The present value of a single future sum ________.
a. increases as the number of discount periods increases
b. is generally larger than the future sum
c. depends upon the number of discount periods
d. increases as the discount rate increases
2. U.S. Savings Bonds are sold at a discount. The face value of the bond represents its value on its
future maturity date. Therefore, ________.
a. the current price of a $50 face value bond that matures in 10 years will be greater than the
current price of a $50 face value bond that matures in 5 years
b. the current price of a $50 face value bond that matures in 10 years will be less than the current
price of a $50 face value bond that matures on 5 years
c. the current prices of all $50 face value bonds will be the same, regardless of their maturity
dates because they will all be worth $50 in the future
d. the current price of a $50 face value bond will be higher if interest rates increase
3. Suppose a corporation can change its depreciation method so that its tax payments will decrease by
$1,000 this year but increase by $1,000 next year.
a. The change will have no impact on the value of the company because its cash flow over time
will be the same.
b. The change will decrease the value of the company because investors don’t like changes in
c. The change will decrease the value of the company because lower tax payments this year
result from lower reported income.
d. The change will increase the value of the company because the value of the cash savings this
year exceeds the cost of the cash payments next year.
4. Bill borrowed $100,000 today that he must repay in 10 annual end-of-year installments of $14,902.
What annual interest rate is Bill paying on his loan?
You charged $1,000 on your credit card for Christmas presents. Your credit card company charges
you 16% annual interest, compounded monthly. If you make the minimum payments of $25 per
month, how long will it take ( to the nearest month) to pay off your balance?
a. 111 months
b. 58 months
c. 46 months
d. 40 months
A financial advisor tells you that you can make your child a millionaire if you just start saving early.
You decide to put an equal amount each year into an investment account that earns 8% interest per
year, starting on the day your child is born. How much would you need to invest each year (rounded
to the nearest dollar) to accumulate a million for your child by the time he is 50 years old? (Your last
deposit will be made on his 49th birthday.)
7. Assuming two investments have equal lives, a high discount rate tends to favor ________.
a. the investment with large cash flow early
b. the investment with large cash flow late
c. the investment with even cash flow
d. neither investment since they have equal lives
8. You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The annual interest rate is
closest to ________.
a. 1.5 percent
b. 12 percent
c. 18 percent
d. 24 percent
9. You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual
dividend of $5.50 per share forever. What is the rate of return on your investment?
What is the future value of $500 invested at 9.5% compounded quarterly for 12.5 years (round to
11. If you put $10,000 in an investment that returns 14 percent compounded monthly what would you
have after 12 years (round to nearest $10)?
If you put $10 in a savings account at the beginning of each month for 10 years, how much money
will be in the account at the end of the 10th year? Assume that the account earns 12% compounded
monthly and round to the nearest $1.
13. How much money must you pay into an account at the end of each of 20 years in order to have
$100,000 at the end of the 20th year? Assume that the account pays 6% per year, and round to the
14. To compound $100 quarterly for 20 years at 8%, we must use:
a. 40 periods at 4%
b. 5 periods at 12%
c. 10 periods at 4%
d. 80 periods at 2%
15. A zero coupon bond pays no annual coupon interest payments. When it matures at the end of 10 years
it pays out $1,000. If investors wish to earn 6.5% per year on this bond investment, what is the current
price of the bond?
16. You discover an antique in your attic that you purchased at an estate sale 10 years ago for $400. You
auction it on Ebay and receive $8,000 for your item. What annual rate of return did you earn?
. Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly.
Credit Onion is offering you a loan where payments are to be made semi-annually; the rate on the
loan is also 10%. Local Bank down the street is also offering a loan at 10% where the payments are
made quarterly. Which loan has the lowest annual cost?
a. Last National Bank’s loan
b. Local Bank’s loan
c. Credit Onion’s loan
d. All of the loans will have the same annual cost.
18. Which of the following conclusions would be true if you earn a higher rate of return on your
a. The greater the present value would be for any lump sum you would receive in the future.
b. The lower the present value would be for any lump sum you would receive in the future.
c. Your rate of return would not have any effect on the present value of any sum to be received in
d. The greater the present value would be for any annuity you would receive in the future.
19. (2 Points) Frank Zanca is considering three different investments that his broker has offered to him.
The different cash flows are as follows:
End of Year A B C
1 300 400
4 300 300 600
8 300 600
Frank questions his broker and wants to calculate the present value of each investment. Assuming a
15% discount rate, what is Frank's best alternative?
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