Question 1     10 points      Save
     Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

          The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
          The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
          The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
          The periodic rate of interest is 3% and the effective rate of interest is 6%.
          The periodic rate of interest is 6% and the effective rate of interest is also 6%.
   Question 2     10 points      Save
     Which of the following statements is CORRECT?

          The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
          If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
          The cash flows for an annuity due must all occur at the ends of the periods.
          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.
          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.
   Question 3     10 points      Save
     Which of the following statements is CORRECT?

          A time line is not meaningful unless all cash flows occur annually.
          Time lines are useful for visualizing complex problems prior to doing actual calculations.
          Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
          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.
   Question 4     10 points      Save
     Which of the following statements is CORRECT?

          The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
          If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.
          If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
          The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
          An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
   Question 5     10 points      Save
     Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

          The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
          Because the outstanding balance declines over time, the monthly payments will also decline over time.
          Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
          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.
          The outstanding balance declines at a faster rate in the later years of the loan
   Question 6     10 points      Save
     Which of the following statements is CORRECT?

          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.
          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.
          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.
          If you solve for I and get a negative number, then you must have made a mistake.
          If CF0 is positive and all the other CFs are negative, then you can still solve for I.
   Question 7     10 points      Save
     A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

          The annual payments would be larger if the interest rate were lower.
          If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.
          The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.
          The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
          The proportion of interest versus principal repayment would be the same for each of the 7 payments.
   Question 8     10 points      Save
     You are considering two equally risky annuities, each of which pays $5,000 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?

          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.
          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.
          The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
          The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.
          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.
   Question 9     10 points      Save
     Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

          The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
          Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.
          Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
          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.
          The outstanding balance declines at a slower rate in the later years of the loan
   Question 10     10 points      Save
     Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

          The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
          A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
          A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.
          If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
          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.