I. ___________ is the process of going from present value to future Value.

Whereas _________ is
finding the present value of some future amount.

(a) Discounting; compounding

(b) Compounding; annualizing
(c) Compounding; discounting
(d) Discounting; leasing
Answer: (c)

2. __________ refers to the interest rate at which money received before the end of the planning Horizon
can be reinvested.

(a) Internal rate

(b) Reinvestment rate
(c) Cost of equity
(d) Compound interest
Answer: (b)

3. The difference between an immediate annuity and an ordinary annuity is

(a) The number of periods

(b) The amount of the payments
(c) The interest rate
(d) The timing of the payments
Answer: (d)

4. The preferred stock of Tavistock Realty offer a cash dividend of $2.28 per year and it is selling at a
price of $110 per share. What is the yield of Tavistock Realty preferred stock?

(a) 2.07%
(b) 2.12%
(c) 2.28%
(d) 48.25%
Answer: (a)

5. Consider the situation where you have won a $10 million lottery to be received in 25 annual equal
payments of $400,000. What will happen to the present value of these winnings if the interest rate
increases during the next 25 years?

(a) it will not change

(b) it will be worth more
(c) it will be worth less
(d) it cannot be determined
Answer: (c)
6. What is the effective annual rate on a bank account that has APR of 8 percent with interest
compounded quarterly?

(a) 6.12%
(b) 8.24%
(c) 8.48%
(d) 17.17%
Answer: (b)

7. You take out a loan with an APR of 10% with monthly compounding. What is the effective annual rate
on your loan?

(a) 23.87%
(b) 21.6%
(c) 19.56%
(d) 18%
Answer: (a)

8. The CFO of CyberHelp Inc. has $250,000 in cash today that he wants to invest. How much will this
investment be worth in four years if the current interest rate is 8%?

(a) $270,000
(b) $330,000
(c) $340,125
(d) $342,150
Answer: (c)

9. If you purchase a $12,000 certificate of deposit today with an APR of 14%, with quarterly
compounding, what will the CD be worth when it matures in 5 years?

(a) $20,846.99
(b) $20,865.60
(c) $23,104.97
(d) $23,877.47
Answer: (d)

10. The CFO of CyberChain Inc. plans to unleash a media campaign that is expected to cost $15 million
four years from today. How much cash should she set aside to pay for this if the current interest rate is
13%?
(a) $9.2 million
(b) $13.3 million
(c) $14.4 million
(d) $16.9 million
Answer: (a)

11. The NPV is a measure of how much your wealth changes as a result of your choice and if the NPV is
it does not pay to undertake that choice.

(a) future; negative

(b) current; negative
(c) current; positive
(d) future; positive
Answer: (b)

12. The is the rate that one can earn somewhere else if one did not invest in the project under evaluation.

(a) opportunity cost of capital

(b) cost of debt
(c) cost of equity
(d) weighted average cost of capital
Answer: (a)

13. You are trying to decide whether or not to buy a bond for $990 that will make one payment for $1,050
four years from today. What is the internal rate of return on the bond's cash flows?

(a) 1.06%
(b) 1.48%
(c) 10.6%
(d) 14.8%
Answer: (b)

14. Calculate the NPV of the following cash flows: you invest $3,000 today and receive $300 one year
from now, $700 two years from now, and $1,100 starting four years from now. Assume that the interest
rate is 7%.

(a) —$1,962.62
(b) —$1,269.04
(c) $1,269.04
(d) $1,962.62
Answer: (b)
15. After each payment of an amortized loan, the outstanding balance is reduced by the amount of
principal repaid. Therefore, the portion of the payment that goes toward the payment of interest is than
the previous period's interest payment and the portion going toward repayment of principal is than the
previous period's.

(a) greater; lower

(b) lower; lower
(c) greater; greater
(d) lower; greater
Answer: (d)

16. The present value of a future amount can be calculated with the equation

(a) PV = FV(1+i)^n
(b) PV = FV(1 +i)(n)
(c) PV = FV/(1+i)^n [NOTE: this should be formatted as a stacked fraction]
(d) PV = FV/(1+i)(n) [NOTE: this should be formatted as a stacked fraction]
Answer: (c)

17. To compute the future value of a present amount use the compound amount factor defined as

(a) PV = FV(1+i)^n
(b) PV = FV(1 +i)(n)
(c) PV = FV/(1+i)^n [NOTE: this should be formatted as a stacked fraction]
(d) PV = FV/(1+i)(n) [NOTE: this should be formatted as a stacked fraction]
Answer: (a)

18. The earnings of BGB Computers have grown from $3.20 to $6.90 in 6 years. Determine the annual
compound rate.

(a) 1.14%
(b) 13.7%
(c) 15.6%
(d) 115.6%
Answer: (b)

19. In five years you intend to go to graduate school. For each of your four years in graduate school, you
need to have a fund that will provide $25,000 per year at the beginning of each year. If the interest rate is
9% throughout, how much must you put in the fund today?

(a) $64,996
(b) $57,379
(c) $50,184
(d) $16,249
Answer: (b)

20. As part of your new job at CyberInc. the company is providing you with a new Jeep. Your firm will
lease this $34,000 Jeep for you. The terms of the lease are seven annual payments at an interest rate of
10%, which will fully amortize the cost of the car. What is the annual lease payment?

(a) $6,984.39
(b) $5,342.86
(c) $4,857.14
(d) $3,584.00
Answer: (a)

21. A rule of thumb with using the internal rate of return is to invest in a project if the IRR is the
opportunity cost of capital.

(a) greater than

(b) less than
(c) less than or equal to
(d) one-half of
Answer: (a)

22. When considering the timeframe of an investment, a rule followed by some is to choose the
investment with payback period.

(a) the longest

(b) the shortest
(c) no
(d) an infinite
Answer: (b)

23. A major problem with using the internal rate of return rule is

(a) there may be multiple cash outflows and multiple cash inflows
(b) the internal rate of return may not exist
(c) the internal rate of return may not be unique
(d) all of the above
Answer: (d)

24. The NPV is the difference between the value of all minus the value of all current and future cash
outflows.
(a) future; present; present
(b) present; future; present
(c) present; present; future
(d) present; future; future
Answer: (b)
cash inflows

25. When considering effective interest rates, are compounding frequency increases, the effective annual
rate gets and but approaches

(a) larger; larger; a limit

(b) smaller; smaller; a limit
(c) larger; larger; infinity
(d) smaller; smaller; infinity
Answer: (a)

26. In 10 years you wish to own your business. How much will you have in your bank account at the end
of 10 years if you deposit $300 each quarter (assume end of the period deposits)? Assume the account is
paying an interest rate of 12% compounded quarterly.

(a) $20,220
(b) $21,060
(c) $21,626
(d) $22,620
Answer: (d)

27. The director of marketing for CyberProducts Inc. plans to unleash a media blitz that is expected to
cost $43 million three years from today. How much cash should she set aside today to pay for this if the
current interest rate is 11%?

(a) $6.43 million

(b) $4.23 million
(c) $3.62 million
(d) $3.44 million
Answer: (d)

28. If you purchased a $10.000 certificate of deposit today with an APR of 12%. with monthly
compounding, what would be the CD worth when it matures in 6 years?

(a) 856,340
(b) 820,468
(C) $19,738
(d) $5,066
Answer: (b)

29. The manufacturing manager of CyberProducts Inc. estimates that she can save the company
$16,000 cash per year over the next 8 years by implementing a recycling plan. What is the value of the
savings today if the appropriate interest rate for the firm is 9%? Assume cash flows occur at the end of the
year.

(a) 864,240
(b) 888,557
(C) $96,527
(d) $128,000
Answer: (b)
30. If the exchange rate between the US. dollar and the French Franc is $0.17 per French Franc, the dollar
interest rate is 5.5% per year, and the French Franc interest rate is 4.5% per year, what is the "break-even"
value of the future dollar-Trench Franc exchange rate one year from now“?

a) $0.172 per FF
b) $0.179 per FF
0) $5827 per FF
d) $5882 per FF
Answer: (a)

31. In any time value of money calculation, the cash flows and the interest rate must be denominated

a) in the same currency

b) in different currencies
c) in terms of a third currency
d) in terms of the ECU
Answer: (a)

32. If the exchange rate between the US. dollar and the Japanese yen is $0.00745 per yen, the
dollar interest rate is 6% per year, and the Japanese interest rate is 7% per year, what is the
“break-eyen” value of the future dollar-yen exchange rate one year from now?

a) $135.49 per yen

b) $134.23 per yen
c) $0.00752 per yen
d) $0.00738 per yen
Answer: (d)

33. Consider the situation where you are trying to decide if you should invest in a Swiss project
or an American project. Both projects require an initial outlay of $15,000. The Swiss project
will pay you 17,100 Swiss Francs per year for 6 years, whereas the American one will pay
you $11,000 per year for 6 years. The dollar interest rate is 5% per year, the Swiss Franc
interest rate is 6% per year, and the current dollar price of a Swiss Franc is $0.68 per Swiss
Franc. Which project has the higher NPV'.’

a) the US. project; its NPV is $55,332

b) the US. project; its NPV is $40,333
c) the Swiss project; its NPV is $42,179
d) the Swiss project; its NPV is $57,178
Answer: (c)

34. The is the rate denominated in dollars or in some other currency, and the
is denominated in units of consumer goods.
a) nominal interest rate; inflation interest rate
b) nominal interest rate; real interest rate
c) real interest rate; inflation interest rate
d) real interest rate; nominal interest rate
Answer: (b)

35. Consider the situation where you are trying to decide if you should invest in a British project
or US project. Both projects require an initial outlay of $55,000. The British project will pay
you 30,000 pounds per year for 6 years, whereas the American one will generate $40,000 per
year for 6 years. The British interest rate is 5% per year, and the American interest rate is 6%
per year; the current dollar price of a pound sterling is $1.6320 per pound sterling. Which
project has the higher NPV?

a) choose the US. one, it has a NPV of $196,693

b) choose the US. one, it has a NPV of $141,693
c) choose the British one, it has a NPV of $248,506
d) choose the British one, it has a NPV of $193,506
Answer: (d)

36. What is the real interest rate if the nominal interest rate is 9% per year and the rate of
inflation is 6% per year?

a) 1.5%
b) 2.75%
c) 2.83%
d) 7.5%
Answer: (c)

37. What is the nominal interest rate if the real rate of interest is 4.5% and the rate of inflation is
6% per year?

a) 10.5%
b) 10.77%
c) 10.86%
d) 14.5%
Answer: (b)

38. What is the real rate of interest if the inflation rate is 6% per year and the nominal interest
rate per year is 12.5%?

a) 1.32%
b) 6.13%
c) 5.78%
d) 11.79%
Answer: (b)

39. Compute the real future value, to the nearest dollar, of $2,000 in 35 years time. The real
interest rate is 3.2%, the nominal interest rate is 8.36%, and the rate of inflation is 5%.

a) $6,023
b) $6,853
c) $33,223
d) $11,032
Answer: (a)

40. The real interest rate is 3.2%, the nominal interest rate is 8.36% and the rate of inflation is 5%.
We are interested in determining the future value of $200 in 35 years time. What is the future
price level?

a) 2.91
b) 3.012
c) 5.516
d) 16.61
Answer: (c)

41. Suppose your child is 9 years old and you are planning to open a fund to provide for the
child’s college education. Currently, tuition for one year of college is $22,000. How much
must you invest now in order to pay enough for the first year of college nine years from now,
if you think you can earn a rate of interest that is 4% more than the inflation rate?

a) $21,154
b) $16,988
c) $15,535
d) $15,457
Answer: (d)

42. Suppose you have a child who is 10 years old and you are planning to open a fund to provide
for the child’s college education Currently, tuition for one year is $22,000. Your child is
planning to travel for two years before starting college. How much must you invest now in
order to pay enough for the first year of college ten years fiom now, if you think you can earn
a rate of interest that is 5% more than the inflation rate?

a) $10,190
b) $13,506
c) $13,660
d) $20,952
Answer: (b)
43. When considering a plan for long run savings, if one does not have an explicit forecast of inflation,
then one can make plans in terms of:

a) constant real payments and a real rate of interest

b) constant nominal payments and a nominal rate of interest
c) constant real payments and a nominal rate of interest
d) constant nominal payments and a real rate of interest
Answer: (a)

44. If the real rate is 4% and the rate of inflation is 6%, What is the nominal rate?

a) 8.16%
b) 10.16%
c) 10.24%
d) 10.36%
Answer: (c)

45. You have an investment opportunity with a nominal rate of 6% compounded daily. If you
want to have $100,000 in your investment account in 15 years, how much should you deposit
today, to the nearest dollar?

a. $43,233
b) $41,727
c) $40,930
d) $40,660
Answer: (d)

46. You have determined the present value of an expected cash inflow stream. Which of the
following would cause the stream to have a higher present value?

a) The discount rate increases.

b) The cash flows are paid over a shorter period of time.
c) The discount rate decreases.
d) Statements (b) and (c) are both correct.
Answer: (d)