Exam1

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1. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater thanits future value.

A) True
B) False
A) True
2. The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The later we are in the loan's life, the larger the principal portion of the payment.

A) True
B) False
A) True
3. If a bank uses quarterly compounding for savings accounts, the nominal rate will be greater than the effective annual rate.

A) True
B) False
B) False
4. The present value of a future sum decreases as either the discount rate or the number of discount periods per year increases.

A) True
B) False
A) True
5. The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity.

A) True
B) False
B) False
6. Mary expects to receive \$1,000
each year through infinity. Each cash
flow will grow at 5% through infinity and discount rate is 10%.

Suppose the first \$1000 to be
received at year 1. What is the present value (i.e., value at
t=0) of Mary’s cash flow?

OR

PV = ? 19,090.91

• FV=21000
• N=1
• I=10%
• PMT=0
7. Mary expects to receive \$1,000
each year through infinity. Each cash
flow will grow at 5% through infinity and discount rate is 10%.

Suppose the first \$1000 to be
received at year 2. What is the present value (i.e., value at
t=0) of Mary’s cash flow?

OR

• PV = ? 19,090.91
• FV=21000
• N=1
• I=10%
• PMT=0
8. Mary expects to receive \$1,000
each year through infinity. Each cash
flow will grow at 5% through infinity and discount rate is 10%.

Suppose the first \$1000 to be
received at year 2. What is the present value (i.e., value at
t=0) of Mary’s cash flow?

Or

PV = ? 17,355.37

• FV=21000
• N=2
• I=10%
• PMT=0
9. Mary expects to receive \$1,000
each year through infinity. Each cash
flow will grow at 5% through infinity and discount rate is 10%.

Suppose the first \$1000 to be received at year 4. What is the present value (i.e., value at
t=0) of Mary’s cash flow?

• PV = ? 14,343.28
• FV=21000
• N=4
• I=10%
• PMT=0
10. Jasmine deposits \$400 today,
how long will take Jasmine double her investment? The annual rate is 6% and interest income is monthly compounded.

When you try
to find out time periods , you have to
distinguish negative from positive cash flow.
• FV = \$800
• PV = -\$400
• PMT = 0
• I = 6%/12 = 0.5%
• N = ?138.98 months (about 11.58 years)
11. If Jasmine deposits \$1,000 and
expects to have \$3,172.17 at the end of 15th year. The bank compounds interest annually.

deposit, what is the annual interest rate paid by the bank?

When you try
to find out interest rate , you have to
distinguish negative from positive cash flow.
• FV = \$3172.17
• PV = -\$1000
• PMT = 0
• N = 15
• I = ?8%(annual
• rate)
12. If Jasmine deposits \$1,000 and
expects to have \$2454.10 at the end of 15th year. The bank compounds interest monthly.

deposit, what is the annual interest rate paid by the bank?

When you try
to find out interest rate , you have to
distinguish negative from positive cash flow.
• FV = \$2454.10
• PV = -\$1000
• PMT = 0
• N = 15*12 = 180
• I = ?6%(annual
• rate)

• You may get monthly rate of 0.5% but have to convert it to annual
• rate.
13. Smith tells Jasmine to invest
\$3 million now and the expected cash flows are listed as follows.

T =1 -\$0.8 million
T = 2 -\$0.5 million
T = 3 \$ 4 million
T = 4 \$4 million

If interest rate is 11%, should
Jasmine take this project?
• CF0 =-\$3 million
• CF1 =-\$0.8 million
• CF2 =-\$0.5 million
• CF3 =\$4 million
• CF4 =\$4 million
• I = 11%
• NPV = \$1.433
• million

• Since NPV of
• this proposed investment is positive, Jasmine will invest in this project.
 Author: ClassicalGirl87 ID: 62787 Card Set: Exam1 Updated: 2011-01-29 20:31:49 Tags: Finance300 TVM Folders: Description: TVM Concept, TVM Growing Perpetuity, TVM Compounding Frequency NPV Show Answers: