Answer Options:
a. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
b. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
c. A bank loan’s nominal interest rate will always be equal to or less than its effective annual rate.
d. If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
e. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
Answer: c. A bank loan’s nominal interest rate will always be equal to or less than its effective annual rate.
Question: If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.
Answer Options:
a. True
b. False
Answer: b. False
Question: The CAPM is a multi-period model that takes account of differences in securities’ maturities, and it can be used to determine the required rate of return for any given level of systematic risk.
a. True
b. False
Answer Options:
Answer: False
Question: Diversification will normally reduce the riskiness of a portfolio of stocks.
Answer Options:
a. True
b. False
Answer: a. True
Question: The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.
Answer Options:
a. True
b. False
Answer: b. False
Question: When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment’s percentage increases in the loan’s later years.
Answer Options:
a. True
b. False
Answer: a. True
Question: Ryngard Corp’s sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)?
Answer Options:
a. 2.07
b. 2.26
c. 2.38
d. 2.26
e. 2.49
Answer: c. 2.38
Question: The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy’s labor force.
Answer Options:
a. True
b. False
Answer: b. False
Question: Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
Answer Options:
a. True
b. False
Answer: a. True
Question: Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky.
Answer Options:
a. True
b. False
Answer: b. False