Time of Value questions:
1- Which of the following statements is CORRECT?
A time line can show some of the cash flows that appear in the form of annuity payments, but none can be uneven amounts.
To visualize a complex problem prior to doing actual calculation, time lines are very useful.
Time lines cannot be constructed if an investment offers some of its cash flows annually and some quarterly.
Time lines can only be constructed for annuities where the payments occur at the end of the periods.
2- An investment offers 6.5% nominal rate of interest, compounded quarterly. Which of the following statements is CORRECT?
The periodic rate of interest is 6.5% and the effective rate of interest is greater than 6.5%.
The periodic rate of interest is 3.25% and the effective rate of interest is 6.5%.
The periodic rate of interest is 3.25% and the effective rate of interest is greater than 6.5%.
The periodic rate of interest is 1.625% and the effective rate of interest is greater than 6.5%.
3- You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?
Bank 1; 4.10% with annual compounding.
Bank 2; 4.0% with monthly compounding.
Bank 3; 4.0% with annual compounding.
Bank 4; 4.0% with quarterly compounding.
Bank 5; 4.0% with daily (365-day) compounding.
4- Which of the following statements is CORRECT?
You are considering to invest in an annuity. You conclude that the present value of a 4-year, $400 ordinary annuity will exceed the present value of a 4-year, $400 annuity due.
You are investing in a fund that offers a nominal annual rate of 5%. Its effective rate will never be less than 5%.
You are investing in a fund that offers annual interest payments. Its effective, periodic, and nominal rates of interest will all be different.
You are investing in a fund that offers a nominal rate of 4% with semi-annual payments. Its effective rate that is smaller than 4%.
5- 2014 revenue of Celine, Inc. was $400,000. If sales grow at 5% per year, how large will the revenue be 6 years later?
$424,000
$520,000
$535,290
$536,038
6- How much would $20,000 due in 30 years be worth today if the discount rate were 5%?
$666.67
$4,627.55
$86,438.85
$571,428.57
7- In ten years, Scuty Inc.'s EPS grew from $1.05 to $2.43. What is the growth rate in earnings per share (EPS) over the 10-year period?
2.31%
8.75%
11.23%
13.8%
8- Alacia has $4,000 invested in a bank that pays 9% annually. How long will it take for his funds to double?
8.04
9.01
9.04
10.05
9- You want to buy a luxury car 10 years from now, and you plan to save $6,000 per year, beginning one year from today. You will deposit your savings in an account that pays 4% interest. How much will you have just after you make the last deposit, 10 years from now?
$60,000.00
$62,400.00
$72,036.64
$74,918.11
10- You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $10,000 per year, beginning immediately. You will make 4 deposits in an account that pays 2.0% interest. Under these assumptions, how much will you have 4 years from today?
$40,800.00
$42,000.00
$42,040.40
$42,080.90
11- You have a chance to buy an annuity that pays $4,000 per year at the end of each year for 5 years. You could earn 4% on your money in other investments with equal risk. What is the most you should pay for the annuity?
$14,892.99
$17,807.29
$18,519.58
$21,104.57
12- What's the present value of a perpetuity that pays $700 per year if the appropriate interest rate is 3%?
$21,000.00
$21,111.11
$23,222.22
$23,333.33
13- You have inherited $200,000 and decided to invest it at 4.00% per year. How much could you withdraw at the end of each of the next 10 years?
$23,709.80
$24,658.19
$57,358.33
$63,094.16
14- Your uncle has $200,000 invested at 4% and he now wants to retire. He wants to withdraw $18,825.87 at the end of each year, beginning at the end of this year. He also wants to have $20,000 left to give you when he ceases to withdraw funds from the account. What is the maximum number of $18,825.87 withdrawals that he can make and still have $20,000 left in the account?
12
13
14
17
15- What annual payment must you receive in order to earn a 5% rate of return on a perpetuity that has a cost of $4,000?
$20
$200
$400
$80,000
16- What is the present value of the following cash flow stream at a rate of 5.0%?
Years Cash Flow
0 $0
1 $2,000
2 $3,000
3 $0
4 $4,000
$7,916.66
$7,989.35
$8,344.56
$9,000.00
17- Find the future value of $2,000 after 6 years if the appropriate interest rate is 4%, compounded semiannually.
$2,274
$2,400
$2,480
$2,536
18- Visa and other major credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.48%, with interest paid monthly, what is the card's effective annual rate?
18.48%
19.23%
20.13%
21.14%
19- Your community bank offers to lend you $20,000 for one year at a nominal annual rate of 5.50%, but you must make interest payments at the end of each month and then pay off the $20,000 principal amount at the end of the year. What is the effective annual rate on the loan?
5.50%
5.64%
5.79%
5.89%
20- Your uncle paid $25,000 (CF at t = 0) for an investment that promises to pay $5,000 at the end of each of the next 5 years, then an additional lump sum payment of $4,000 at the end of the 5th year. What is the expected rate of return on this investment?
4.71%
5.65%
6.33%
6.59%
Bonds Questions:
1- Junk bonds are high risk but also high yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength. A rational investor should never invest in junk bonds due to their high risk.
True
False
2- A bond has a $1,000 par value, makes annual interest payments of $40, has 30 years to maturity, cannot be called, and is not expected to default. The current market interest rate in 4.5%. The bond should sell at a premium.
True
False
3- Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
Market interest rates decline sharply.
The company's bonds are downgraded.
Market interest rates rise sharply.
The company's financial situation deteriorates significantly.
4- A large corporation is planning to issue bonds with one annual coupon payment of 4%. The bonds will have a par value of $1,000, a current price of $1,040, and they will mature in 30 years. What is the yield to maturity on these bonds?
3.78%
3.85%
3.92%
4.00%
5- You are planning to purchase a 15-year bond with an annual coupon rate of 4%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 5% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
$895.35
$905.81
$916.96
$1,027.86