Test Bank for Final Exam
Part-1: Multiple Choice
Future Value is also known as:
A. Single Period Value
B. Accumulation Value
C. Compound Value 
D. Time Value
The current value of future cash flows discounted at the discount rate is:
A. future value
B. present value interest factor
C. compounding value
D. present value 
Interest earned on only the original principal amount invested is:
A. present value interest
B. simple interest 
C. time value of money
D. beginning interest
Present value is:
A. FV * (1+r)t
B. FV / (1+r)t 
C. FV / (1-r)t
D. none of the given answers
The actual rate of interest to be earned or paid is known as:
A. stated interest rate
B. nominal interest rate
C. effective annual interest rate 
D. interest on interest rate
EAR stands for:
A. earning annual rates
B. effective annual return
C. effective annual rates 
D. none of the given answers
NIR is also known as:
A. effective annual rate
B. stated interest rate
C. normal interest rate
D. both stated interest rate and nominal interest rate 
The difference between net cash inflow and net cash outflow is known as:
A. internal rate of return
B. discounted cash flow
C. net present value 
D. capital budgeting
The discount rate that makes the NPV of an investment zero is known as the:
A. discounted rate of return
B. average rate of return
C. required rate of return
D. internal rate of return 
An investment is accepted if the IRR exceeds the:
A. cost of capital (interest rate on load and equity) 
B. expected rate of return
C. nominal rate of return
D. none of the above
An investment is accepted if the value of NPV is:
A. zero
B. negative
C. positive 
D. none of the above
A project whose NPV equals zero:
A. should be rejected
B. should be accepted
C. should be indifference (may be accepted or rejected). 
D. None of the above
Of the different methods used in evaluating projects, ______ is considered the best.
A. IRR
B. NPV 
C. ARR
D. both IRR and NPV
The IRR is sometimes called:
A. the true rate of return
B. the overall rate of return
C. the DCF (Discount Cash Flow) return 
D. the average return
Coupon rate is the:
A. annual coupon divided by the face value of a share 
B. annual coupon divided by the face value of a debenture
C. annual coupon divided by the selling price of a debenture
D. annual coupon divided by the selling price of a share
All other things being equal, the longer the time to maturity:
A. the lower the coupon rate
B. the lower the price of a debenture
C. the higher the coupon rate
D. the greater the interest rate risk 
Salvage value means
A. the face value
B. depreciated value
C. value after paying taxes
D. estimated value on its sale at the end of its useful life 
All other things being equal, the lower the coupon rate:
A. the longer the time to maturity
B. the higher the price of the debenture
C. the lower the price of the debenture
D. the greater the interest rate risk 
Periodic distributions of profit by a company to its shareholders are:
A. interest
B. coupon
C. dividends 
D. both interest and coupon
The internal rate of return on a bond is known as the:
A. required rate of return
B. coupon rate
C. discount rate
D. yield to maturity 
There is an inverse relationship between interest rates and:
A. coupon
B. bond prices 
C. term to maturity
D. face value
The debt securities that issued and backed by the centre government is called:
A. treasuries 
B. agencies
C. munis
D. corporates
The debt securities that issued by local government (Municipal corporation) is
called:
A. treasuries
B. agencies
C. munis 
D. corporates
The debt securities that issued by corporations is called:
A. treasuries
B. agencies
C. munis
D. corporates 
Four distinct categories of government bond is known as:
A. treasury bills, treasury notes, treasury bonds and treasury inflation protected
securities.
B. treasuries, agencies, minus and corporates
C. coupon payment, face value, maturity and coupon rate
D. none of the above
If the market interest rate is the same as the coupon rate, the bond’s value is:
A. less than the face value.
B. more than the face value
C. the same as the face value 
D. none of the given answers
If the market interest rate rises above the coupon rate, the bond’s value:
A. rises above the face value
B. falls below the face value 
C. equal the face value
D. none of the above
If the market interest rate falls below the coupon rate, the bond’s value:
A. rises above the face value 
B. falls below the face value
C. equal the face value
D. none of the above
Total return has two components: one of them is the dividend yield and the other is:
A. required return
B. current price
C. capital gains yield 
D. cash dividend rate
Coupon payment is ------ at the end of each term.
A. the stated interest payment 
B. the principal amount payment
C. the salvage value
D. depreciated value
Bonds/shares are issued when an organisation/company wishes
to borrow money from
A. to donate to the society
B. to pay money to the public
C. to borrow money from the public 
D. none of the above
The compounding period could be
A. yearly only
B. quarterly only
C. monthly only
D. yearly, semi-annually, quarterly, monthly, weekly, and daily 
Total return (r) can be shown as:
D
A. r  0  g
B. r 
C. r 
P0
D1
P0
D1
P0
g

D. none of the above
The formula to calculate Bond value isA.
B.
C.
D.
C
1 
1/ 1  r t 

F

 
r
1  r t
C
1 
1/ 1  r t 

F


1  r 
r
C
1 
1/ 1  r t 

F

 
r
r - g t

1 
1/ 1  r t 
F


r
1  r t

A share’s cash dividend divided by its current price is known as:
A. dividend growth rate
B. dividend Yield 
C. coupon payment
D. total return
The formula to calculate Share price with zero growth dividend isA.
P0 
D1
r -g
B.
P0 
D

r
D
g
D. none of the above
C.
P0 
The formula to calculate Share price with constant growth dividend isC.
P0 
D. P0 
C. P0 
D.
D (1  g )
0
r -g
D
r
D
g
none of the above
D (1  g )
The model P0  0
r -g
that determines the current share price of a share is the
A. growth model
B. valuation model
C. cash flow model
D. constant dividend growth model 
When an asset is sold at a price (salvage value) different from the book value of the
asset, you will have a(n):
A. loss on sale
B. gain on sale
C. gain or loss on sale 
D. opportunity cost
When an asset’s salvage value more than the book value of the asset, you will have
a(n):
A. loss on sale
B. gain on sale 
C. gain or loss on sale
D. opportunity cost
When an asset’s salvage value less than the book value of the asset, you will have
a(n):
A. loss on sale 
B. gain on sale
C. gain or loss on sale
D. opportunity cost
True/False
The amount of an investment worth after one or more periods is known as
compound value.
A. True 
B. False
PV stands for Present Value of Investment.
A. True 
B. False
Discount rate is the interest rate that reduces a given future value to an equivalent
present value.
A. True 
B. False
The actual rate of interest to be earned or paid is the effective annual interest rate.
A. True
B. False 
A simple way of amortising a loan is to have the borrower pay the interest each
period plus some principal amount.
A. True 
B. False
An investment should be rejected if the NPV is positive and accepted if the NPV is
negative.
A. True
B. False 
(Correct answer: accepted, rejected)
An investment is acceptable if its calculated IRR is less than the cost of capital
(interest rate on loan and equity).
A. True
B. False 
(Correct answer: more)
A dollar received today is more value than a dollar received in the future.
A. True 
B. False
The process of diversification can reduce risk.
A. True 
B. False
The market value and the book value are always the same.
A. True
B. False 
(Correct answer: could be more or less)
Maturity is the specified date at which the principal amount of a bond is paid.
A. True 
B. False
Dividend on a preference share has zero growth and is constant through time.
A. True 
B. False
Under the assumption that the dividend has a zero growth rate, the per share value
is given by P0 = D / r.
A. True 
B. False
The number of years until the face value is paid is called the bond’s time to
maturity.
A. True 
B. False
When an asset is sold at a different price to the book value, you must have a gain on
sale of the asset.
A. True
B. False 
(Correct answer: may gain or loss)
PROBLEM SOLUTIONS
Q1.
A local bank is offering 5% interest per year on savings accounts. If you
deposit $700 today how much will you have in two years? How much will
you have in 3 years?
Answer:
Manual Solution
FV = 700*(1.05)2 = $771.75
FV = 700*(1.05)3 = $810.34
By Using SHARP Financial Calculator
700 PV, 2 N, 5 I/Y, COMP FV
=> -771.75
700 PV, 2.5 N, 5 I/Y, COMP FV => -810.34
Q2.
$771.75
$810.34
A local bank is offering 5% interest rate on savings accounts and
compounded semi-annually. If you deposit $700 today how much will you
have in two years? How much will you have in 3 years?
Answer:
Manual Solution
Formula: FV = PV x (1 + r)t
(Here, 2 years (t) = 2 x 2 = 4 half-years, interest rate (r) = (52)/100 = 0.025)
FV = 700 x (1.025)4 = $772.67
If duration is 3 years then ‘t’ = 2 x 3 = 6 half-years
FV = 700 x (1.025)6 = $811.79
By Using SHARP Financial Calculator
700 PV, 2x2 N, 52 I/Y, COMP FV
700 PV, 3x2 N, 52 I/Y, COMP FV
Q3.
=> -772.67
=> -811.79
$772.67
$811.79
An investment is expected to return $10,000 in two years’ time. If the cost
of capital (interest rate) is assessed to be 12% per annum what is the
present value of the investment?
Answer:
Manual Solution
FV
The formula: PV = --------(1+r)t
(here FV = $10,000, r = 12% = 0.12, ‘t’ = 2)
10000
10000
PV = ------------- = ------------- = $7971.94
(1+0.12)2
(1.12)2
By Using SHARP Financial Calculator
10000 FV, 2 N, 12 I/Y, COMP PV,
Q4.
=>
-7,971.94
$7971.94
An investment is expected to return $10,000 in two years’ time. If the cost
of capital (interest rate) is assessed to be 12% per annum and
compounded quarterly. what is the present value of the investment?
Answer:
Manual Solution
FV
The formula: PV = --------(1+r)t
(here FV = $10,000, r = 12/4 % = 3% = 0.03, ‘t’ = 2x4 = 8)
10000
10000
PV = ------------- = ------------- = $7894.09
(1+0.03)8
(1.03)8
By Using SHARP Financial Calculator
10000 FV, 2x4 N, 124 I/Y, COMP PV, =>
Q5.
-7,894.09
$7894.09
If you get a loan from Samba Bank with 10% per annum nominal interest
rate (NIR) and compounded semi-annually, what is the effective rate
(EAR)?
Answer:
Manual Solution
 NIR 
EAR  1 
m 

m
1
(Here, m = 2 (sami-annually), nominal interest rate = 10/100 = 0.10)
2


EAR =  1 
  1  0.1025  10.25%
2


0.10
By Using SHARP Financial Calculator
2(x,y) 10 2ndF →EFF{PV}, => 10.25%
Q6.
A company is considering developing a new product. Net cash flows over
the next five years are estimated below. If the cost of capital (interest rate)
is 16% is this project worthwhile?
Year
0
1
2
3
4
Net
Cash Flows
-420,000
-105,000
71,000
420,000
240,000
Answer:
Manual Solution:
-420,000
-420,000 -420,000
PV of year 0 cash flow = --------------- = ------------- = ----------------- = -420,000
(1+0.16)0
(1.16)0
1
-105,000
-105,000
-105,000
PV of year 1 cash flow = --------------- = ------------- = ------------------ = -90,517.24
(1+0.16)1
(1.16)1
1.16
71,000
71,000
71,000
PV of year 2 cash flow = --------------- = ------------- = --------------- = 52,592.59
(1+0.16)2
(1.16)2
1.35
420,000
420,000
420,000
PV of year 3 cash flow = --------------- = ------------- = ----------------- = 269,230.77
(1+0.16)3
(1.16)3
1.56
240,000
240,000
240,000
PV of year 4 cash flow = --------------- = --------------- = -------------- = 132,596.69
(1+0.16)4
(1.16)4
1.81
So NPV = cash inflow – cash out flow
= (52,592.59+269,230.77+132,596.69) – (420,000+90,517.24)
= 454420.05 – 510517.24
= - 56097.19
So at 16% cost of capital, NPV is negative and this project is not profitable.
By using SHARP financial calculator
Press CFi 2ndF CA{MODE} to clear any previous cash flows.
+/- 420,000 Data
+/- 105,000 Data
71,000 Data
420,000 Data
240,000 Data
Press ON/C
Press 2ndF CASH{CFi}
Enter the interest rate: 16 ENT
Press ▼ COMP to compute the NPV
NPV = - 56097.19
The NPV is negative. Thus this project is not profitable.
Q7.
If ARAMCO has just paid a dividend of 50 cents per share (D0), which
is expected to grow at 5 per cent per annum (g). What price should
you pay for the share if the required rate of return (r) on the
investment is 12 per cent?
Answer:
Manual solution
With the constant growth of dividends, the price (value) of a share is:
𝑃0 =
𝐷0 ×(1+𝑔)
𝑟−𝑔
Here, D0 = 50 cents = $0.50
g = 5% = 0.05
r = 12% = 0.12
So, 𝑃0
=
0.50×(1+0.05)
0.12−0.05
=
0.50×1.05
0.07
=
0.525
0.07
= $7.5