# Exam1

 .remove_background_ad { border: 1px solid #555555; padding: .75em; margin: .75em; background-color: #e7e7e7; } .rmbg_image { max-height: 80px; } Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater thanits future value. A) True B) False A) True The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The later we are in the loan's life, the larger the principal portion of the payment. A) True B) False A) True If a bank uses quarterly compounding for savings accounts, the nominal rate will be greater than the effective annual rate. A) True B) False B) False The present value of a future sum decreases as either the discount rate or the number of discount periods per year increases. A) True B) False A) True The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity. A) True B) False B) False Mary expects to receive \$1,000 each year through infinity. Each cash flow will grow at 5% through infinity and discount rate is 10%. Suppose the first \$1000 to be received at year 1. What is the present value (i.e., value at t=0) of Mary’s cash flow? OR PV = ? 19,090.91 FV=21000N=1I=10%PMT=0 Mary expects to receive \$1,000 each year through infinity. Each cash flow will grow at 5% through infinity and discount rate is 10%. Suppose the first \$1000 to be received at year 2. What is the present value (i.e., value at t=0) of Mary’s cash flow? OR PV = ? 19,090.91FV=21000N=1I=10%PMT=0 Mary expects to receive \$1,000 each year through infinity. Each cash flow will grow at 5% through infinity and discount rate is 10%. Suppose the first \$1000 to be received at year 2. What is the present value (i.e., value at t=0) of Mary’s cash flow? Or PV = ? 17,355.37 FV=21000 N=2 I=10% PMT=0 Mary expects to receive \$1,000 each year through infinity. Each cash flow will grow at 5% through infinity and discount rate is 10%. Suppose the first \$1000 to be received at year 4. What is the present value (i.e., value at t=0) of Mary’s cash flow? PV = ? 14,343.28FV=21000N=4I=10%PMT=0 Jasmine deposits \$400 today, how long will take Jasmine double her investment? The annual rate is 6% and interest income is monthly compounded. When you try to find out time periods , you have to distinguish negative from positive cash flow. FV = \$800PV = -\$400PMT = 0I = 6%/12 = 0.5%N = ?138.98 months (about 11.58 years) If Jasmine deposits \$1,000 and expects to have \$3,172.17 at the end of 15th year. The bank compounds interest annually. If there is no additional deposit, what is the annual interest rate paid by the bank? When you try to find out interest rate , you have to distinguish negative from positive cash flow. FV = \$3172.17PV = -\$1000PMT = 0N = 15I = ?8%(annualrate) If Jasmine deposits \$1,000 and expects to have \$2454.10 at the end of 15th year. The bank compounds interest monthly. If there is no additional deposit, what is the annual interest rate paid by the bank? When you try to find out interest rate , you have to distinguish negative from positive cash flow. FV = \$2454.10PV = -\$1000PMT = 0N = 15*12 = 180I = ?6%(annualrate) You may get monthly rate of 0.5% but have to convert it to annualrate. Smith tells Jasmine to invest \$3 million now and the expected cash flows are listed as follows. T =1 -\$0.8 million T = 2 -\$0.5 million T = 3 \$ 4 million T = 4 \$4 million If interest rate is 11%, should Jasmine take this project? CF0 =-\$3 millionCF1 =-\$0.8 millionCF2 =-\$0.5 millionCF3 =\$4 millionCF4 =\$4 millionI = 11%NPV = \$1.433million Since NPV ofthis proposed investment is positive, Jasmine will invest in this project. .remove_background_ad { border: 1px solid #555555; padding: .75em; margin: .75em; background-color: #e7e7e7; } .rmbg_image { max-height: 80px; } AuthorClassicalGirl87 ID62787 Card SetExam1 DescriptionTVM Concept, TVM Growing Perpetuity, TVM Compounding Frequency NPV Updated2011-01-29T20:31:49Z Show Answers