods per year. C) It is the interest rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction). D) It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.
It is the interest rate that would earn the same interest with annual compounding.
When the costs of an investment come before that investmentʹs benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors? A) It will make it more attractive, since it will increase the investmentʹs net present value (NPV). B) It will make it more attractive, since it will decrease the investmentʹs net present value (NPV). C) It will make it less attractive, since it will increase the investmentʹs net present value (NPV). D) It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).
It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).
An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright? A) Leasing costs $116 more than buying. B) Leasing costs $174 more than buying. C) Leasing costs $145 more than buying. D) Leasing costs $289 more than buying.
Leasing costs $145 more than buying.
In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe? A) Long-term interest rates will tend to be higher than short-term interest rates. B) Long-term interest rates will be about the same as short-term interest rates. C) Both long- and short-term interest rates would be expected to fall sharply. D) No relative change in short and long term interest rates could be predicted.
Long-term interest rates will tend to be higher than short-term interest rates.
If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets.ʺ A) The Net Present Value rule B) The Law of One Price C) The Valuation Principle D) The Time Value of Money
The Law of One Price
Which of the following statements is FALSE about interest rates? A) As interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of cash flows. C) The annual percentage rate indicates the amount of simple interest earned in one year. D) The annual percentage rate indicates the amount of interest including the effect of compounding.
The annual percentage rate indicates the amount of interest including the effect of compounding.
Which of the following situations would result in lowering of interest rates by the banking authority of a country? A) The economy is slowing down. B) Inflation is rising rapidly. C) The level of investment is quite high. D) The rate of savings is quite low.
The economy is slowing down.
Which of the following statements is FALSE? A) The actual return kept by an investor will depend on how the interest is taxed. B) The equivalent after-tax interest rate is r(1 - τ). C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities. D) It is important to use a discount rate that matches both the horizon and the risk of the cash
The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities.
Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by? A) The monthly payment will increase by $104.79. B) The monthly payment will decrease by $104.79 C) The monthly payment will increase by $343.12. D) The monthly payment will decrease by $343.12.
The monthly payment will DECREASE by $104.79
Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE? A) The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments. B) The total amount paid (principal and interest) will increase with $1,000 monthly payment compared to $900 monthly payments. C) The total interest expense will increase with $1,000 monthly payment compared to $900 monthly payments. D) The total principal paid will decrease with $1,000 monthly payment compared to $900 monthly payments.
The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments.
You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. B) The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. C) The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. D) No comparison can be madewe need to know the cash flows to calculate the present
The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
Historically, why were high inflation rates associated with high nominal interest rates? A) Individuals will spend more when they expect their investments to increase in value. B) Growth in investment and savings is encouraged when consumers are judged to be overspending. C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
Which of the following best describes the valuation principle? A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.
The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
Which of the following best describes the annual percentage rate? A) the quoted interest rate which, considered with the compounding period, gives the effective interest rate B) the effective annual rate, after compounding is taken into account C) the discount rate, when compounded more than once a year or less than once a year D) the discount rate, when effective annual rate is divided by the number of times it is compounded in a year
he quoted interest rate which, considered with the compounding period, gives the effective interest rate
Which of the following statements regarding the cost-benefit analysis is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.
in the absence of competitive markets, we can use one-sided prices to determine exact cash values
What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? A) inverted; higher B) normal; higher C) inverted; lower D) normal; lower
inverted; lower
Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true? A) Investment X has a higher growth rate than Investment Y. B) Investment X has a lower growth rate than Investment Y. C) The answer cannot be determined without knowing the interest rate for both investments. D) With the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value.
investment X has a higher growth rate than investment Y
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? A) Investment X has a higher present value. B) Investment Y has a higher present value. C) Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. D) No comparison can be madewe need to know the interest rate to calculate the present value.
investment Y has a higher value
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow? A) It will cause the present value to fall. B) It will cause the present value to rise. C) It will have no effect on the present value. D) The effect cannot be determined with the information provided.
it will cause the present value to fall
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow? A) It will cause the future value to fall. B) It will cause the future value to rise. C) It will have no effect on the future value. D) The effect cannot be determined with the information provided.
it will have no effect on the future value
Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon? A) Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities. B) The return from U.S. Treasury securities generally attracts less tax than the returns from other investments. C) The opportunity cost of capital for a given horizon is generally based on U.S. Treasury securities with that same horizon. D) U.S. Treasury securities are generally considered to be the best alternative to most investments.
most investment opportunities bear far greater risk than those offered by US Treasury securities
Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutyʹs marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one? A) No, since costs are $7,800,000 more than benefits. B) No, since costs are $6,800,000 more than benefits. C) Yes, since the benefits are $3,400,000 more than the costs. D) Yes, since the benefits are $7,300,000 more than the costs.
no, since the costs are $6,800,000 more than the benefits
Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year? A) one that pays $900 now B) one that pays $1080 in two years C) one that pays $1350 in five years D) one that pays $1620 in ten years
one that pays $1350 in five years
Which of the following accounts has the highest EAR? A) one that pays 5.4% every six months B) one that pays 1.0% per month C) one that pays 9.6% per year D) one that pays 2.4% every three months
one that pays 1.0% per month
Which of the following is/are TRUE? I. The EAR can never exceed the APR. II. The APR can never exceed the EAR. III. The APR and EAR can never be equal.
only II is true
Given the above term structure of interest rates, which of the following is most likely in the future? Option I: Interest rates will fall. Option II: Economic growth will slow. Option III: Long-term rates will rise relative to short term rates.
option I only
A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?
semi-annual compounding
The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation? A) The State Bank would experience a surge in demand for loans. B) The Colonial Bank would experience a surge in demand for deposits. C) The State Bank would experience a fall in demand for deposits. D) The Colonial Bank would experience a surge in demand for loans.
the colonial bank would experience a surge in demand for loans
What, typically, is used to calculate the opportunity cost of capital on a risk-free investment? A) the best expected return offered in any investment available in the market B) the interest rate on U.S. Treasury securities with the same term C) the interest rate of any investments alternatives that are available D) the best rate of return offered by U.S. Treasury securities
the interest rate of US Treasury securities with the same term
Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate? A) There is a greater chance that inflation may fall in a longer time-frame. B) The penalties for closing out a long term loan early make them unattractive to many investors. C) Long-term loans typically have ongoing costs that accumulate over the life of the loan. D) The loan values are very sensitive to changes in market interest rates.
the loan values are very sensitive to changes in market interest rates
A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%? A) $1456 B) $19,867 C) $21,320 D) There is no solution to this problem.
there is no solution
The yield curve is typically ________.
upward sloping
Which of the following statements regarding arbitrage and security prices is INCORRECT? A) We call the price of a security in a normal market the no-arbitrage price for the security. B) In financial markets it is possible to sell a security you do not own by doing a short sale. C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. D) The general formula for the no-arbitrage price of a security is Price(security) = PV (all cash flows paid by the security).
when a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds
13) In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r) + C2/(1 + r)2 + . . . . + Cn/(1 + r)n when determining the present value (PV) of a cash flow stream? A) when yield curves are flat B) when short-term and long-term interest rates vary widely C) when the inflation rate is high D) when the discount rate is high
when short term and long term interest rates vary widely
Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today? A) Yes, as the difference between the present value of selling now and selling in one year is $12,300 dollars today. B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today. C) Yes, as the difference between the present value of selling now and selling in one year is $9840 dollars today. D) No, as the difference between the present value of selling now and selling in one year is - $8786 dollars today.
yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today.
An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made? A) No, because the investment will yield $82,840 less than putting the money in a bank. B) Yes, because the investment will yield $66,272 more than putting the money in a bank. C) Yes, because the investment will yield $74,556 more than putting the money in a bank. D) Yes, because the investment will yield $82,840 more than putting the money in a bank.
yes, because the investment will yield $82,840 more than putting the money in the bank
A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer? A) No, the costs are $1500 more than the benefits. B) No, the costs and the benefits are the same. C) Yes, the costs are $2500 less than the benefits. D) Yes, the costs are $2000 less than the benefits.
yes, the costs are $2000 less than the benefits
When computing a present value, which of the following is TRUE? A) You should adjust the discount rate to match the interval between cash flows. B) You should adjust the future value to match the present value. C) You should adjust the time period to match the present value. D) You should adjust the cash flows to match the time period of the discount rate.
you should adjust the discount rate to match the interval between cash flows
