Chapter 2 - BUS 361 Sample Test

1. The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied (interest-on-interest) is called:

a. discounting

b. compounding

c. time lines

d. outflows

2. The present value of a sum due in the future:

a. increases as the years to receipt increases.

b. is unaffected as the years to receipt increases

c. decreases as the years to receipt increases

3. Disregarding risk, if money has time value, the present value of a given sum:

a. will be less than its future value

b. will be greater than its future value

c. may be less than or greater than its future value

4. The present value (future value) of an uneven cash flow stream is __________ sum of the present values (future values) of each of the individual cash flows.

a. greater than the

b. equal to the

c. less than the

5. You are told that if you invest $12,200 per year for 17 years (all payments made at the beginning of each year) you will have accumulated $516,000 at the end of the period. What annual rate of return is the investment offering?

a. 8.657%

b. 10.455%

c. 9.465%

d. 9.478%

6. A loan that is repaid in equal payments over its life with each payment including a portion of interest and principal is:

a. a lump sum loan

b. an uneven cash flow loan

c. a predatory loan

d. an amortized loan

7. The future value of an annuity due will:

a. exceed the future value of an ordinary annuity (assuming all else equal).

b. be equal to the future value of an ordinary annuity (assuming all else equal).

c. be less than the future value of an ordinary annuity (assuming all else equal).

8. The present value of a single sum to be received in the future:

a. increases as the interest rate (discount rate) increases.

b. is unaffected when the interest rate (discount rate) changes

c. decreases as the interest rate (discount rate) increases

9. At what quoted annual interest rate must $156,000 be invested so that it will grow to be $377,000 in 7 years?

a. 12.62%

b. 13.43%

c. 10.24%

d. 12.26%

10. If you wish to accumulate $234,000 in 12 years, how much must you deposit today in an account that pays an annual interest rate of 11%?

a. $67,269.41

b. $53,509.40

c. $66,886.75

d. $818,637.44

11. All else equal, which of the following investments has the highest effective annual rate (EAR or EFF%)?

a. A bank CD that pays 10 percent interest, compound quarterly.

b. A bank CD that pays 10 percent monthly.

c. A bank CD that pays 10.2% annually.

d. A bank CD that pays 10% semiannually.

e. A bank CD that pays 9.8% daily (365-day basis).

12. You plan to borrow $212,000 now and repay it in 11 equal annual installments (payments will be made at the end of each year). If the annual interest rate is 14%, how much will your annual payments be?

a. $8069.81

b. $34,104.90

c. $9199.59

d. $38,879.59

13. Comparisons of investment alternatives with different compounding periods should be made based on the:

a. nominal interest rates.

b. quoted interest rates.

c. annual percentage rates (APR).

d. effective annual interest rate.

14. You are offered an annuity that will pay $17,000 per year for 7 years (the first payment will occur one year from today). If you feel that the appropriate discount rate is 11%, what is the annuity worth to you today?

a. $184,610.38

b. $166,315.66

c. $88,919.14

d. $80,107.34

15. Frank Lewis has a 30-year, $100,000 mortgage with a nominal interest rate of 10 percent and monthly compounding. Which of the following statements regarding his mortgage is most correct?

a. The monthly payments will decline over time.

b. The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan.

c. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.

d. all of the above are correct