Question 1

It is known that the total interest paid over a 5-year period is $2 081.13. What was the principal amount borrowed at a 6% nominal interest rate compounded quarterly?
A)$3 000
B)$4 000
C)$5 000
D)$6 000
E)$7 000

Accepted Answer

D

Question 2

Milo has just inherited $6 500 and immediately spent the money purchasing an investment certificate. He decided to use the investment certificate to finance his return to the university that he left because of the financial problems at the time. Milo calculated that the interest rate the bank would pay on his investment certificate would allow him to accumulate the $7 600 he would need over 4 years. What interest rate does the bank pay?
A)2.0
B)2.5
C)3.0
D)3.5
E)4.0

Accepted Answer

E

Question 3

What makes one dollar in the future less desirable than one dollar today?
A)variable interest rate
B)a forgone opportunity of investment
C)a diminishing purchasing power of money over time
D)a growing inflation
E)accumulated welfare of people

Accepted Answer

B

Question 4

Your credit card statement says that your card charges 0.0562% interest per day. What is the actual interest rate per year?
A)11.6%
B)14.5%
C)18.3%
D)20.1%
E)22.8%

Accepted Answer

The actual annual interest rate can be calculated by compounding the daily rate over the course of a year: $ (1 + 0.000562)^{365} - 1 \approx 0.228 $, or 22.8%.

Question 5

If an interest rate is 18% per year, what is the equivalent interest rate per quarter?
A)3.8%
B)4.5%
C)4.8%
D)6.2%
E)8.6%

Accepted Answer

To find the equivalent quarterly interest rate from an annual rate of 18%, we divide the annual rate by 4 (since there are 4 quarters in a year): 18% / 4 = 4.5%.

Question 6

How many compounding periods are needed to obtain an effective interest rate of 25% if the interest rate per sub-compounding period is 1.88%?
A)13
B)12
C)11
D)10
E)9

Accepted Answer

The formula to find the effective interest rate (EIR) given a nominal rate (r) and the number of compounding periods (n) is EIR = (1 + r)^n - 1. Rearranging to solve for n gives n = log(EIR + 1) / log(1 + r). Substituting EIR = 0.25 and r = 0.0188, we get n = log(1.25) / log(1.0188) ≈ 12.

Question 7

The nominal interest rate is 6% per year compounded quarterly. What is the effective annual rate?
A)5.74%
B)5.84%
C)5.94%
D)6.04%
E)6.14%

Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + i/n)^(n*t) - 1, where i is the nominal interest rate, n is the number of compounding periods per year, and t is the time in years. Plugging in the given values: EAR = (1 + 0.06/4)^(4*1) - 1 = 1.0614 - 1 = 0.0614 or 6.14%.

Question 8

The principal amount is
A)the present value of money.
B)the future value of money.
C)the amount of money invested at the prime interest rate.
D)the annual equivalent value of money.
E)the difference between the amount of money lent and the amount of money later repaid.

Accepted Answer

The principal amount refers to the present value of money, which is the original sum of money invested or loaned, before any interest or earnings are added.

Question 9

J.D.Irving Ltd. is considering a construction project with $2 million initial investment that will last for 10 years. The duration of the construction phase is one year. Once the construction is over, the project starts yielding a constant annual revenue of $1.0 million. By the end of the fifth year the project generates $0.5 million extra revenue. The annual operation and maintenance expenses of $0.5 million will start at year four and last till the end of the project's life. At the very end of the 10-year project the used equipment can be sold for $1.5 million. What cash flow diagram represents this project?
A)

B)

C)

D)

E)

Accepted Answer

The answer of J.D.Irving Ltd. is considering a construction project...

Question 10

Emily is considering two mutually exclusive financial options: (i)to deposit $4 000 in her bank's savings account that pays 4.6% annual interest, or (ii)to purchase a $4 000 one-year guaranteed investment certificate with a monthly interest rate of 0.3%. From an opportunity cost standpoint, by making the decision to deposit $4 000 in the bank account, Emily will
A)gain $37.6 by the end of the year.
B)lose $37.6 by the end of the year.
C)gain $57.6 by the end of the year.
D)lose $57.6 by the end of the year.
E)make zero economic profit.

Accepted Answer

The annual interest earned on the savings account is $4,000 x 4.6% = $184. The annual interest earned on the GIC is $4,000 x 0.3% x 12 = $144. Therefore, Emily will lose $184 - $144 = $37.6 by depositing the money in the savings account.

Question 11

You would like to have $8 500 for future spending in three years from now. How much should you deposit in your bank account now if the account pays you 0.4% interest per month?
A)$2 071
B)$7 362
C)$8 102
D)$8 399
E)$8 429

Accepted Answer

To find the present value, we use the formula for compound interest: $PV = \frac{FV}{(1 + r)^n}$, where $FV$ is the future value, $r$ is the monthly interest rate, and $n$ is the total number of periods. Here, $FV = 8500$, $r = 0.004$, and $n = 36$ (3 years * 12 months). Calculating gives $PV \approx 7362$.

Question 12

Nominal interest rate is calculated by
A)summing up all interest rates for all compounding periods.
B)converting a given interest rate with a compounding period to an equivalent interest rate with a one-year compounding period.
C)dividing the interest rate per compounding period by the number of compounding periods per year.
D)multiplying the simple interest rate by the number of years.
E)multiplying the interest rate per compounding period by the number of compounding periods per year.

Accepted Answer

The nominal interest rate is calculated by multiplying the interest rate per compounding period by the number of compounding periods per year. This gives the annual rate of interest without accounting for the effect of compounding.

Question 13

You invest $10 000 at 5% interest rate compounded monthly, what is your accumulated interest at the end of year 2?
A)$511.62
B)$537.79
C)$1 025.00
D)$1 049.41
E)$1 089.41

Accepted Answer

The formula for compound interest is A = P(1 + r/n)^(nt), where P is the principal amount ($10,000), r is the annual interest rate (0.05), n is the number of times interest is compounded per year (12), and t is the time in years (2). The accumulated amount A is $11,049.41, so the interest is $11,049.41 - $10,000 = $1,049.41.

Question 14

Bill wants to buy a new car in three years from now. He expects that the price of a car will be $15 000 in three years. How much money should Bill put in his savings account now if a bank pays 5% interest rate on this account?
A)$11 629
B)$12 104
C)$12 958
D)$13 465
E)$14 286

Accepted Answer

The answer of Bill wants to buy a new car...

Question 15

Equivalence is a condition that exists when
A)the value of a cost at one time is numerically equal to the value of the related benefits received at a different time.
B)the present worth of a cost equals the future worth of a cost at any point in time.
C)the present worth of all costs and benefits equals the future worth of these costs and benefits at any point in time.
D)the project breaks even, meaning costs equal benefits at a certain point in time.
E)a decision-maker assesses two sets of cashflows as equally attractive.

Accepted Answer

Equivalence in financial terms often refers to a decision-maker assessing two sets of cashflows as equally attractive, meaning they have the same value or utility to the decision-maker.

Question 16

COSCO invested $5.5 million in a project ten years ago. As of today the worth of this project is $24.9 million. What annual interest rate has the project been earning if interest is compounded monthly?
A)14.2%
B)14.8%
C)15.2%
D)15.8%
E)16.2%

Accepted Answer

The answer of COSCO invested $5.5 million in a project...

Question 17

If you borrow $2 000 today at 20% interest rate for 5 years, what is your simple interest in this case?
A)$2 000
B)$4 000
C)$4 976.64
D)$976.64
E)$2 976.64

Accepted Answer

Simple interest is calculated as principal times rate times time. Here, it's $2000 * 20% * 5 = $2000.

Question 18

What does the term "market equivalence" imply?
A)indifference on the part of a decision maker among available choices
B)the existence of a mathematical relationship between time and money
C)the ability to exchange one cash flow for another at minimum cost
D)the ability to exchange one cash flow for another at no cost
E)the ability to obtain a zero net cash flow

Accepted Answer

Market equivalence implies that a decision maker is indifferent among available choices, meaning they perceive the options as having equal value or utility.

Question 19

What does a cash flow diagram of a project represent?
A)summary of benefits and costs of a project
B)summary of the timing and magnitude of payments and receipts as they occur over time
C)magnitude of cash flows at a given period of time
D)summary of present, future, and annual worths of a project
E)change in value of money at different interest rates at various compounding periods

Accepted Answer

A cash flow diagram is a visual representation that shows the timing and magnitude of cash inflows and outflows for a project over a specific period. It helps in understanding when money will be spent and received, aiding in the financial planning and analysis of the project.

Question 20

Bill deposits $100 to his savings account biweekly. His savings account pays a nominal interest rate of 5% per year, compounded every six months. What is his savings account's effective interest rate for a 6-month period?
A)2.1%
B)2.5%
C)3.2%
D)4.2%
E)5.1%

Accepted Answer

The effective interest rate for a 6-month period can be calculated using the formula for converting a nominal annual rate to an effective rate for a given compounding period: $ (1 + \frac{r}{n})^n - 1 $, where $ r $ is the nominal annual rate and $ n $ is the number of compounding periods per year. Given a nominal annual rate of 5% (or 0.05) and compounding every six months (n = 2), the effective 6-month interest rate is $ (1 + \frac{0.05}{2})^2 - 1 = (1.025)^2 - 1 = 1.050625 - 1 = 0.050625 $ or 5.0625% annually. To find the semi-annual (6-month) effective rate, we simply use the given nominal rate divided by the number of compounding periods, which is $ \frac{0.05}{2} = 0.025 $ or 2.5%.

Quiz 2: Time Value of Money

It is known that the total interest paid over a 5-year period is $2 081.13. What was the principal amount borrowed at a 6% nominal interest rate compounded quarterly?

What makes one dollar in the future less desirable than one dollar today?

Your credit card statement says that your card charges 0.0562% interest per day. What is the actual interest rate per year?

If an interest rate is 18% per year, what is the equivalent interest rate per quarter?

How many compounding periods are needed to obtain an effective interest rate of 25% if the interest rate per sub-compounding period is 1.88%?

The nominal interest rate is 6% per year compounded quarterly. What is the effective annual rate?

The principal amount is

You would like to have $8 500 for future spending in three years from now. How much should you deposit in your bank account now if the account pays you 0.4% interest per month?

Nominal interest rate is calculated by

You invest $10 000 at 5% interest rate compounded monthly, what is your accumulated interest at the end of year 2?

Bill wants to buy a new car in three years from now. He expects that the price of a car will be $15 000 in three years. How much money should Bill put in his savings account now if a bank pays 5% interest rate on this account?

Equivalence is a condition that exists when

COSCO invested $5.5 million in a project ten years ago. As of today the worth of this project is $24.9 million. What annual interest rate has the project been earning if interest is compounded monthly?

If you borrow $2 000 today at 20% interest rate for 5 years, what is your simple interest in this case?

What does the term "market equivalence" imply?

What does a cash flow diagram of a project represent?

Bill deposits $100 to his savings account biweekly. His savings account pays a nominal interest rate of 5% per year, compounded every six months. What is his savings account's effective interest rate for a 6-month period?