ch4 practice test

# ch4 practice test -...

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INDIANA UNIVERSITY NORTHWEST Division of Business and Economics F301 Financial Management Fall 2000 Test 2 1. When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan. a. True b. False 2. Suppose someone offered you your choice of two equally risky annuities, each paying \$5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth maximizing investor which annuity would you choose? (Hint: Which annuity is worth more today?) a. The annuity due. b. The deferred annuity. c. Either one, because as the problem is set up, they have the same present value. d. Without information about the appropriate interest rate, we cannot find the values of the two annuities, hence we cannot tell which is better. e. The annuity due; however, if the payments on both were doubled to \$10,000, the deferred annuity would be preferred. 3. At an effective annual interest rate of 20 percent, how many years will it take a given amount to triple in value? (Round to the closest year.) a. 5 years b. 8 years c. 6 years d. 10 years e. 9 years 4. Assume that you will receive \$2,000 a year in Years 1 through 5, \$3,000 a year in Years 6 through 8, and \$4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows? a. \$ 9,851 b. \$13,250 c. \$11,714 d. \$15,129 e. \$17,353 5. If \$100 is placed in an account that earns a nominal 4 percent, compounded quarterly, what will it be worth in 5 years? a. \$122.02 b. \$105.10 c. \$135.41 d. \$120.90 e. \$117.48 6. South Penn Trucking is financing a new truck with a loan of \$10,000 to be repaid in 5 annual end-of-year installments of \$2,504.56. What annual interest rate is the company paying? a. 7% b. 8% c. 9% d. 10% e. 11% http://www.iun.edu/~bnwwbn/f301/f301t2.html 1 of 11 9/27/2010 9:56 PM

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7. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? a. 0.25% b. 0.50% c. 0.70% d. 1.00% e. 1.25% 8. Your company is planning to borrow \$2,500,000 on a 10-year, 9 percent, annual payment, fully amortized term loan. What fraction of the payment made at the end of the third year will represent repayment of principal? a. 29.83% b. 50.19% c. 35.02% d. 64.45% e. 72.36% 9. Your father, who is 60, plans to retire in 2 years, and he expects to live independently for 3 years. He wants a retirement income which has, in the first year, the same purchasing power as \$40,000 has today. However, his retirement income will be of a fixed amount, so his real income will decline over time. His retirement income will
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## This note was uploaded on 10/03/2010 for the course FINANCE 08FB40447 taught by Professor Raymond during the Spring '10 term at University of Manchester.

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ch4 practice test -...

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