1. Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:
A. Reducing.
B. Compounding.
C. Accumulating.
D. Discounting.
2. Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years?
A. $12,650
B. $12,967
C. $13,020
D. $13,256
3. __________ is the process of determining the future value of an investment.
A. Compounding.
B. Simplifying.
C. Aggregation.
D. Discounting.
4. True or False. The amount of compound interest you earn is constant each year, whereas the amount of simple interest gets bigger every year.
A. True
B. False
5. Travis invested $8,250 in an account that pays 4 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?
A. $341.41
B. $296.44
C. $302.16
D. $266.67
6. What is the future value of $11,600 invested for 17 years at 7.25 percent compounded annually?
A. $32,483.60
B. $27,890.87
C. $38,125.20
D. $41,009.13
7. This morning, DJ's invested $238,000 to help fund a company expansion project. How much additional money will the firm have three years from now if it can earn 4 percent rather than 3.5 percent on its savings? Assume it's a compound interest.
A. $3,940.09
B. $3,842.78
C. $4,008.17
D. $4,219.68
8. You would like to give your daughter $75,000 towards her college education 17 years from now. How much money must you set aside today for this purpose if you can earn 8 percent compound interest on your investments?
A. $18,388.19
B. $20,270.17
C. $28,417.67
D. $29,311.13
9. Sixty years ago, your mother invested $4,500. Today, that investment is worth $430,065.11. What is the average annual compound rate of return she earned on this investment?
A. 6.67 percent
B. 11.71 percent
C. 7.90 percent
D. 10.40 percent
10. Interest earned on both the initial principal and the interest reinvested from prior periods is called:
A. Free interest.
B. Dual interest.
C. Simple interest.
D. Compound interest.
11. An annuity is best defined by which one of the following?
A. Increasing payments paid for a definitive period of time.
B. Increasing payments paid at regular intervalsforever.
C. Equal payments paid at regular intervals over a stated time period.
D. Equal payments paid at regular intervals for anunlimited time period.
12. Jane plans on saving $2,000 a year and expects to earn an annual compound rate of 8.8 percent. How much will she have in her account at the end of 43 years?
A. $806,429
B. $838,369
C. $997,407
D. $831,532
13. A loan where the borrower receives money today and repays a single lump sum (total interest and loan principal) on a future date is called a(n) _____ loan.
A. Amortized.
B. Interest-only.
C. Balloon.
D. Pure discount.
14. You are looking at two savings accounts.Bank A pays 17.0 percent compounded monthly. Bank B pays 13.0 percent compounded daily. Which of these is the best if you are thinking of opening a savings account?(i.e. which bank charges a higher effective annual rate)
A. Bank A
B. Bank B
15. Ian will make the following deposits in a bank account that pays 10 percent compound interest: $100 today, $300 in two years from now and $500 in 4 years from now. Draw a timeline for this example.
16. Use information provided in question 15. On the above timeline, demonstrate calculations you would do for each cash flow to know how much Ian will have in his account in 4 years from now.
17. Use information provided in question 15.How much will Ian have in 4 years?
A. $ 689.44
B. $ 999.96
C. $ 1,009.41
D. $ 1,059.41
18. Mortgagesare structured as _____ loans.
A. Pure discount
B. Interest-only
C. Amortized
D. Balloon.
19. Suppose you need $300 in one year from now, $400 in two years from now and $600 in three years from now. You can earn 10% compound interest. Draw a timeline for this example.
20. Use information provided in question 19. On the above timeline, demonstrate calculations you would do for each cash flow to find how much do you have to put up today to exactly cover these amounts in the future?
21. Use information provided in question 19. Overall, how much do you have to put up today to exactly cover these amounts in the future?
A. $ 1,054.10
B. $ 1,081.37
C. $ 1,439.30
D. $ 1,499.30
22. Investment X offers to pay you $4,700 per year for 8 years, whereas Investment Y offers to pay you $6,700 per year for 5 years. Assume the discount rate is 5 percent. Which of these cash flow streams has the higher present value?
A. Investment X
B. Investment Y
C. Their present values are the same.
23. If you put up $38,000 today in exchange for a 5.8 percent, 15-year annuity, what will the annual cash flow be?
A. $1,450.85
B. $3,861.62
C. $7,723.23
D. $88,525.55
24. Today, Dinero Bank offers you a 5-year $50,000 loan at an annual compound interest of 7.5 percent. What will your annual loan payment be?
A. $ 8,158.04
B. $ 8,608.24
C. $ 12,358.24
D. $ 71.781.47
25. Today, you earn a salary of $28,000. What will be your annual salary 12 years from now if you earn annual raises of 2.6 percent? Assume it's a compound growth rate.
A. $38,100.12
B. $37,414.06
C. $38,235.24
D. $37,122.08
26. At 6 percent interest, how long would it take to double your money?
A. 11.90 years
B. 16.64 years
C. 18.87 years
D. 23.79 years
27. Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment?
A. Coupon.
B. Face value.
C. Discount.
D. Yield to maturity.
28. A___________ is generally defined as a long-term debt with an initial maturity of 10 years or less, whereas a___________ is a long-term debt with an initial maturity of more than 10 years.
A. Note; bond
B. Bond; note
C. Unfunded debt; note
D. Note; unfunded debt
29. True or False. Compounding during the year can lead to a significant difference between the quoted rate and the effective annual rate.
A. True
B. False
30. Suppose XYZCorporation wants to issue a $1,000 bond with 20 years to maturity. This bond has an annual coupon rate of 10%. Similar bonds have a yield to maturity of 10%. Draw a timeline to show cash flows associated with this bond forXYZ Corporation,which is the borrower in this transaction.
31. Use information provided in question 30. Draw a timeline to show cash flows associated with this bond for bondholders.
32. Use information provided in question 30. What is the present value of coupons?
A. $ 14.86
B. $ 148.64
C. $ 491.57
D. $ 851.36
33. Use information provided in question 30. What is the present value of face value?
A. $ 83.33
B. $ 148.64
C. $ 851.36
D. $ 909.09
34. In class, we talked about the differences between debt and equity.
True or False: Common shareholders do not have voting power, whereas creditors vote for the board of directors and other issues.
A. True
B. False
35. True or False. When corporations fund their operations by issuing/selling bonds, they promise to make regularly scheduled interest payments and to repay the original amount borrowed at maturity.
A. True
B. False
36. Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent?
A. $24.56
B. $25.06
C. $26.60
D. $26.94
37. A______ arranges a transaction between a buyer and a seller of equity securities but does not maintain an inventory, whereas a ______maintains an inventory from which he or she buys and sells securities.
A. dealer, broker
B. broker, dealer
C. capitalist, dealer
D. broker, capitalist
38. You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?
A. Alternative voting.
B. Cumulative voting.
C. Straight voting.
D. Voting by proxy.
39. Three Corners Markets paid an annual dividend of $1.37 a share last month. Today, the company announced that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how much are you willing to pay to purchase one share of this stock today?
A. $15.56
B. $16.00
C. $16.67
D. $17.68
40. As a common shareholder you will have the following rights except for:
A. Right to elect the corporate directors.
B. Right to attend annual meetings.
C. Right to share in company profits prior to other shareholders.
D. Right to share in company profits after preferred shareholders.
41. True or False. Most dividends on preferred stock are cumulative, which means that any missed preferred dividends must be paid before common dividends can be paid.
A. True
B. False