Corp.fin, Test 2solultion

Corp.fin, Test 2solultion - Test 2 Name _ 1. If you have a...

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Test 2 Name __________________ 1. If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compound interest at 7.5% for three years which one will pay more and by how much? a. Simple interest by $50.00 b. Compound interest by $22.97 c. Compound interest by $150.75 d. Compound interest by $150.00 e. None of the above. Solution: Simple Interest = $10,000 (0.08)(3) = $2,400; Compound Interest = $10,000(1.075) 3 = $2,422.97; Difference = $2,422.97 - $2,400 = $22.97 2. You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities? a. Both annuities are of equal value today. b. Annuity B is an annuity due. c. Annuity A has a higher future value than annuity B. d. Annuity B has a higher present value than annuity A. e. Both annuities have the same future value as of ten years from today. 3. An annuity stream where the payments occur forever is called a(n): a. annuity due. b. indemnity.
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c. perpetuity. d. amortized cash flow stream. e. amortization table. 4. Which one of the following statements concerning the annual percentage rate is correct? a. The annual percentage rate considers interest on interest. b. The rate of interest you actually pay on a loan is called the annual percentage rate. c. The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly. d. When firms advertise the annual percentage rate they are violating U.S. truth-inlending laws. e. The annual percentage rate equals the effective annual rate when the rate on
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This note was uploaded on 06/18/2010 for the course MBA MBA 5131 taught by Professor Mm during the Summer '10 term at Cumberland TN.

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Corp.fin, Test 2solultion - Test 2 Name _ 1. If you have a...

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