2023 the grandfather has been disappointed with Ed | Assignments Online

FIN 534 CH 4 QUIZ :

 

Questions :

 

1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

a. The annual payments would be larger if the interest rate were lower.

b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.

c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.

d. The last payment would have a higher proportion of interest than the first payment.

e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.

 

 

2. Which of the following statements is CORRECT?

a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.

b. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.

c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.

d. If you solve for I and get a negative number, then you must have made a mistake.

e. If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

 

3. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?

a. 0.52%

b. 0.44%

c. 0.36%

d. 0.30%

e. 0.24%

 

 

4. Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate’s trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve’s 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a “trust fund baby

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