1.
As she works with rates of return, Maria is using mathematical techniques that quantify the time value of money. The time value of money depends on several factors, including the following: when the money will change hands, the amount that's invested or borrowed, the interest rate, and the frequency of compounding. If Maria wishes to borrow money, which of the following offers is most advantageous from a time-value point of view?
a. Daily compounding with a nominal annual interest rate of 12%.
b. Semi-annual compounding with a nominal interest rate of 12%.
c. Semi-annual compounding with a nominal interest rate of 13%.
d. Daily compounding with a nominal annual interest rate of 13%.
2.
When Maria discusses her parents' retirement strategy, she suggests that it is not enough simply to target how much one saves. One must also carefully consider what type of investment one will make with those savings. She discusses bank certificates of deposit, corporate bonds, and stocks. Maria says that bonds will earn about 2% more per year than CDs, and stocks will earn an average return that is higher than bonds. Corporate bonds tend to have lower rates of return than corporate common stock because they tend to be
a. higher risk.
b. worth more.
c. less risky.
d. longer term.
3.
Cash flows with higher risk will have
a. lower present value than low risk cash flows, all else the same.
b. lower expected future value than low risk cash flows, all else the same.
c. higher present value than low risk cash flows, all else the same.
d. higher expected future value than low risk cash flows, all else the same.
e. a and c.
f. a and d.
g. b and d.
4.
A perpetuity is:
a. like an ordinary annuity except that the payments continue indefinitely.
b. worth less than an ordinary annuity of equal risk and making equal payments.
c. like an annuity due except that the payments continue indefinitely.
d. more difficult to value than an annuity.
5.
Find the present value of $5,000 to be received in 36 months, if the interest rate is 12% per year, compounded monthly.
a. $84.55
b. $3,558.90
c. $3,494.62
d. none of the above
6.
Maria's parents plan to rent an apartment when they retire. The apartment is part of a retirement center and rents for $500 a month, payable in advance. If her parents can earn 8% per year on any amount deposited in a special savings account, how much would they need to deposit in that account today in order to fully fund the rental requirements for the coming 12 months? (Hint: Assume that they will include the first month's rent in the deposit even though the money will only be in the account momentarily before it is used to pay the rent.)
a. $5,786.21
b. $5,747.89
c. $4,069.48
d. $3,768.04
7.
A British Consol bond is a security that pays its holder a fixed amount every year forever. Suppose Maria's parents own such a bond that pays them 150 British pounds annually and is selling for 2,000 pounds. What discount rate must investors apply to this bond as they determine its value?
a. There is not enough information to estimate the discount rate.
b. 7.5%
c. .075%
d. 13.33%
