Question

QUESTION 11

1. Which of the following statements is CORRECT?

   	a.	If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows will be more than the cash flow at Time 0.
   	b.	If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
   	c.	To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.
   	d.	If you solve for I and get a negative number, then you must have made a mistake.
   	e.	If CF0 is positive and all the other CFs are negative, then you can still solve for I.

QUESTION 12

1. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

   True

   False

QUESTION 13

1. You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

   	a.	The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
   	b.	The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
   	c.	The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
   	d.	If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
   	e.	The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

QUESTION 14

1. Which of the following statements is CORRECT?

   	a.	A time line is not meaningful unless all cash flows occur annually.
   	b.	Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
   	c.	Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.
   	d.	Time lines are not useful for visualizing complex problems prior to doing actual calculations.
   	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.

QUESTION 15

1. Which of the following statements is CORRECT?

   	a.	The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
   	b.	If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
   	c.	The cash flows for an annuity due must all occur at the beginning of the periods.
   	d.	If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
   	e.	The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

QUESTION 16

1. 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 rate is less than 3%.
   	b.	The periodic interest rate is greater than 3%.
   	c.	The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.
   	d.	The present value would be greater if the lump sum were discounted back for more periods.
   	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.

QUESTION 17

1. Which of the following statements is CORRECT?

   	a.	If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
   	b.	The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
   	c.	An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
   	d.	The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
   	e.	If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.

QUESTION 18

1. 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 PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.
   	c.	The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.
   	d.	The present value would be greater if the lump sum were discounted back for more periods.
   	e.	The periodic rate is less than 3%.

QUESTION 19

1. 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.	The last payment would have a higher proportion of interest than the first payment.
   	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 proportion of interest versus principal repayment would be the same for each of the 7 payments.
   	e.	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.

QUESTION 20

1. Which of the following statements is CORRECT?

   	a.	If you solve for I and get a negative number, then you must have made a mistake.
   	b.	To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
   	c.	If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows will be more than the cash flow at Time 0.
   	d.	If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
   	e.	If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.

Answer 1

Answering the first 4 parts

Answer 11) Option E) If CF0 is positive and all the other CFs are negative, then you can still solve for I.

CFO represents an initial cash inflow whereas other represent cash outlays ,we can get the I i.e. the rate of return.

Option A) is incorrect because all cash inflows and no cash outflow will not produce a value of I or rate of return.

Option B) is incorrect because rate of return can be computed even if the sum of undiscounted cash flows is less than initial cash outlay.

Option C) is incorrect because there are other methods of computing I such as trial and error method. It is not impossible to compute without financial calculator or computer.

Option D) is incorrect becuase rate of return can be negative.

Answer 12) FALSE

This is because timelines can easily be constructed for cash flows at uneveal time intervals. They can be constructed if some occur annually whereas others occur semi annually.

Answer 13) Option E) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

This is because annuity due represents payments made at the beginning of the period whereas Ordinary represents payment at the end of the period. Payments received earlier will always be more valuable than payments received in end as per the time value of money. As a result it will have a higher present and future value.

Option A) is incorrect because the future value of annutiy due will always be higher than ordinary. Considering the concept of compounding, due will have a slightly longer time period and will have a higher future value.

Option B) is incorrect because the present value of orrdinary will be lesser than Due. This is because ORD will be discounted at a slightly longer time period than due and will have a lower Present value.

Option C) is incorrect becuase present and future values of Ordinary cannot be grater than due as per the above mentioned explanations.

Option D) is incorrect because the difference will not remain constant with change in interest rates.

Answer 14) OptionB) Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

This is because timelines can depict both quarterly or annual cashflows. Timelines can accomodate uneven time intervals of cash flows.

Option A) is incorrect because timelines can be made for different time periods. They are not only restricted to Annual cash flows.

Option C) is incorrect because timelines can be constructed as per the beginning of the period i.e. Annuity Due.

Option D) is incorrect becuase timelines assist in visualizing complex problems prior to making actual calculations.

Option E) is incorrect because timeline can consider uneven cash flows even those which are not part of annuity.