Quiz 2

No.
:
FACULTY OF BUSINESS ADMINISTRATION
TT/P.KT&KĐCL/11/BM01
PROCESS EXERCISE - SEMESTER: 1
Time of issue: 01
ACADEMIC YEAR: 2024 – 2025
Effective Date: 07/01/2019
Course: Advanced Financial Management

Code: BA701250
Duration: 45 minutes
The students are not allowed to use materials.
Name of student: ………………….………………; Student ID.:.……………No.:….…
PART I: True/False and Explanation (5 points)
1. Starting to invest early for retirement increases the benefits of compound interest.
2. A time line is not meaningful unless all cash flows occur annually.
3. Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
4. Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven
amounts.
5. Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its
present value.
6. If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
7. The greater the number of compounding periods within a year, then (1) the greater the future value of a lump
sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future
date.
8. Suppose Sally Smith plans to invest $1,000. She 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
more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs
annually.)
9. The present value of a future sum increases as either the discount rate or the number of periods per year
increases, other things held constant.
10. All other things held constant, the present value of a given annual annuity decreases as the number of periods per
year increases.
PART II: Multiple choices (5 points)

1. Which of the following statements is CORRECT?
a. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
b. A time line is not meaningful unless all cash flows occur annually.
c. Time lines are useful for visualizing complex problems prior to doing actual calculations.
d. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
e. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.
2. 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 lower the calculated value of the investment?
a. The discount rate decreases.
b. The discount rate increases.
c. The riskiness of the investment's cash flows decreases.
d. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less
are received in the later years.
3. Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly.
Which of the following statements is CORRECT?
a. The periodic rate of interest is 5% and the effective rate of interest is also 5%.
b. The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.
c. The periodic rate of interest is 5% and the effective rate of interest is greater than 5%.
d. The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%.
e. The periodic rate of interest is 2.5% and the effective rate of interest is 5%.
4. Which of the following bank accounts has the highest effective annual return?
1
a. An account that pays 8% nominal interest with daily (365-day) compounding.
b. An account that pays 8% nominal interest with monthly compounding.
c. An account that pays 8% nominal interest with annual compounding.
d. An account that pays 7% nominal interest with daily (365-day) compounding.
e. An account that pays 7% nominal interest with monthly compounding.
5. JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD)
that pays 3.5% interest, compounded annually. How much will you have when the CD matures?
a. $1,781.53
b. $1,870.61
c. $1,964.14
d. $2,062.34
e. $2,165.46
6. Cochrane Associate's net sales last year were $525 million. If sales grow at 7.5% per year, how
large (in millions) will they be 8 years later?
a. $845.03
b. $889.51
c. $936.33
d. $983.14
e. $1,032.30
7. Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year
for 5 years. He could earn 4.5% on his money in other investments with equal risk. What is the most
he should pay for the annuity?
a. 20,701
b. $21,791
c. $22,938
d. $24,085
e. $25,289
8. A salt mine you inherited will pay you $25,000 per year for 25 years, with the first payment being
made today. If you think a fair return on the mine is 7.5%, how much should you ask for it if you
decide to sell it?
a. $284,595
b. $299,574
c. $314,553
d. $330,281
e. $346,795
9. What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000
at the end of Year 4 if the interest rate is 5%?
a. $8,509
b. $8,957
c. $9,428
d. $9,924
e. $10,446
10. Your aunt wants to retire and has $375,000. She expects to live for another 25 years and to earn
7.5% on her invested funds. How much could she withdraw at the end of each of the next 25 years and
end up with zero in the account?
a. $28,843.38
b. $30,361.46
c. $31,959.43
d. $33,641.50
e. $35,323.58
-End-
TRUE/FALSE ANSWER SHEET

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MULTIPLE CHOICE ANSWER SHEET
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No.

Course: Advanced Financial Management

PART II: Multiple choices (5 points)

TRUE/FALSE ANSWER SHEET

MULTIPLE CHOICE ANSWER SHEET

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