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accounting - Time value of money part 2 mcq

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Question;Question 1 of 20;You have determined the profitability of a planned project;by finding the present value of all the cash flows from that project. Which of;the following would cause the project to look more appealing in terms of the;present value of those cash flows?;A. a. The discount;rate decreases.;B. b. The cash flows;are extended over a longer period of time, but the total amount of the cash;flows remains the same.;C. c. The discount;rate increases.;D. d. Answers b and c;above.;E. e. Answers a and b;above.;Question 2 of 20;Which of the following statements is correct?;A. a. The present;value of an annuity due will exceed the present value of an ordinary annuity;(assuming all else equal).;B. b. The future;value of an annuity due will exceed the future value of an ordinary annuity;(assuming all else equal).;C. c. The nominal;interest rate will always be greater than or equal to the effective annual;interest rate.;D. d. Statements a;and b are correct.;E. e. All of the;statements above are correct.;Question 3 of 20;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 correct?;A. a. The monthly;payments will decline over time.;B. b. The proportion;of the monthly payment which represents interest will be lower for the last;payment than for the first payment on the loan.;C. c. The total;dollar amount of principal being paid off each month gets larger as the loan;approaches maturity.;D. d. Statements a;and c are correct.;E. e. Statements b;and c are correct.;Question 4 of 20;Suppose someone offered you the choice of two equally risky;annuities, each paying $10,000 per year for five years. One is an ordinary (or;deferred) annuity, the other is an annuity due. Which of the following;statements is correct?;A. a. The present;value of the ordinary annuity must exceed the present value of the annuity due;but the future value of an ordinary annuity may be less than the future value;of the annuity due.;B. b. The present;value of the annuity due exceeds the present value of the ordinary annuity;while the future value of the annuity due is less than the future value of the;ordinary annuity.;C. c. The present;value of the annuity due exceeds the present value of the ordinary annuity, and;the future value of the annuity due also exceeds the future value of the;ordinary annuity.;D. d. If interest;rates increase, the difference between the present value of the ordinary;annuity and the present value of the annuity due remains the same.;E. e. Answers a and d;are correct.;Question 5 of 20;Which of the following investments would provide an investor;the highest effective annual return?;A. a. An investment;which has a 9 percent nominal rate with semiannual compounding.;B. b. An investment;which has a 9 percent nominal rate with quarterly compounding.;C. c. An investment;which has a 9.2 percent nominal rate with annual compounding.;D. d. An investment;which has an 8.9 percent nominal rate with monthly compounding.;E. e. An investment;which has an 8.9 percent nominal rate with quarterly compounding;Question 6 of 20;You just put $1,000 in a bank account which pays 6 percent;nominal annual interest, compounded monthly. How much will you have in your;account after 3 years?;A. a. $1,006.00;B. b. $1,056.45;C. c. $1,180.32;D. d. $1,191.00;E. e. $1,196.68;Question 7 of 20;You just graduated, and you plan to work for 10 years and;then to leave for the Australian "Outback" bush country. You figure;you can save $1,000 a year for the first 5 years and $2,000 a year for the next;5 years. These savings cash flows will start one year from now. In addition;your family has just given you a $5,000 graduation gift. If you put the gift;now, and your future savings when they start, into an account which pays 8 percent;compounded annually, what will your financial "stake" be when you;leave for Australia 10 years from now?;A. a. $21,432;B. b. $28,393;C. c. $16,651;D. d. $31,148;E. e. $20,000;Question 8 of 20;If you buy a factory for $250,000 and the terms are 20;percent down, the balance to be paid off over 30 years at a 12 percent rate of;interest on the unpaid balance, what are the 30 equal annual payments?;A. a. $20,593;B. b. $31,036;C. c. $24,829;D. d. $50,212;E. e. $ 6,667;Question 9 of 20;You are contributing money to an investment account so that;you can purchase a house in five years. You plan to contribute six payments of;$3,000 a year--the first payment will be made today (t = 0), and the final;payment will be made five years from now (t = 5). If you earn 11 percent in;your investment account, how much money will you have in the account five years;from now (at t = 5)?;A. a. $19,412;B. b. $20,856;C. c. $21,683;D. d. $23,739;E. e. $26,350;Question 10 of 20;If you receive $15,000 today and can invest it at a 5;percent annual rate compounded continuously, what will be your ending value;after 20 years?;A. a. $35,821;B. b. $40,774;C. c. $75,000;D. d. $81,342;E. e. $86,750;Question 11 of 20;You decide to begin saving toward the purchase of a new car;in 5 years. If you put $1,000 at the end of each of the next 5 years in a;savings account paying 4 percent compounded annually, how much will you;accumulate after 5 years?;A. a. $1,481.25;B. b. $4,394.51;C. c. $6,592.34;D. d. $5,416.30;E. e. $4,935.35;Question 12 of 20;Calculate the present value of $1,000 to be received at the;end of 8 years. Assume an interest rate of 5 percent.;A. a. $1,812.39;B. b. $525.18;C. c. $676.80;D. d. $650.30;E. e. $5,962.31;Question 13 of 20;How much would you be willing to pay today for an investment;that would return $800 each year at the end of each of the next 6 years? Assume;a discount rate of 4 percent.;A. a. $5,435.89;B. b. $4,398.87;C. c. $4,431.29;D. d. $4,532.21;E. e. $4,193.68;Question 14 of 20;If you would like to accumulate $7,500 over the next 5;years, how much must you deposit each six months, starting six months from now;given a 8 percent interest rate and semiannual compounding?;A. a. $624.69;B. b. $801.22;C. c. $910.16;D. d. $571.32;E. e. $751.56;Question 15 of 20;What is the effective annual percentage rate (EAR) of 12;percent compounded monthly?;A. a. 12.00%;B. b. 12.55%;C. c. 12.68%;D. d. 12.75%;E. e. 13.00%;Question 16 of 20;You have $ 1,000 invested in an account which pays 16;percent compounded annually. A commission agent (called a finder?) can locate;for you an equally safe deposit which will pay 16 percent, compounded;semi-annually, for 2 years. What is the maximum amount you should be willing to;pay him now as a fee for locating the new account?;A. a. $5.63;B. b. $10.95;C. c. $17.15;D. d. $16.94;E. e. $20.15;Question 17 of 20;Assume that your aunt sold her house on December 31 and that;she took a mortgage in the amount of $50,000 as part of the payment. The;mortgage has a stated (or nominal) interest rate of 10 percent, but it calls;for payments every 6 months, beginning on June 30, and the mortgage is to be;amortized over 20 years. Now, one year later, your aunt must file Schedule B of;her tax return with the IRS informing them of the interest that was included in;the two payments made during the year. (This interest will be income to your;aunt and a deduction to the buyer of the house.) What is the total amount of;interest that was paid during the first year?;A. a. $4,979.31;B. b. $683.56;C. c. $2,651.83;D. d. $3,881.78;E. e. $760.52;Question 18 of 20;Assume that you inherited some money. A friend of yours is;working as an unpaid intern at a local brokerage firm, and her boss is selling;some securities which call for five payments, $75 at the end of each of the;next 4 years, plus a payment of $1,075 at the end of Year 5. Your friend says;she can get you some of these securities at a cost of $960 each. Your money is;now invested in a bank that pays an 4 percent nominal (quoted) interest rate;but with quarterly compounding. You regard the securities as being just as;safe, and as liquid, as your bank deposit, so your required effective annual;rate of return on the securities is the same as that on your bank deposit. You;must calculate the value of the securities to decide whether they are a good;investment. What is their present value to you?;A. a. $721.93;B. b. $878.96;C. c. $824.51;D. d. $1,532.91;E. e. $1,152.82;Question 19 of 20;Your company is planning to borrow $500,000 on a 5-year, 8;percent, annual payment, fully amortized term loan. What fraction of the;payment made at the end of the second year will represent repayment of;principal?;A. a. 62.91%;B. b. 45.93%;C. c. 51.32%;D. d. 48.13%;E. e. 73.50%;Question 20 of 20;Which of the following statements is correct?;A. a. Except in;situations where compounding occurs annually, the periodic interest rate;exceeds the nominal interest rate.;B. b. The effective;annual rate always exceeds the nominal rate, no matter how few or many;compounding periods occur each year.;C. c. If compounding;occurs more frequently than once a year, and if payments are made at times;other than at the end of compounding periods, it is impossible to determine;present or future values, even with a financial calculator. The reason is that;under these conditions, the basic assumptions of discounted cash flow analysis;are not met.;D. d. Assume that;compounding occurs quarterly, that the nominal interest rate is 8 percent, and;that you need to find the present value of $ 1,000 due 6 months from today. You;could get the correct answer by discounting the $ 1,000 at 2 percent for 2;periods.;E. e. Statements a;b, c, and d are all false.

 

Paper#42475 | Written in 18-Jul-2015

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