Question 1

Trial and error is the only way to compute the internal rate of return (IRR)when interest is calculated over five or more periods.

Accepted Answer

While trial and error can be used to calculate IRR, there are also several methods and formulas available to compute IRR for any number of periods. Examples include using Excel's IRR function, using the Newton-Raphson method, or using a financial calculator.

Question 2

Joey buys a bond for $10,000 that will mature in 25 years.He will receive a single payment of $150,000 when the bond reaches maturity.What is the interest rate?

Accepted Answer

To find the interest rate, we can use the formula:
Present value = Future value / (1 + r)^n
where r is the interest rate and n is the number of years.

Substituting the given values:
Present value = $10,000
Future value = $150,000
n = 25 years

$10,000 = $150,000 / (1 + r)^25
(1 + r)^25 = 15
1 + r = 15^(1/25)
1 + r = 1.1144
r = 0.1144 or 11.44%

Therefore, the answer is B) 11.44%.

Question 3

Dan buys a property for $250,000.He is offered a 20-year loan by the bank,at an interest rate of 6% per year.What is the annual loan payment Dan must make?

Accepted Answer

The annual loan payment can be calculated using the formula for an annuity: P = [rPV] / [1 - (1 + r)^-n], where P is the payment, r is the annual interest rate divided by the number of periods per year, PV is the present value of the loan, and n is the total number of payments. Here, r = 0.06, PV = $250,000, and n = 20. Plugging these values into the formula gives an annual payment of approximately $21,796.14.

Question 4

What is the difference between a perpetuity and an annuity?

Accepted Answer

The answer of What is the difference between a perpetuity...

Question 5

You are offered an investment opportunity that costs you $28,000,has a net present value (NPV)of $2278,lasts for three years,has interest rate of 10%,and produces the following cash flows:  The missing cash flow from year 2 is closest to:

Accepted Answer

To find the missing cash flow for year 2, we need to use the formula for NPV:
NPV = ∑(Cashflow / (1+r)^t) - Initial Investment
where r is the discount rate (interest rate) and t is the time period.
We know that NPV = $2,278, r = 10%, initial investment = $28,000, and cash flows for year 1 and year 3.
Substituting the values, we have:
$2,278 = $11,000 / (1+0.1)^1 + CF2 / (1+0.1)^2 + $16,500 / (1+0.1)^3 - $28,000
Solving for CF2, we get:
CF2 = ($2,278 + $28,000 - $11,000 / (1+0.1)^1 - $16,500 / (1+0.1)^3) x (1+0.1)^2
CF2 = $12,000
Therefore, the missing cash flow for year 2 is $12,000. The best choice is B.

Question 6

The present value of an annuity that pays $1 million per year for n years,is $9 million.If the interest rate is 5% per annum,n is approximately equal to how many years?

Accepted Answer

The answer of The present value of an annuity that...

Question 7

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in ten years.If the bond is currently selling for $485.20,then the internal rate of return (IRR)for investing in this bond is closest to:

Accepted Answer

To calculate the IRR in this case, we need to solve for the interest rate that equates the current market price of the bond with its future value at maturity. Using a financial calculator or Excel's IRR function, we get an IRR of approximately 7.5%. Therefore, Choice C is the closest option to the calculated IRR.

Question 8

A businessman wants to buy a truck.The dealer offers to sell the truck for either $120,000 now,or six yearly payments of $25,000.Which of the following is closest to the interest rate being offered by the dealer?

Accepted Answer

Option 1: Buying the truck for $120,000 now

Option 2: Paying six yearly installments of $25,000

Total amount paid in option 2 = $25,000 x 6 = $150,000

Extra amount paid in option 2 = $150,000 - $120,000 = $30,000

This extra amount is the interest charged by the dealer.

Interest rate = (Extra amount paid/Total amount paid) x 100

Interest rate = (30,000/150,000) x 100 = 20%

Therefore, the interest rate being offered by the dealer is 20%, which is closest to option B (7%).

Question 9

The timeline below shows a $10,000 dollar investment that is being compounded at a set rate per year.What is that rate?

Accepted Answer

The answer of The timeline below shows a $10,000 dollar...

Question 10

What is the internal rate of return (IRR)of an investment that requires an initial investment of $10,000 today and pays $14,000 in one year's time?

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, the equation to solve is $10,000 = $14,000 / (1 + IRR), solving for IRR gives an IRR of 40%.

Question 11

A consol bond (perpetual bond)pays $27,500 every year.If its present value is $3,000,000,what is the interest rate?

Accepted Answer

The answer of A consol bond (perpetual bond)pays $27,500 every...

Question 12

How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000?

Accepted Answer

The correct answer is A.The formula for compound interest is A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate, n is the number of times per year that the interest is compounded, and t is the number of years.In this case, we have P = $50,000, A = $75,000, r = 10%, n = 1 (since the interest is compounded annually), and we want to find t.Plugging these values into the formula, we get:$75,000 = $50,000(1 + 0.10/1)^(1*t)Dividing both sides by $50,000, we get:1.5 = (1.10)^tTaking the logarithm of both sides, we get:log(1.5) = t*log(1.10)Solving for t, we get:t = log(1.5) / log(1.10) = 4.25 yearsTherefore, it will take 4.25 years for $50,000 placed in a savings account at 10% interest to grow into $75,000.

Question 13

You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15-year fixed rate mortgage (180 months)at 9% APR (0.75% month).If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:

Accepted Answer

We can use the formula for calculating monthly mortgage payments:

M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]

where
M = monthly mortgage payment
P = the amount borrowed (principal)
i = monthly interest rate, expressed as a decimal
n = number of monthly payments (in this case, 180)

Plugging in the numbers, we get:

M = 250000 [ 0.0075(1 + 0.0075)^180 ] / [ (1 + 0.0075)^180 – 1]

M ≈ $2535

So the closest answer choice is C: $2535.

Question 14

What is the interest rate of an investment that pays $65 million next year with a current value of $58 million?

Accepted Answer

The interest rate can be found using the formula for future value: FV = PV(1 + r), where FV is the future value ($65 million), PV is the present value ($58 million), and r is the interest rate. Rearranging the formula to solve for r gives us r = (FV/PV) - 1. Plugging in the values gives us r = ($65 million / $58 million) - 1 = 1.1207 - 1 = 0.1207, or 12.07%.

Question 15

You are interested in purchasing a new automobile that costs $35,000.The dealership offers you a special financing rate of 6% APR (0.5%)per month for 48 months.Assuming that you do not make a down payment on the auto and you take the dealer's financing deal,then your monthly car payments would be closest to:

Accepted Answer

The answer of You are interested in purchasing a new...

Question 16

Can we apply the annuity or perpetuity equations to cash flows that do NOT arrive at regular intervals?

Accepted Answer

The answer of Can we apply the annuity or perpetuity...

Question 17

The internal rate of return (IRR)is the interest rate that sets the net present value (NPV)of the cash flows equal to zero.

Accepted Answer

This statement is true. The IRR is the discount rate at which the NPV of the cash flows equals zero.

Question 18

A bank offers a home buyer a 25-year loan at 8% per year.If the home buyer borrows $120,000 from the bank,how much must be repaid every year?

Accepted Answer

The answer of A bank offers a home buyer a...

Question 19

An investor receives X dollars at the end of each of the next 3 years.If the present value of her investment is $10 million,what is her yearly cash flow,given that the interest rate is 5%?

Accepted Answer

The present value (PV) of an annuity formula is used to calculate the yearly cash flow, X. The formula is: PV = X * [(1 - (1 + r)^-n) / r], where r is the interest rate, and n is the number of periods. Plugging in the values: $10 million = X * [(1 - (1 + 0.05)^-3) / 0.05]. Solving for X gives approximately $3.672 million.

Question 20

Faisal has $15,000 in his savings account and can save an additional $5000 per year.If interest rates are 12%,how long will it take his savings to grow to $50,000?

Accepted Answer

Let the number of years be x.
Using compound interest formula, we have:
15000(1+0.12)^x + 5000[((1+0.12)^x - 1)/0.12] = 50000
Simplifying, we get:
1.12^x = 2
Taking log on both sides, we get:
x = log 2 / log 1.12
x ≈ 11.02
Hence, it would take approximately 11 years for Faisal's savings to grow to $50,000. The closest option is C, which is 11 years.

Quiz 4: The Time Value of Money