FINMAN2

QUIZ # 1
SUMMER AY 2010-2011

MULTIPLE CHOICE:

1. The future value of a single sum:

A. increases as the compound rate decreases.
B. decreases as the compound rate increases.
C. increases as the number of compound periods decreases.
D. increases as the compound rate increases.

2. The present value of a single sum:

A. increases as the discount rate decreases.
B. decreases as the discount rate decreases.
C. increases as the number of discount periods increases.
D. increases as the discount rate increases.

3. If you are an investor, which of the following would you prefer?

A. Earnings on funds invested would compound annually.
B. Earnings on funds invested would compound daily.
C. Earnings on funds invested would compound monthly.
D. Earnings on funds invested would compound quarterly.

4. Discounting is the opposite of:

A. compounding. C. opportunity costs.
B. future value. D. both A and C.

5. Assuming two investments have equal lives, a high discount rate tends to favor:
A. the investment with large cash flow early.
B. the investment with large cash flow late.
C. the investment with even cash flow.
D. neither investment since they have equal lives.

6. The effective annual rate increases when the _______ increases.

A. number of compounding periods in a year
B. number of years invested
C. quoted rate
D. both A and C

7. When comparing annuity due to ordinary annuities, annuity due will have higher:
A. present values.
B. annuity payments.
C. future values.
D. both A and C.
E. all of the above.

8. As time increases for an amortized loan, the ___________ decreases.

A. interest paid per payment
B. principal paid per payment
C. the outstanding loan balance
D. both A and C
9. The present value of a perpetuity decreases when the _______ decreases.
A. number of investment periods C. perpetuity payment
B. annual discount rate D. both B and C

10. Which of the following provides the greatest annual interest?

A. 10% compounded annually C. 9% compounded quarterly
B. 9.5% compounded monthly D. 8.5% compounded daily

11. At 8% compounded annually, how long will it take $750 to double?

A. 6.5 years B. 48 months C. 9 years D. 12 years

12. At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
A. 6% B. 5% C. 7% D. 8%

13. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual
interest rate is:
A. 24%. B. 8%. C. 18%. D. 12%.

14. If you have $20,000 in an account earning 8% annually, what constant amount could you
withdraw each year for five years?
A. $3,525.62 B. $5,008.76 C. $3,408.88 D. $2,465.78

15. If you invest $750 every six months at 8% per year compounded semi-annually, how much
would you accumulate at the end of 10 years?
A. $10,065 B. $10,193 C. $22,334 D. $21,731

16. You have just purchased a share of preferred stock for $50.00. The preferred stock pays an
annual dividend of $5.50 per share forever. What is the rate of return on your investment?
A. .055 B. .010 C. .110 D. .220

17. If you place $50 in a savings account with an interest rate of 7% per year compounded
weekly, what will the investment be worth at the end of five years (round to the nearest
dollar)?
A. $72 B. $70 C. $71 D. $57

18. What is the present value of $300 received at the beginning of each year for five years?
Assume that the first payment is not received until the beginning of the third year (thus the
last payment is received at the beginning of the seventh year). Use a 10% discount rate,
and round your answer to the nearest $100.
A. $1,100 B. $1,000 C. $900 D. $1,200

19. You are going to pay $800 into an account at the beginning of each of 20 years. The
account will then be left to compound for an additional 20 years. At the end of the 41st
year you will begin receiving a perpetuity from the account. If the account pays 14%, how
much will you receive each year from the perpetuity (round to nearest $1,000)?
A. $140,000 B. $150,000 C. $160,000 D. $170,000

20. What is the present value of an investment that pays $400 at the end of three years and
$700 at the end of 10 years if the discount rate is 5%?
A. $1,100.00 B. $675.30 C. $775.40 D. $424.60