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%
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