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Question;1. Which of the following statements;is CORRECT?;a. A time line;is not meaningful unless all cash flows occur annually.;b. Time lines;are useful for visualizing complex problems prior to doing actual calculations.;c. Time lines;cannot be constructed in situations where some of the cash flows occur annually;but others occur quarterly.;d. Time lines;cannot be constructed for annuities where the payments occur at the beginning;of the periods.;e. Some of the cash flows shown on a time line;can be in the form of annuity payments, but none can be uneven amounts.;2. 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 in situations where some of the cash flows occur annually;but others occur quarterly.;d. Time lines;can be constructed for annuities where the payments occur at either the;beginning or the end of the periods.;e. Some of the;cash flows shown on a time line can be in the form of annuity payments, but;none can be uneven amounts.;3. 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 can 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 cannot be constructed where some of the payments;constitute an annuity but others are unequal and thus are not part of the;annuity.;4. 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.;5. 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?;a. 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.;b. The discount rateincreases.;c. The riskiness of the investment?s cash flows decreases.;d. 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.;e. The discount rate decreases.;6. 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 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.;b. The discount rate decreases.;c. The riskiness of the investment?s cash;flows increases.;d. 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.;e. The discount rate increases.;7. Your bank account pays a 6% nominal;rate of interest. The interest is;compounded quarterly. Which of the;following statements is CORRECT?;a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.;b. The periodic rate of interest is 6% and the;effective rate of interest is greater than 6%.;c. The periodic rate of interest is 1.5% and;the effective rate of interest is greater than 6%.;d. The periodic rate of interest is 3% and the effective rate of interest is 6%.;e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.;8. 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 2% and the;effective rate of interest is 4%.;b. The periodic rate of interest is 8% and the;effective rate of interest is greater;than 8%.;c. The periodic rate of interest is 4% and the;effective rate of interest is less;than 8%.;d. The periodic rate of interest is 2% and the;effective rate of interest is greater;than 8%.;e. The periodic rate of interest is 8% and the;effective rate of interest is also;8%.;9. A;$50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?;a. The annual payments would be larger if the;interest rate were lower.;b. 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.;c. The proportion of each payment that;represents interest as opposed to repayment of principal would be lower if the;interest rate were lower.;d. The last payment would have a higher;proportion of interest than the first payment.;e. The proportion of interest versus principal;repayment would be the same for each of the 7 payments.;10. A $150,000 loan is to be amortized over 7 years, with;annual end-of-year payments. Which of these;statements is CORRECT?;a. The annual payments would be larger if the;interest rate were lower.;b. 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.;c. The proportion of each payment that;represents interest as opposed to repayment of principal would be higher if the;interest rate were lower.;d. The proportion of each payment that;represents interest versus repayment of principal would be higher if the;interest rate were higher.;e. The proportion of interest versus principal;repayment would be the same for each of the 7 payments.;11. Which of the following statements regarding a 15-year (180-month);$125,000, fixed-rate mortgage is CORRECT?;(Ignore taxes and transactions costs.);a. The remaining balance after three years;will be $125,000 less one third of the interest paid during the first three;years.;b. Because it is a fixed-rate mortgage, the;monthly loan payments (which include both interest and principal payments) are;constant.;c. Interest payments on the mortgage will;increase steadily over time, but the total amount of each payment will remain;constant.;d. 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.;e. The outstanding balance declines at a;slower rate in the later years of the loan?s life.;12. Which of the following statements regarding a 15-year;(180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.);a. The remaining balance after three years;will be $125,000 less one third of the interest paid during the first three;years.;b. Because the outstanding balance declines;over time, the monthly payments will also decline over time.;c. Interest payments on the mortgage will;increase steadily over time, but the total amount of each payment will remain;constant.;d. 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.;e. The outstanding balance declines at a;faster rate in the later years of the loan?s life.;13. Which of the following statements regarding a 30-year monthly;payment amortized mortgage with a nominal interest rate of 10% is CORRECT?;a. The monthly payments will decline over;time.;b. A smaller proportion of the last monthly;payment will be interest, and a larger proportion will be principal, than for;the first monthly payment.;c. The total dollar amount of principal being;paid off each month gets smaller as the loan approaches maturity.;d. The amount representing interest in the;first payment would be higher if the nominal interest rate were 7%;rather than 10%.;e. Exactly 10% of the first monthly payment;represents interest.;14. Which of the following statements regarding a 30-year;monthly payment amortized mortgage with a nominal interest rate of 10% is;CORRECT?;a. The monthly payments will increase over;time.;b. A larger proportion of the first monthly;payment will be interest, and a smaller proportion will be principal, than for;the last monthly payment.;c. The total dollar amount of interest being;paid off each month gets larger as the loan approaches maturity.;d. The amount representing interest in the;first payment would be higher if the nominal interest rate were 7%;rather than 10%.;e. Exactly 10% of the first monthly payment;represents interest.;15. 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 periodic interest rate is greater than;3%.;b. The periodic rate is less than 3%.;c. The present value would be greater if the;lump sum were discounted back for more periods.;d. The present value of the $1,000 would be;smaller if interest were compounded monthly rather than semiannually.;e. The PV of the $1,000 lump sum has a higher;present value than the PV of a 3-year, $333.33 ordinary annuity.;16. 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 periodic interest rate is greater than;3%.;b. The periodic rate is less than 3%.;c. The present value would be greater if the;lump sum were discounted back for more periods.;d. The present value of the $1,000 would be;larger if interest were compounded monthly rather than semiannually.;e. The PV of the $1,000 lump sum has a smaller;present value than the PV of a 3-year, $333.33 ordinary annuity.;17. Which of the following statements is;CORRECT, assuming positive interest rates and holding other things constant?;a. The present value of a 5-year, $250 annuity;due will be lower than the PV of a similar ordinary annuity.;b. A 30-year, $150,000 amortized mortgage will;have larger monthly payments than an otherwise similar 20-year mortgage.;c. A bank loan's nominal interest rate will;always be equal to or less than its effective annual rate.;d. If an investment pays 10% interest;compounded annually, its effective annual rate will be less than 10%.;e. 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.;18. Which of the following statements is CORRECT, assuming;positive interest rates and holding other things constant?;a. The present value of a 5-year, $250 annuity;due will be lower than the PV of a similar ordinary annuity.;b. A 30-year, $150,000 amortized mortgage will;have larger monthly payments than an otherwise similar 20-year mortgage.;c. A bank loan's nominal interest rate will;always be equal to or greater than its effective annual rate.;d. If an investment pays 10% interest;compounded quarterly, its effective annual rate will be greater than 10%.;e. 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.;19. Which of the following statements is CORRECT?;a. The present value of a 3-year, $150 annuity;due will exceed the present value of a 3-year, $150 ordinary annuity.;b. If a loan has a nominal annual rate of 8%;then the effective rate can never be greater than 8%.;c. If a loan or investment has annual;payments, then the effective, periodic, and nominal rates of interest will all;be different.;d. The proportion of the payment that goes;toward interest on a fully amortized loan increases over time.;e. An investment that has a nominal rate of 6%;with semiannual payments will have an effective rate that is smaller than 6%.;20. Which of the following statements is CORRECT?;a. The present value of a 3-year, $150;ordinary annuity will exceed the present value of a 3-year, $150 annuity due.;b. If a loan has a nominal annual rate of 8%;then the effective rate will never be less than 8%.;c. If a loan or investment has annual;payments, then the effective, periodic, and nominal rates of interest will all;be different.;d. The proportion of the payment that goes;toward interest on a fully amortized loan increases over time.;e. An investment that has a nominal rate of 6%;with semiannual payments will have an effective rate that is smaller than 6%.

 

Paper#51047 | Written in 18-Jul-2015

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