Question

1.Can effective rate be greater than the nominal rate? (Given the following notation: annual compounding: M=1, semiannual compounding: M=2)

A. Yes, only when M=1

B. Yes, only when M>1

C. Yes, only when M>2

D. No, effective rate equals the nominal rate regardless of M values

E. None of the above

2. Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.0% with annual compounding?

A. $205

B. $216

C. $231

D. $240

E. $252

3.Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year is $2.80. What was the growth rate in earnings per share (EPS) over the 10-year period?

A. 15.17%

B. 15.97%

C. 16.77%

D. 17.61%

E. 18.80%

4. An investment of $222 will increase in value to $313 in four years. The annual compound growth rate is closest to:

A. 5.82%

B. 6.38%

C. 7.64%

D. 8.97%

E. 9.39%

F. None of the above

5. Suppose you inherited $275,000 and invested it at 8.00% per year. How much could you withdraw at the end of each of the next 20 years? A. $28,010

B. $29,959

C. $32,301

D. $33,030

E. $34,681

6. If the real risk-free rate is 1.5% and if inflation was expected to be 2.0% during the next year, the quoted rate of interest on one-year T-bills would be 1.5%.

A. True B. False

7. What is normal yield curve?

A. A yield curve where interest rates on long-term maturities are higher than rates on both short- and intermediate-term.

B. A yield curve where interest rates on intermediate-term maturities are lower than rates on both short- and long-term maturities.

C. A yield curve where real risk-free interest rates are higher than nominal risk-free interest rates.

D. A yield curve where real risk-free interest rates are lower than nominal risk-free interest rates. E. None of above.

8. Which one of the following has the highest effective annual rate?

A. 6 percent compounded annually

B. 6 percent compounded semiannually

C. 6 percent compounded quarterly

D. 6 percent compounded daily

E. 6 percent compounded every 2 years

9. An investment of $231 will increase in value to $268 in three years. The annual compound growth rate is closest to:

A. 4.0%

B. 5.0%

C. 5.5%

D. 6.0%

Answer 1

1.Can effective rate be greater than the nominal rate? (Given the following notation: annual compounding: M=1, semiannual compounding: M=2)
ear=(1+nominal rate/m)^(1/m)-1
B. Yes, only when M>1

2. Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.0% with annual compounding?
=125*1.08^8=231
C. $231

3.Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year is $2.80. What was the growth rate in earnings per share (EPS) over the 10-year period?
=(2.8/0.5)^(1/10)-1=18.80%
E. 18.80%

4. An investment of $222 will increase in value to $313 in four years. The annual compound growth rate is closest to:
=(313/222)^(1/4)-1=8.97%
D. 8.97%

5. Suppose you inherited $275,000 and invested it at 8.00% per year. How much could you withdraw at the end of each of the next 20 years?
=PMT(8%,20,275000)=28010
A. $28,010

6. If the real risk-free rate is 1.5% and if inflation was expected to be 2.0% during the next year, the quoted rate of interest on one-year T-bills would be 1.5%.

=1.5%+2%=3.5%
B. False

7. What is normal yield curve?

A. A yield curve where interest rates on long-term maturities are higher than rates on both short- and intermediate-term.

8. Which one of the following has the highest effective annual rate?

D. 6 percent compounded daily

9. An investment of $231 will increase in value to $268 in three years. The annual compound growth rate is closest to:
=(268/231)^(1/3)-1=5.077%
B. 5.0%