User

Brooke B Hewitt

Course

BA 520: Financial Strat/Tech(68796-W15)

Test

Part 2 Quiz

Started

1/7/15 9:25 PM

Submitted

1/8/15 2:20 PM

Status

Completed

Attempt Score

75 out of 75 points

Time Elapsed

16 hours, 55 minutes.

Instructions

Question 1

3 out of 3 points

Starting to invest early for retirement increases the benefits of compound interest.

Correct Answer: True

Question 2

3 out of 3 points

A time line is meaningful even if all cash flows do not occur annually.

Correct Answer: True

Question 3

3 out of 3 points

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

Correct Answer: True

Question 4

3 out of 3 points

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Correct Answer: True

Question 5

3 out of 3 points

Suppose Randy Jones plans to invest $1,000. He 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 somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

Correct Answer: False

Response Feedback:

Work out the numbers with a calculator:

PV

1000

FVA =

$1,710.34

Rate on A

5%

2 FVA =

$3,420.68

Rate on B

12%

FVB =

$3,478.55

Years

11

FVB > 2 FVA, so FALSE

Question 6

3 out of 3 points

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

Correct Answer: The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

Question 7

3 out of 3 points

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?

Correct Answer: The discount rate decreases.

Question 8

3 out of 3 points

Which of the following statements regarding a 15-year (180-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Correct Answer: The outstanding balance declines at a faster rate in the later years of the loan's life.

Response Feedback: a is the correct answer. Thinking through the question, the other answers can all be eliminated. One could also set up an amortization schedule to prove that only statement a is correct.

Question 9

3 out of 3 points

Which of the following bank accounts has the lowest effective annual return?

Correct Answer: An account that pays 7% nominal interest with monthly compounding.

Response Feedback:

By inspection, we can see that c must have a lower EFF% than either a or b because they all pay the same nominal rate but c is compounded least frequently. Similarly, d and e pay the same rate, but e is compounded less frequently, hence e must have the lower EFF%. So, the correct answer must be either c or e. It is not obvious which of these two has the lower EFF%, so we must do a quick calculation to determine the correct response. As the following calculations show, e is the correct answer.

a.

8.328% = (1 + 0.08/365)3651

b.

8.300% = (1 + 0.08/12)121

c.

8.000% = (1 + 0.08/1)11

d.

7.250% = (1 + 0.07/365)3651

e.

7.229% = (1 + 0.07/12)121

Question 10

3 out of 3 points

Which of the following bank accounts has the highest effective annual return?

Correct Answer: An account that pays 8% nominal interest with daily (365-day) compounding.

Response Feedback:

By inspection, we can see that a dominates b and c, and that d dominates e because, with the same interest rate, the account with the most frequent compounding has the highest EFF%. Thus, the correct answer must be either a or d. Moreover, we can see by inspection that since a and d have the same compounding