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Exam Review

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1. The amount of simple interest is equal to the product of the principal times ____
times ____.
a. (1 + rate per time period), the number of time periods
b. (1 + rate per time period), (the number of time periods -1)
c. rate per time period, the number of time periods
d. rate per time period, (the number of time periods - 1)
c. rate per time period, the number of time periods
2. The present value of a single amount can be represented as
a. PV0 = FVn(PVIFi,n)
b. PV0 = FVn(PVIFAi,n)
c. PV0 = FVn[1/(1 + i)n]
d. a and c
d. a and c
The basic future value equation is given by
a. FVn = PV0(PVIFi,n)
b. FVn = PV0(FVIFAi,n)
c. FVn = PV0(1/(1+ i)n)
d. FVn = PV0(FVIFi,n)
d. FVn = PV0(FVIFi,n)
2. The process of finding present values is frequently called
a. annualizing
b. compounding
c. discounting
d. leasing
c. discounting
3. The values shown in ordinary annuity tables (either present value or compound
value) can be adjusted to the annuity due form by ____ the ordinary annuity interest
factor by ____.
a. dividing, (1 + i)
b. dividing, (1 + i)n
c. multiplying, (1 + i)
d. multiplying, (1 + i)n
c. multiplying, (1 + i)
4. A(n) ____ is a financial instrument that agrees to pay an equal amount of money per
period into the indefinite future (i.e. forever)
a. annuity
b. annuity due
c. sinking fund
d. perpetuity
d. perpetuity
5. Finding the discounted current value of $1,000 to be received at the end of each of
the next 5 years requires calculating the
a. future value of an annuity
b. future value of an annuity due
c. present value of an annuity
d. present value of an annuity due
c. present value of an annuity
6. Finding the compound sum of $1,000 to be received at the beginning of each of the
next 5 years requires calculating the
a. future value of an annuity
b. present value of an annuity
c. future value of an annuity due
d. present value of an annuity due
c. future value of an annuity due
7. When using a present value of an annuity table(e.g.,Table IV at the back of the book),
a. payments are assumed to be made at the beginning of each period
b. PVIFA factors decrease with an increase in the interest rate
c. PVIFA factors increase with an increase in the number of periods
d. b and c only
d. b and c only
8. When using a future value of an annuity table (e.g., Table III at the back of the book),
a. payments are assumed to be made at the end of each period
b. FVIFA factors increase with an increase in the interest rate
c. FVIFA factors increase with an increase in the number of periods
d. all of the above
d. all of the above
9. An annuity due is one in which
a. payments or receipts occur at the end of each period.
b. payments or receipts occur at the beginning of each period.
c. payments or receipts occur forever.
d. cash flows occur continuously.
b. payments or receipts occur at the beginning of each period.
10. You have just won a $5 million lottery to be received in twenty annual equal
payments of $250,000. What will happen to the present value of your winnings if the
interest rate increases during the next 20 years.
a. it will be worth less
b. it will be worth more
c. it will not change
d. it will increase during the first ten years
a. it will be worth less
11. You have just calculated the present value of the expected cash flows of a potential
investment. Management thinks your figures are too low. Which of the following actions
would improve the present value of your cash flows?
a. extend the cash flows over a longer period of time
b. increase the discount rate
c. decrease the discount rate
d. extend the cash flows over a longer period of time, and decrease the discount rate
d. extend the cash flows over a longer period of time, and decrease the discount rate
12. If the present value of a given sum is equal to its future value, then
a. the discount rate must be very high
b. there is no inflation
c. the discount rate must be zero
d. none of the answers is correct
c. the discount rate must be zero
13. Using the "Rule of 72," about how long will it take a sum of money to double in value
if the annual interest rate is 9 percent?
a. 9 years
b. 7 years
c. 8 years
d. 10 years
c. 8 years
14. The present value of an ordinary annuity is the
a. sum of the present value of a series of equal periodic payments
b. future value of an equal series of payments
c. receipt of equal cash flows for a specified amount of time
d. sum of the future value of an equal series of payments
a. sum of the present value of a series of equal periodic payments
15. When a loan is amortized over a five year term, the
a. rate of interest is reduced each year
b. amount of interest paid is reduced each year
c. payment is reduced each year
d. balance is paid as a balloon payment in the fifth year
b. amount of interest paid is reduced each year
16. Annuity due calculations are especially important when dealing with
a. term loans
b. lease contracts
c. capital investments
d. capital recovery problems
b. lease contracts
17. The more frequent the compounding the
a. greater the present value
b. greater the amount deposited
c. greater the effective interest rate
d. lesser the future value
c. greater the effective interest rate
18. The effective rate of interest will always be ____ the nominal rate.
a. greater than
b. equal to
c. less than
d. equal to or greater than
d. equal to or greater than
19 ____ is interest that is paid not only on the principal, but also on any interest earned
but not withdrawn during earlier periods.
a. basic interest
b. simple interest
c. future interest
d. compound interest
d. compound interest
20. Which of the following is worth more?
a. Future value of an ordinary annuity of PMT dollars per year for n years discounted at i
percent.
b. Future value of an annuity due of PMT dollars per year for n years discounted at i
percent.
c. Both are worth the same amount.
d. Cannot be determined from the information given.
b. Future value of an annuity due of PMT dollars per year for n years discounted at i
percent.
21. The annual effective rate of interest (ieff ) is a function of:
a. the annual nominal rate of interest (inom)
b. the number of compounding intervals per year (m)
c. the number of years (n)
d. a and b
d. a and b
22. More frequent compounding results in ____ future values and ____ present values
than less frequent compounding at the same interest rate.
a. higher, higher
b. lower, higher
c. higher, lower
d. lower, lower
c. higher, lower
23. The present value of a(n) ____ is determined by dividing the annual cash flow by
the interest rate.
a. annuity
b. annuity due
c. perpetuity
d. lease
c. perpetuity
24. An annuity that begins more than 1 year in the future is referred to as a(n) ____.
a. perpetuity
b. annuity due
c. uneven annuity
d. deferred annuity
d. deferred annuity
25. The ____ of a perpetual stream of equal, annual returns (PMT) discounted at i% per
year is equal to ____.
a. present value; PMT/i
b. present value; PMT ⋅ i
c. future value; PMT/i
d. future value; PMT ⋅ i
a. present value; PMT/i
26. Annuity due calculations are most common when dealing with:
a. cash dividends
b. loan repayments
c. lease contracts
d. interest payments
c. lease contracts
27. The payment or receipt of a series of equal cash flows per period, at the end of each
period, for a specified amount of time is called a(n):
a. annuity due
b. perpetuity
c. ordinary annuity
d. simple interest
c. ordinary annuity
28. The difference between an ordinary annuity and an annuity due is:
a. the interest rate
b. the timing of the payments
c. the amount of the payments
d. the number of periods
b. the timing of the payments
29. ____ is the return earned by someone who has forgone current consumption.
a. the present value
b. principle
c. an annuity
d. interest
d. interest
30. Determine how much $1,000 deposited in a savings account paying 8%
(compounded annually) will be worth after 5 years.
a. $5,526
b. $ 784
c. $1,400
d. $1,469
d. $1,469
The primary operating goal of a publicly-owned firm interested in serving its
stockholders should be to
-To maximize the stock price per share over the long run, which is the stocks intrinsic
value
What's the present value of a 4-year ordinary annuity of $2,250 per year plus an
additional $3,000 at the end of Year 4 if the interest rate is 5%?
N=4
I/YR=5%
PMT=2,250
FV=3,000
Looking for PV=10,446
Suppose you just won the state lottery, and you have a choice between receiving
$2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one
year from today. What rate of return is built into the annuity? Disregard taxes.
N=20
PV=-2,550,000
PMT=250,000
FV=0
Looking for I/YR=7.49
Your father is about to retire, and he wants to buy an annuity that will provide him with
$85,000 of income a year for 25 years, with the first payment coming immediately. The
going rate on such annuities is 5.15%. How much would it cost him to buy the annuity
today?
The PV of the annuity is the sum of the PV of the future 24 yearly payments from t=1 to
t=24 and the first payment at t=0.
N: 24
I/YR: 5.15%
PMT: 85,000
FV: 0
PV = -1,155,959.53
Add the price for the first payment:
Total PV = -(1,155,959.53+85,000) = -1,240,959.53 or -1,240,960
Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20.
What was the growth rate in earnings per share (EPS) over the 10-year period?
N: 10
PV: -0.50
PMT: 0
FV: 2.20
I/YR = 15.97%
What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85
per year?
Cost (PV): 950
PMT: 85
I/YR = PMT/PV = 8.95%
Your bank account pays an 8% nominal rate of interest. The interest is compounded
quarterly. Which of the following statements is CORRECT?
The periodic rate of interest is 2% and the effective rate of interest is greater than 8%
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