# MC Questions for Finance

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### II and III only

Which of the following will increase the future value of a lump sum investment?
I. Decreasing the interest rate
II. Increasing the interest rate
III. Increasing the time period
IV. Decreasing the amount of the lump sum investment

-I and III only
-I and IV only
-II and III only
-II and IV only
-II, III, and IV only

### increases as the interest rate decreases

The present value of a lump sum future amount:

-increases as the interest rate decreases.
-decreases as the time period decreases.
-is inversely related to the future value.
-is directly related to the interest rate.
-is directly related to the time period.

### The period of time she has to wait decreases as the amount she invests today increases.

Today, Courtney wants to invest less than \$5,000 with the goal of receiving \$5,000 back some time in the future. Which one of the following statements is correct?

-The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest.
-The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal.
-She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest.
-The length of time she has to wait to reach her goal is directly related to the interest rate she earns.
-The period of time she has to wait decreases as the amount she invests today increases.

### 91.75 years

When you were born, your parents opened an investment account in your name and deposited \$500 into the account. The account has earned an average annual rate of return of 4.8 percent. Today, the account is valued at \$36,911.22. How old are you?

-74.47 years
-76.67 years
-81.08 years
-87.33 years
-91.75 years

### compounding

Tom earned \$120 in interest on his savings account last year. Tom has decided to leave the \$120 in his account so that he can earn interest on the \$120 this year. This process of earning interest on prior interest earnings is called:

-discounting.
-compounding.
-duplicating.
-multiplying.
-indexing.

### interest on interest

Jamie earned \$180 in interest on her savings account last year. She has decided to leave the \$180 in her account so that she can earn interest on the \$180 this year. The interest Jamie earns this year on this \$180 is referred to as:

-simple interest.
-complex interest.
-accrued interest.
-interest on interest.
-discounted interest.

### compound interest

Lester had \$6,270 in his savings account at the beginning of this year. This amount includes both the \$6,000 he originally invested at the beginning of last year plus the \$270 he earned in interest last year. This year, Lester earned a total of \$282.15 in interest even though the interest rate on the account remained constant. This \$282.15 is best described as:

-simple interest.
-interest on interest.
-discounted interest.
-complex interest.
-compound interest.

### discount rate

The interest rate used to compute the present value of a future cash flow is called the:

-prime rate.
-current rate.
-discount rate.
-compound rate.
-simple rate.

### 7 percent interest, compounded annually

Sam wants to invest \$5,000 for 5 years. Which one of the following rates will provide him with the largest future value?

-5 percent simple interest
-5 percent interest, compounded annually
-6 percent interest, compounded annually
-7 percent simple interest
-7 percent interest, compounded annually

### Terry could have the same future value and invest less than \$2,000 initially if he could earn more than 6.5 percent interest

Terry invested \$2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

-Terry will earn the same amount of interest each year.
-Terry could have the same future value and invest less than \$2,000 initially if he could earn more than 6.5 percent interest.
-Terry will earn an increasing amount of interest each and every year even if he should decide to withdraw the interest annually rather than reinvesting the interest.
-Terry's interest for year two will be equal to \$2,000 × 0.065 × 2.
-Terry will be earning simple interest.

### 8 percent interest for 9 years

Lisa has \$1,000 in cash today. Which one of the following investment options is most apt to double her money?

-6 percent interest for 3 years
- 12 percent interest for 5 years
- 7 percent interest for 9 years
- 8 percent interest for 9 years
- 6 percent interest for 10 years

### PV = \$600/(1 + 0.07)6

Which one of the following is the correct formula for computing the present value of \$600 to be received in 6 years? The discount rate is 7 percent.

- PV = \$600 × (1 + 6)7
- PV = \$600 × (1 + 0.07)6
- PV = \$600 × (0.07 × 6)
- PV = \$600/(1 + 0.07)6
- PV = \$600/(1 + 6)0.07

### Perpetuity

The Jones Brothers recently established a trust fund that will provide annual scholarships of \$12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?

-Ordinary annuity
-Annuity due
-Amortized payment
-Perpetuity
-Continuation

### effective annual rate

Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:

-annual percentage rate.
-compounded rate.
-quoted rate.
-stated rate.
-effective annual rate.

### annual percentage rate

Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

-annual percentage rate.
-compounded rate.
-effective annual rate.
-perpetual rate.
-simple rate.

### Decrease in the annuity payment

Which one of the following will decrease the present value of an annuity?

-Increase in the annuity's future value
-Increase in the payment amount
-Increase in the time period
-Decrease in the discount rate
-Decrease in the annuity payment

### To compute the initial loan amount, you must use a monthly interest rate.

Christie is buying a new car today and is paying a \$500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of \$450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?

-The present value of the car is equal to \$500 + (36 × \$450).
-The \$500 is the present value of the purchase.
-The car loan is an annuity due.
-To compute the initial loan amount, you must use a monthly interest rate.
-The future value of the loan is equal to 36 × \$450.

### All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Which one of the following statements is true concerning annuities?

-All else equal, an ordinary annuity is more valuable than an annuity due.
-All else equal, a decrease in the number of payments increases the future value of an annuity due.
-An annuity with payments at the beginning of each period is called an ordinary annuity.
-All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
-All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.

### Trust income of \$1,200 a year forever

Which one of the following is an example of a perpetuity?

-Trust income of \$1,200 a year forever
-Retirement pay of \$2,200 a month for 20 years
-Lottery winnings of \$1,000 a month for life
-Car payment of \$260 a month for 60 months
-Apartment rent payment of \$800 a month for one year

### Future value of a perpetuity

Which one of the following can NOT be computed?

-Future value of an ordinary annuity
-Future value of a perpetuity
-Present value of a perpetuity
-Present value of an annuity due
-Present value of an ordinary annuity

### Timing of the annuity payments

Which one of the following features distinguishes an ordinary annuity from an annuity due?

-Number of equal payments
-Amount of each payment
-Frequency of the payments
-Annuity interest rate
-Timing of the annuity payments

### 6 percent compounded monthly

Which one of the following has the highest effective annual rate?

-6 percent compounded annually
-6 percent compounded semi-annually
-6 percent compounded quarterly
-6 percent compounded monthly
-All the other answers have the same effective annual rate.

### 9,672.48

Karl can afford car payments of \$235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?

-\$9,672.48
-\$9,734.95
-\$9,899.60
-\$10,022.15
-\$10,422.09

### highest effective annual rate

When comparing savings accounts, you should select the account that has the:

-lowest annual percentage rate.
-highest annual percent rate.
-highest stated rate.
-lowest effective annual rate.
-highest effective annual rate.

### will be greater than 12.9 percent

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

-will be less than 12.9 percent.
-can either be less than or equal to 12.9 percent.
-is 12.9 percent.
-can either be greater than or equal to 12.9 percent.
-will be greater than 12.9 percent.

### 7.67 percent; 7.94 percent

You have just purchased a new warehouse. To finance the purchase, you've arranged for a 25-year mortgage for 80 percent of the \$1,800,000 purchase price. The monthly payment on this loan will be \$10,800. What is the APR? The EAR?

-7.67 percent; 7.94 percent
-7.67 percent; 8.03 percent
-7.72 percent; 7.94 percent
-7.72 percent; 8.03 percent
-7.75 percent; 8.03 percent

### Annuity due

Janis just won a scholarship that will pay her \$500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

-Ordinary annuity
-Annuity due
-Consol
-Ordinary perpetuity
-Perpetuity due

### Annuity B has both a higher present value and a higher future value than Annuity A.

You are comparing two annuities. Annuity A pays \$100 at the end of each month for 10 years. Annuity B pays \$100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

-The present value of Annuity A is equal to the present value of Annuity B.
-Annuity B will pay one more payment than Annuity A will.
-The future value of Annuity A is greater than the future value of Annuity B.
-Annuity B has both a higher present value and a higher future value than Annuity A.
-Annuity A has a higher future value but a lower present value than Annuity B.

### charge interest annually

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

-have a one-year term.
-have a zero percent interest rate.
-charge interest annually.
-must be an interest-only loan.
-require the accrued interest be paid in full with each monthly payment.

### 13,097.52

What is the value today of \$3,600 received at the end of each year for 7 years if the first payment is paid at the end of year 3 and the discount rate is 12 percent?

-\$11,694.21
-\$12,484.57
-\$13,097.52
-\$15,089.23
-\$16,429.52

### 3.00 percent

Your parents loaned you money at 0.25 percent interest per month. What is the APR of this loan?

-2.97 percent
-3.00 percent
-3.04 percent
-4.00 percent
-4.07 percent

### Annual interest payment

When you refer to a bond's coupon, you are referring to which one of the following?

-Difference between the purchase price and the face value
-Annual interest divided by the current bond price
-Difference between the bid and ask price
-Annual interest payment
-Principal amount of the bond

### Face value

What is the principal amount of a bond that is repaid at the end of the loan term called?

-Coupon
-Market price
-Accrued price
-Dirty price
-Face value

### Zero coupon

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

-Callable
-Income
-Zero coupon
-Convertible
-Tax-free

### option of repurchasing the bonds prior to maturity at a pre-specified price.

A call provision grants the bond issuer the:

-right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds.
-option to exchange the bonds for equity securities.
-right to automatically extend the bond's maturity date.
-right to repurchase the bonds on the open market prior to maturity.
-option of repurchasing the bonds prior to maturity at a pre-specified price.

### Inflation

A real rate of return is defined as a rate that has been adjusted for which one of the following?

-Inflation
-Interest rate risk
-Taxes
-Liquidity
-Default risk

### semi-annual

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.

-annual
-semi-annual
-quarterly
-monthly
-daily

### 8 percent annual coupon, 4 year

Which one of the following bonds is the least sensitive to changes in market interest rates?

-Zero-coupon, 10 year
-6 percent annual coupon, 10 year
-Zero-coupon, 4 year
-8 percent annual coupon, 4 year
-6 percent annual coupon, 4 year

### Baa

The lowest rating a bond can receive from Moody's and still be classified as an investment-quality bond is:

-BB.
-BBB.
-B.
-Ba.
-Baa.

Which one of the following individuals is most apt to purchase a municipal bond?

-Minimum-wage employee
-Retired individual with minimal current income
-Tax-exempt organization

### 3.75 percent

AB Builders, Inc. has 12-year bonds outstanding with a face value of \$1,000 and a market price of \$974. The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate?

-3.75 percent
-4.20 percent
-4.25 percent
-7.50 percent
-8.40 percent

### 5.77 percent

Best Lodging has \$1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity?

-5.77 percent
-5.84 percent
-6.00 percent
-6.13 percent
-6.27 percent

### A; 7.94

You own two bonds. Both bonds pay annual interest, have 6 percent annual coupons, \$1,000 face values, and currently have 6 percent yields to maturity. Bond A has 12 years to maturity and Bond B has 4 years to maturity. If the market rate of interest rises unexpectedly to 7 percent, Bond _____ will be the most volatile with a price decrease of _____ percent.

-A; 5.73
-A; 6.08
-A; 7.94
-B; 3.39
-B; 4.51

### \$331.40

Arts and Crafts Warehouse wants to issue 15-year, zero coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is \$1,000? (Assume semi-annual compounding.)

-\$308.15
-\$331.40
-\$356.08
-\$362.14
-\$369.94

### coupon rate and the yield to maturity

The value of a bond is dependent upon the:

-coupon rate and the current yield.
-coupon rate and the yield to maturity.
-current yield and the yield to maturity.
-coupon rate but neither the current yield nor the yield to maturity.
-yield to maturity but neither the current yield nor the coupon rate.

### Decrease in the time to maturity and an increase in the coupon rate

Which of the following combinations is assured to decrease the interest rate sensitivity of a bond?

-Increase in both the time to maturity and the coupon rate
-Increase in the time to maturity and a decrease in the coupon rate
-Decrease in both the time to maturity and the coupon rate
-Decrease in the time to maturity and an increase in the coupon rate
-A decrease in the time to maturity and an increase in the face value

### \$1,021.00

What is the price of a \$1,000 face value bond if the quoted price is 102.1?

-\$102.10
-\$1,002.10
-\$1,020.01
-\$1,020.10
-\$1,021.00

### Treasury bill

Which one of the following bonds is most apt to have the smallest liquidity premium?

-Treasury bill
-Corporate bond issued by a new firm
-Municipal bond issued by the State of New York
-Municipal bond issued by a rural city in Alaska
-Corporate bond issued by General Motors (GM)

### 14,783 bonds

The Outlet needs to raise \$3.2 million for an expansion project. The firm wants to raise this money by selling zero coupon bonds with a par value of \$1,000 that mature in 20 years. The market yield on similar bonds is 7.8 percent. How many bonds must The Outlet sell to raise the money it needs? (Assume semi-annual compounding.)

-3,200 bond
-3,450 bond
-11,508 bond
-13,797 bond
-14,783 bonds

### 1.60 percent; 1.56 percent

If Treasury bills are currently paying 4.2 percent and the inflation rate is 2.6 percent, what is the approximate real rate of interest? The exact real rate?

-1.60 percent; 1.56 percent
-1.60 percent; 1.64 percent
-6.80 percent; 6.67 percent
-6.80 percent; 6.87 percent
-6.80 percent; 6.92 percent

### 7.50 percent

Smiley Industrial Goods has bonds on the market making annual payments, with 13 years to maturity, and selling for \$1,095. At this price, the bonds yield 6.4 percent. What must the coupon rate be on these bonds?

-6.67 percent
-6.84 percent
-7.23 percent
-7.50 percent
-7.83 percent

### \$115,687.50

A \$100,000 Treasury bond has a bid quote of 115:21 and an asked quote of 115:22. What is the dollar price at which you can purchase this bond?

-\$115,220.00
- \$115,687.50
- \$115,656.25
- \$115,210.00

### 8.55 percent

What taxable yield is equivalent to a municipal bond yield of 5.3 percent if a taxpayer has a marginal tax rate of 38 percent?

- 7.76 percent
- 2.96 percent
- 8.55 percent
- 3.29 percent

### \$963.33

What is the dirty price of a 7 percent, semi-annual bond with a quoted price of 94.00 and a face value of \$1,000 if the next coupon payment is two months from today?

- \$970.83
- \$960.83
-\$963.33
-\$955.83

### 7.72 percent

Last year, inflation averaged 4.9 percent while you earned a nominal return of 13 percent on your investments. What real rate of return did you earn?

- 7.72 percent
- 8.10 percent
- 17.90 percent
- 12.27 percent

### 16.28 percent

You have a goal of earning a real rate of return of 9.8 percent on your investments. What nominal rate will you have to earn if the inflation rate is 5.9 percent?

-3.68 percent
- 6.69 percent
- 16.37 percent
- 16.28 percent

Which one of the following is NOT included in the term structure of interest rates?

-real rate

Which one of the following is compensation to a bond holder for the inability of that holder to sell his or her bond quickly and receive its actual value?

Example: