Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Ch 04 Time Value of Money
e.
Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the
periods.
39. Which of the following statements is CORRECT?
a.
Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and
thus are not part of the annuity.
b.
A time line is not meaningful unless all cash flows occur annually.
c.
Time lines are not useful for visualizing complex problems prior to doing actual calculations.
d.
Time lines can be constructed to deal with situations where some of the cash flows occur annually but others
occur quarterly.
e.
Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for
ordinary annuities.
40. Which of the following statements is CORRECT?
a.
A time line is not meaningful unless all cash flows occur annually.
b.
Time lines are not useful for visualizing complex problems prior to doing actual calculations.
c.
Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but
others occur quarterly.
d.
Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for
ordinary annuities.
e.
Time lines can be constructed where some of the payments constitute an annuity but others are unequal and
thus are not part of the annuity.
41. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected
cash flows. Which of the following would lower the calculated value of the investment?
Ch 04 Time Value of Money
a.
The discount rate decreases.
b.
The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity
lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
c.
The discount rate increases.
d.
The riskiness of the investment's cash flows decreases.
e.
The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years
and less are received in the later years.
42. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected
cash flows. Which of the following would increase the calculated value of the investment?
a.
The discount rate increases.
b.
The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity
lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
c.
The discount rate decreases.
d.
The riskiness of the investment's cash flows increases.
e.
The total amount of cash flows remains the same, but more of the cash flows are received in the later years and
less are received in the earlier years.
43. Which of the following statements is CORRECT?
a.
If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the
textbook defines as a variable annuity.
b.
The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
c.
If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition
an annuity.
d.
The cash flows for an annuity due must all occur at the ends of the periods.
e.
The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year
or once a month.
44. Which of the following statements is CORRECT?
a.
If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the
textbook defines as a variable annuity.
b.
The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
c.
If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition
an annuity.
d.
The cash flows for an annuity due must all occur at the beginning of the periods.
e.
The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as
once a year or once a month.
45. Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following
statements is CORRECT?
a.
The periodic rate of interest is 5% and the effective rate of interest is also 5%.
b.
The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.
c.
The periodic rate of interest is 5% and the effective rate of interest is greater than 5%.
d.
The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%.
e.
The periodic rate of interest is 2.5% and the effective rate of interest is 5%.
46. 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 8% and the effective rate of interest is also 8%.
b.
The periodic rate of interest is 2% and the effective rate of interest is 4%.
c.
The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
d.
The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
e.
The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
47. A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is
CORRECT?
a.
The proportion of interest versus principal repayment would be the same for each of the 8 payments.
b.
The annual payments would be larger if the interest rate were lower.
c.
If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either
case, the first payment would include more dollars of interest under the 8-year amortization plan.
d.
The proportion of each payment that represents interest as opposed to repayment of principal would be lower
if the interest rate were lower.
e.
The last payment would have a higher proportion of interest than the first payment.
48. A $150,000 loan is to be amortized over 6 years, with annual end-of-year payments. Which of these statements is
CORRECT?
a.
The proportion of interest versus principal repayment would be the same for each of the 7 payments.
b.
The annual payments would be larger if the interest rate were lower.
c.
If the loan were amortized over 10 years rather than 6 years, and if the interest rate were the same in either
Ch 04 Time Value of Money
case, the first payment would include more dollars of interest under the 6-year amortization plan.
d.
The proportion of each payment that represents interest as opposed to repayment of principal would be higher
if the interest rate were lower.
e.
The proportion of each payment that represents interest versus repayment of principal would be higher if the
interest rate were higher.
49. Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT?
(Ignore taxes and transactions costs.)
a.
The outstanding balance declines at a slower rate in the later years of the loan's life.
b.
The remaining balance after three years will be $225,000 less one third of the interest paid during the first
three years.
c.
Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal
payments) are constant.
d.
Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will
remain constant.
e.
The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from
now than it will be the first year.
50. Which of the following statements regarding a 15-year (180-month) $225,000, fixed-rate mortgage is CORRECT?
(Ignore taxes and transactions costs.)
a.
The outstanding balance declines at a faster rate in the later years of the loan's life.
b.
The remaining balance after three years will be $125,000 less one third of the interest paid during the first
three years.
c.
Because the outstanding balance declines over time, the monthly payments will also decline over time.
d.
Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will
remain constant.
e.
The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from
now than it will be the first year.
51. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest
rate of 8% is CORRECT?
a.
Exactly 8% of the first monthly payment represents interest.
b.
The monthly payments will decline over time.
c.
A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal,
than for the first monthly payment.
d.
The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
e.
The amount representing interest in the first payment would be higher if the nominal interest rate were 6%
rather than 8%.
52. Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest
rate of 10% is CORRECT?
a.
Exactly 10% of the first monthly payment represents interest.
b.
The monthly payments will increase over time.
c.
A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal,
than for the last monthly payment.
d.
The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity.
e.
The amount representing interest in the first payment would be higher if the nominal interest rate were 7%
rather than 10%.
53. At the end of 10 years, which of the following investments would have the highest future value? Assume that the
effective annual rate for all investments is the same and is greater than zero.
a.
Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
b.
Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
c.
Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20
payments).
d.
Investment D pays $2,500 at the end of 10 years (just one payment).
e.
Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).
54. Of the following investments, which would have the lowest present value? Assume that the effective annual rate for
all investments is the same and is greater than zero.
a.
Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).
b.
Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
c.
Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20
Ch 04 Time Value of Money
payments).
d.
Investment D pays $2,500 at the end of 10 years (just one payment).
e.
Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
55. A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%,
semiannual compounding. Which of the following statements is CORRECT?
a.
The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.
b.
The periodic interest rate is greater than 3%.
c.
The periodic rate is less than 3%.
d.
The present value would be greater if the lump sum were discounted back for more periods.
e.
The present value of the $1,000 would be smaller if interest were compounded monthly rather than
semiannually.
56. A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%,
semiannual compounding. Which of the following statements is CORRECT?
a.
The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.
b.
The periodic interest rate is greater than 3%.
c.
The periodic rate is less than 3%.
d.
The present value would be greater if the lump sum were discounted back for more periods.
e.
The present value of the $1,000 would be larger if interest were compounded monthly rather than
semiannually.
57. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
a.
Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays
semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
b.
The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
c.
A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year
mortgage.
d.
A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
e.
If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
58. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
a.
Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays
semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
b.
The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
c.
A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year
mortgage.
d.
A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.
e.
If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
59. Which of the following statements is CORRECT?
a.
An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is
smaller than 6%.
b.
The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary
annuity.
c.
If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
d.
If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all
be different.
e.
The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
60. Which of the following statements is CORRECT?
a.
An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is
smaller than 6%.
b.
The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity
due.
c.
If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.
d.
If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all
be different.
e.
The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
61. You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD
is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is
CORRECT?
a.
If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and
the present value of DUE would remain constant.
Ch 04 Time Value of Money
b.
The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less
than the future value of DUE.
c.
The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the
future value of ORD.
d.
The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the
future value of DUE.
e.
The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the
future value of ORD.
62. You are considering two equally risky annuities, each of which pays $25,000 per year for 10 years. Investment ORD
is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is
CORRECT?
a.
If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and
the present value of DUE would remain constant.
b.
A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
c.
The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the
future value of ORD.
d.
The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the
future value of DUE.
e.
The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the
future value of ORD.
63. Which of the following statements is CORRECT?
a.
If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
b.
If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I
causes the PV of the cash flows to equal the cash flow at Time 0.
c.
If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve
for I, but only if the sum of the undiscounted cash flows exceeds the cost.
d.
To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute
value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a
computer or financial calculator but quite difficult otherwise.
e.
If you solve for I and get a negative number, then you must have made a mistake.
64. Which of the following statements is CORRECT?
a.
If CF0 is positive and all the other CFs are negative, then you can still solve for I.
b.
If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I
causes the PV of the cash flows to equal the cash flow at Time 0.
c.
If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve
for I, but only if the sum of the undiscounted cash flows exceeds the cost.
d.
To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute
value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial
calculator.
e.
If you solve for I and get a negative number, then you must have made a mistake.
65. Which of the following bank accounts has the highest effective annual return?
