Time Value of Money

  1. Money has time value because:
    1. Individuals prefer future consumption to present consumption.
    2. Money today is more certain than money tomorrow
    3. Money today is wroth more than money tomorrow in terms of purchasing power.
    4. There is a possibility of earning risk free return on money invested today.
    5. (b), (c) and (d) above.
  2. Given an investment of Rs. 10,000 to be invested for one year;
    1. It is better to invest in a scheme that pays 10% simple interest.
    2. It is better to invest in a scheme that pays 10% annual compound interest.
    3. Both (a) and (b) provide the same return
  3. Given an investment of Rs. 10,000 for a period of one year, it is better to invest in a scheme that pays:
    1. 12% interest compounded annually
    2. 12% interest compounded quarterly
    3. 12% interest compounded monthly
    4. 12% interest compounded daily
  4. Given an investment of Rs. 10,000 over a period of two years, it is better to invest in a scheme that pays;
    1. 10% interest in the first year and 12% in second year.
    2. 12% interest in the first year and 10% in second year.
    3. Both (a) and (b) above provide the same return
  5. The relation between effective annual rate of interest (re) and nominal rate of interest (r) is best represented by;
    1. None of the above
  6. To find the present value of a sum of Rs. 10,000 to be received at the end of each year for the next 5 years at 10% rate, we use:
    1. Present value of a single cash flow table
    2. Present value of annuity table.
    3. Future value of a single cash flow table
    4. Future value of annuity table
  7. Sinking fund factor is the reciprocal of:
    1. Present value interest factor of a single cash flow.
    2. Present value interest factor of an annuity.
    3. Future value interest factor of a single cash flow.
    4. Future value interest factor of an annuity.
  8. If the effective rate of interest compounded quarterly is 16%, then the nominal rate of interest is:
    1. 14.6%
    2. 15%
    3. 14.8%
    4. 15.12%
  9. If the interest rate on a loan is 1% per month, the effective annual rate of interest is:
    1. 12%
    2. 12.36%
    3. 12.68%
    4. 12.84%
  10. If a loan of Rs. 30,000 is to be paid in 5 annual installments with interest rate of 12% p.a. then the equal annual installment will be;
    1. Rs. 7400
    2. Rs. 8100
    3. Rs. 7812
    4. Rs. 8322
  11. X took a housing loan of Rs. 25,00,000. The loan is to be redeemed in 120 monthly installments of Rs. 31,000 each to be paid at the end of each month. What is the implied interest rate per annum.
    1. 8.50%
    2. 8.1%
    3. 7.70%
    4. 9.12%
  12. The difference between effective annual rate of interest with monthly and quarterly compounding, when nominal rate of interest is 10% is;
    1. 0.10%
    2. 0.14%
    3. 0.21%
    4. 0.09%
  13. A bond has a face value of Rs. 1000 and a coupon rate of 10%. It will be redeemed after 4 years at 10% premium. Find the present value of bond at a required rate of 12%:
    1. Rs. 1002.80
    2. Rs. 960.72
    3. Rs. 980.84
    4. Rs. 1020.12
  14. You want to buy an ordinary annuity that will pay you 4,000 a year for the next 20 years. You expect annual interest rates will be 8 percent over that time period. The maximum price you would be willing to pay for the annuity is closest to
    1. 32,000
    2. 39,272
    3. 40,000
    4. 80,000
  15. With continuous compounding at 10 percent for 30 years, the future value of an initial investment of 2,000 is closest to
    1. 34,898
    2. 40,141
    3. 1,64,500
    4. 3,28,282
  16. In 3 years you are to receive 5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would
    1. fall
    2. rise
    3. remain unchanged
    4. cannot be determined without more information
  17. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer?
  18. Year1Year2Year3Year4
    A.400300200100
    B.100200300400
    C.250250250250
    D.Any of the above, since they each sum to 1,000
  19. You are considering investing in a zero-coupon bond that sells for 250. At maturity in 16 years it will be redeemed for 1,000. What approximate annual rate of growth does this represent?
    1. 8 percent
    2. 9 percent
    3. 12 percent
    4. 25 percent
  20. To increase a given present value, the discount rate should be adjusted
    1. upward
    2. downward
    3. same
  21. For 1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly payment of 263.80 for 5 years. The compound annual interest rate implied by this arrangement is closest to
    1. 8 percent
    2. 9 percent
    3. 10 percent
    4. 11 percent
  22. You are considering borrowing 10,000 for 3 years at an annual interest rate of 6%. The loan agreement calls for 3 equal payments, to be paid at the end of each of the next 3 years. (Payments include both principal and interest.) The annual payment that will fully pay off (amortize) the loan is closest to
    1. 2,674
    2. 2,890
    3. 3,741
    4. 4,020
  23. In a typical loan amortization schedule, the amount of interest paid each period          .
    1. increases with each payment
    2. decreases with each payment
    3. remains constant with each payment
  24. In a typical loan amortization schedule, the total amount of money paid each period          .
    1. increases with each payment
    2. decreases with each payment
    3. remains constant with each payment

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