Question Details

ou plan to analyze the value of a potential investment 



1.	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- 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.


2.	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%.

3.	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%.
	
4.	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.
	
5.	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.




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