accounts data bank

1. Which of the following statements is CORRECT?

a. A time line is not meaningful unless all cash flows occur annually.

b. Time lines are useful for visualizing complex problems prior to doing actual calculations.

c. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

d. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.

e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

2. Which of the following statements is CORRECT?

a. A time line is not meaningful unless all cash flows occur annually.

b. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

c. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

3. Which of the following statements is CORRECT?

a. A time line is not meaningful unless all cash flows occur annually.

b. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

c. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

d. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

e. Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

4. Which of the following statements is CORRECT?

a. A time line is not meaningful unless all cash flows occur annually.

b. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

c. Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

d. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

e. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

5. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

b. The discount rateincreases.

c. The riskiness of the investment’s cash flows decreases.

d. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.

e. The discount rate decreases.

6. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?

a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.

b. The discount rate decreases.

c. The riskiness of the investment’s cash flows increases.

d. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

e. The discount rate increases.

7. Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.

b. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.

c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.

d. The periodic rate of interest is 3% and the effective rate of interest is 6%.

e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.

8. Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

a. The periodic rate of interest is 2% and the effective rate of interest is 4%.

b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.

c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.

d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

e. The periodic rate of interest is 8% and the effective rate of interest is also 8%.

9. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

a. The annual payments would be larger if the interest rate were lower.

b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.

c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.

d. The last payment would have a higher proportion of interest than the first payment.

e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.

10. A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

a. The annual payments would be larger if the interest rate were lower.

b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.

c. The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.

d. The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.

11. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

a. The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.

b. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

c. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

e. The outstanding balance declines at a slower rate in the later years of the loan’s life.