Fin 534/Fin534 Week 4 Quiz 3 (All Correct) – myassignmentgeek.net

Fin 534/Fin534 Week 4 Quiz 3 (All Correct) – myassignmentgeek.net

Question 1
Which of the following statements is CORRECT?
Answer
If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
The cash flows for an annuity due must all occur at the ends of the periods.
The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
4 points
Question 2
Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. If you invest $2,000 in the CD, how much will you have when it matures?
Answer
$3,754.27
$3,941.99
$4,139.09
$4,346.04
$4,563.34
4 points
Question 3
You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?
Answer
If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.
4 points
Question 4
Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
Answer
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.
The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
A bank loan’s nominal interest rate will always be equal to or greater than its effective annual rate.
If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
4 points
Question 5
You are considering two equally risky annuities, each of which pays $25,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?
Answer
If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.
4 points
Question 6
How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5% with annual compounding?
Answer
$591.09
$622.20
$654.95
$689.42
$723.89
4 points
Question 7
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?
Answer
The discount rate increases.
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.
The discount rate decreases.
The riskiness of the investment’s cash flows increases.
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.
4 points
Question 8
Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.
Answer
Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).
Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
Investment D pays $2,500 at the end of 10 years (just one payment).
Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
4 points
Question 9
Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?
Answer
Exactly 8% of the first monthly payment represents interest.
The monthly payments will decline over time.
A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.
4 points
Question 10
Which of the following statements is CORRECT?
Answer
If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
The cash flows for an annuity due must all occur at the beginning of the periods.
The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
4 points
Question 11
Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?
Answer
$205.83
$216.67
$228.07
$240.08
$252.08
4 points
Question 12
Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)
Answer
The outstanding balance declines at a slower rate in the later years of the loan’s life.
The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years.
Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.
Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
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.
4 points
Question 13
Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
Answer
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.
The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
A bank loan’s nominal interest rate will always be equal to or less than its effective annual rate.
If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
4 points
Question 14
Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?
Answer
Exactly 10% of the first monthly payment represents interest.

The monthly payments will increase over time.
A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment.
The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity.
The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.
4 points
Question 15
Which of the following statements is CORRECT?
Answer
An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
4 points
Question 16
Which of the following statements is CORRECT?
Answer
All else equal, long-term bonds have less interest rate price risk than short-term bonds.
All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.
All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
4 points
Question 17

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