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Unformatted text preview: Old Exam Questions  Time Value of Money  Solutions Page 1 of 117 Pages Time Value of Money  Solutions 1. Given an equivalent number of payments and interest rates, the future value of an annuity due is typically a little more that the future value of a regular annuity. * A. True B . F a l s e 2. The future value of an annuity due will always be greater than the future value of an equivalent ordinary annuity, whereas the present value of an annuity due will always be less than the present value of an equivalent ordinary annuity. A . T r u e * B. False 3. The value of a perpetuity with cash flows starting in Year 1, minus the value of a perpetuity with equivalent cash flows starting in Year N+1, where both perpetuities are valued as of Year 0, is nothing more than the present value of an ordinary annuity with equivalent cash flows in Years 1 through N. * A. True B . F a l s e 4. Time value of money is nothing more than mathematical manipulation. In fact, you can find the present value of a cash flow by using a negative interest rate and using a future value calculation. * A. True B . F a l s e 5. All other factors held constant, the present value of a given annual annuity decreases as the number of discounting/compounding periods per year increases. * A. True B . F a l s e 6. A 15year mortgage will have larger monthly payments than a 30year mortgage of the same amount and same interest rate. * A. True B . F a l s e 7. Suppose someone offered you the choice of two equally risky annuities, each paying $10,000 per year for five years. One is an ordinary (or deferred) annuity, while the other is an annuity due. Given the mathematics of finance, we know that the present value of Old Exam Questions  Time Value of Money  Solutions Page 2 of 117 Pages the annuity due will exceed the present value of the ordinary annuity, while the future value of the annuity due will be less than the future value of the ordinary annuity. A . T r u e * B. False 8. Suppose someone offered you the choice of two equally risky annuities, each paying $10,000 per year for five years. One is an ordinary (or deferred) annuity, while the other is an annuity due. Given the mathematics of finance, we know that if interest rates increase, the difference between the present value of the ordinary annuity and the present value of the annuity due will remain the same. A . T r u e * B. False 9. As shown in class, it is possible to find the present value of an annuity as the difference of two perpetuities. However, it is impossible to use an equivalent approach to find the future value of an annuity. A . T r u e * B. False 10. Mathematically, discounting a single, lumpsum value over a 10year period at a fixed interest rate is equivalent to compounding the same lumpsum value, at the same fixed interest rate, over a negative 10year period....
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This note was uploaded on 02/12/2011 for the course GEB 3373 taught by Professor Crum during the Spring '10 term at University of Florida.
 Spring '10
 Crum

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