1. Assuming positive, nonzero risk-free interest rate, which of the following statement regarding time value of money is correct? A. Value of 100 dollar today = Value of 100 dollar 10 years ago B. Value of 100 dollar today > Value of 100 dollar 10 years ago C. Value of 100 dollar today < Value of 100 dollar 10 years ago D. Value of 100 dollar today ? Value of 100 dollar 10 years ago E. Value of 100 dollar today ? Value of 100 dollar 10 years ago.
2. Last year Thomson Inc’s earnings per share were $3.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Thomson’s EPS to double? A. 8.04 B. 10.33 C. 11.47 D. 12.75 E. 14.02
3. What is Ordinary Annuity? A. A series of cash flows where the amount varies from one period to next. B. An annuity whose payments occurs at the begin of each period C. An annuity whose payments occurs at the end of each period D. None of the above
4. What is the effective annual rate? A. An annual rate that ignores compounding effects B. The amount of interest charged each period C. An annual rate that takes compounding into consideration. D. A loan that is repaid in unequal payments over its life E. None of the above
5. Can effective rate be greater than the nominal rate? (Given the following notation: annual compounding: M=1, semiannual compounding: M=2) A. Yes, only when M=1 B. Yes, only when M>1 C. Yes, only when M>2 D. No, effective rate equals the nominal rate regardless of M values E. None of the above
6. Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.0% with annual compounding? A. $205 B. $216 C. $231 D. $240 E. $252
7. Amy now has $150. How much would she have after 10 years if she leaves it invested at 9% with semiannual compounding? A. $285 B. $313 C. $355 D. $362 E. $402 F. None of the above
8. Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? A. The periodic rate of interest is 2% and the effective rate of interest is 4%. B. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. C. The periodic rate of interest is 4% and the effective rate of interest is less than 8%. D. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. E. The periodic rate of interest is 8% and the effective rate of interest is also 8%.
9. Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year is $2.80. What was the growth rate in earnings per share (EPS) over the 10-year period? A. 15.17% B. 15.97% C. 16.77% D. 17.61% E. 18.80%
10. You are comparing two savings accounts. Account A has an APR of 4.65 percent and an EAR of 4.75 percent. Account B has an APR of 4.70 percent and an EAR of 4.70 percent. Given this, you should invest in account: A. A because it has the higher EAR. B. B because it has the higher APR. C. A because it has the lower APR. D. B because it has the lower EAR.
11. What’s PV of a perpetual $100 ordinary annuity at 5% A. 445 B. 811 C. 1562 D. 2000 E. 3500
12. A 20-year-old student wants to save $1,825 in a saving account every year with an expected annual return of 8%. All payments occur at the end of each year. How much money will she have when she is 65 years old? A. 609,343 B. 705,373 C. 546,343 D. 1,825 E. 912,343
13. An investment of $222 will increase in value to $313 in four years. The annual compound growth rate is closest to: A. 5.82% B. 6.38% C. 7.64% D. 8.97% E. 9.39% F. None of the above
14. Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year’s interest earnings is called: A. simple interest. B. complex interest. C. accrued interest. D. interest on interest. E. discounted interest.
15. What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 5%? A. $16,806 B. $17,690 C. $18,621 D. $20,348 E. $20,633
16. Suppose you inherited $275,000 and invested it at 8.00% per year. How much could you withdraw at the end of each of the next 20 years? A. $28,010 B. $29,959 C. $32,301 D. $33,030 E. $34,681
17. Which of the following statements is CORRECT? A. A time line is not meaningful unless all cash flows occur annually. B. Time lines are useful for visualizing complex problems prior to doing actual calculations. C. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. D. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
18. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value. A. True B. False
19. Normal yield curve is a downward-sloping yield curve. A. True B.False
20. Which of the following is not a determent of interest rate? A. Inflation Premium B. Liquidity Premium C. Time Preference Premium D. Default risk Premium
21. If the real risk-free rate is 1.5% and if inflation was expected to be 2.0% during the next year, the quoted rate of interest on one-year T-bills would be 1.5%. A. True B. False 22 Credit rations measure default risk. A. True B. False
23. What is yield curve? A. A graph showing the relationship between bond yields and real risk-free rate. B. A graph showing the relationship between bond yields and nominal risk-free rate. C. A graph showing the relationship between bond yields and maturities. D. A graph showing the relationship between bond yields and inflation premium. E. None of above.
24. What is normal yield curve? A. A yield curve where interest rates on long-term maturities are higher than rates on both short- and intermediate-term. B. A yield curve where interest rates on intermediate-term maturities are lower than rates on both short- and long-term maturities. C. A yield curve where real risk-free interest rates are higher than nominal risk-free interest rates. D. A yield curve where real risk-free interest rates are lower than nominal risk-free interest rates. E. None of above.
25. Given the following time value of money calculation formula: 1. FV=PV*(1+i)N 2. PV=FV*(1+i)N 3. FV=PV/(1+i)N 4. PV=FV/(1+i)N Which is/are correct? A. 1, 2 B. 3, 4 C. 2, 3 D. 1, 4 E. None of the above
26. Which one of the following is an ordinary annuity, but not a perpetuity? A. $75 paid at the beginning of each monthly period for 50 years B. $15 paid at the end of each monthly period for an infinite period of time C. $40 paid quarterly for 5 years, starting today D. $50 paid every year for ten years, starting today E. $25 paid weekly for 1 year, starting one week from today
27. Which one of the following features distinguishes an ordinary annuity from an annuity due? A. Number of equal payments B. Amount of each payment C. Frequency of the payments D. Annuity interest rate E. Timing of the annuity payments
28. What is the effective annual rate of 8.25 percent compounded quarterly? A. 8.25 percent B. 8.49 percent C. 8.38 percent D. 8.51 percent
29. Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18% The differences in these rates were probably caused primarily by: A. Tax effects. B. Default and liquidity risk differences. C. Maturity risk differences. D. Inflation differences. E. Real risk-free rate differences. 30 .All else held constant, the future value of an annuity will increase if you: A. decrease both the interest rate and the time period. B. increase the time period. C. decrease the present value. D. decrease the payment amount. E. decrease the interest rate.
31. Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semiannually C. 6 percent compounded quarterly D. 6 percent compounded daily E. 6 percent compounded every 2 years
32. You would like to establish a trust fund that would provide annual scholarships of $100,000 forever. How much would you have to deposit today in one lump sum to achieve this goal if you can earn a guaranteed 4.5 percent rate of return? A. $1,678,342 B. $1,800,000 C. $2,413,435 D. $1,620,975 E. $2,222,222
33. Standards Life Insurance offers a perpetuity that pays annual payments of $12,000. This contract sells for $250,000 today. What is the interest rate? A. 4.80 percent B. 3.87 percent C. 4.10 percent D. 4.21 percent
34. S&S Furniture is offering a bedroom suite for $3,200. The credit terms are 60 months at $55 per month. What is the interest rate on this offer? [Note: Time period and interest rate must match.] A. 1.22 percent B. 1.50 percent C. 1.65 percent D. 1.15 percent E. 1.30 percent
35. Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the: A. true value. B. future value. C. present value. D. discounted value. E. complex value.
36. An investment of $231 will increase in value to $268 in three years. The annual compound growth rate is closest to: A. 4.0% B. 5.0% C. 5.5% D. 6.0%
37. Alexander Industries just had a very profitable year. The owner has decided to invest $225,000 of the profits in a venture that pays an 8% rate of return for fifteen years. How much more would the investment have been worth if the owner could have made 9% on this investment? A. $52,910.25 B. $105,820.50 C. $211,641.00 D. $713,738.05
38. A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: A. will be less than 12.9 percent. B. can either be less than or equal to 12.9 percent. C. is 12.9 percent. D. can either be greater than or equal to 12.9 percent. E. will be greater than 12.9 percent.
39. Suenette plans to save $600 at the end of Year 1, $800 at the end of Year 2, and $1,000 at the end of Year 3. If she earns 3.4 percent on her savings, how much money will she have saved at the end of Year 3? A. $2,200.00 B. $2,238.47 C. $2,468.69 D. $2,309.16 E. $2,402.19
40. U.S. Treasury bonds are completely riskless. A. True B. False
41. What is par value of a bond? A. The principal payment value of a bond B. The face value of a bond C. The market value of a bond D. The coupon value of a bond E. None of the above
42. What is a zero-coupon bond? A. Bonds that pays no annual interest rate, sold at a premium above par. B. Bonds that pay no annual interest rate, sold at a discount below par. C. Bonds that pay annual interest rate, sold at a discount below par. D. Bonds that pays annual interest rate, sold at a premium above par. E. None of the above
43. What is price risk/interest rate risk of a bond? A. The risk of a decline in a bond’s price due to an decrease in interest rate B. The risk of an increase in a bond’s price due to an decrease in interest rate C. The risk of a decline in a bond’s price due to an increase in interest rate D. The risk of an increase in a bond’s price due to an increase in interest rate E. None of the above
44. What is reinvestment risk of a bond? A. The risk that an increase in interest rates will lead to a decline in income from a bond portfolio. B. The risk that a decline in interest rates will lead to a decline in income from a bond portfolio. C. The risk that a decline in interest rates will lead to an increase in income from a bond portfolio. D. The risk that an increase in interest rates will lead to an increase in income from a bond portfolio. E. None of the above.
45. A Treasury bond has an 8% annual coupon and a 10% yield to maturity. Which of the following statements is CORRECT? A. The bond sells at a premium. B. The bond sells at a discount. C. If the yield to maturity remains constant, the price of the bond will decline over time. D. None of the above
46. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT? A. If the bond’s yield to maturity declines, the bond will sell at a discount. B. The bond’s current yield is less than its expected capital gains yield. C. Market Interest rate on the bond is 9%. D. Can not be determined from the information given.
47. What is the relationship between yield to maturity, current yield and capital gains yield? A. Yield to maturity=current yield - capital gains yield B. Yield to maturity= capital gains yield - current yield C. Yield to maturity=current yield + capital gains yield D. Yield to maturity= capital gains yield E. None of the above.
48. Which of the following three bonds has the greatest dependence on reinvestment income to generate the computed yield? Assume that each bond is offering the same yield to maturity. (No calculations are needed to answer this question.) Bond Maturity Coupon Rate (%) X 25 years 0 Y 10 years 9 Z 20 years 8 A. Bond X B. Bond Y C. Bond Z
49. What is the value of a 10-year, 15% annual coupon bond, if rd = 15%? A. 1000 B. 1057 C. 1034 D. 998 E. 987
50. What is the value of a 10-year, 10% semiannual coupon bond, if rd = 16%? A. 705 B. 834 C. 872 D. 791 E. 988