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10 views4 pages

Practice+Questions+(Quantitative+Methods+ Time+Value+of+Money)

Uploaded by

ritikprasad1998
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Practice questions: Quantitative Methods - Discounted Cash Flow Applications

Question 1

Which of the following statements is not true for time lines?

A. Time lines represent a graphical representation of the cash flows associated with a time value of
money problem.
B. Cash flows which occur later are put to the left on the time line.
C. Cash outflows are given a negative sign, while cash inflows are given a positive sign.

Question 2

Which of the following statements is not true for interpretation of interest rates?

A. Interest rates are also called opportunity costs because they measure the value investors forgo
when choosing a particular course of action.
B. Interest rates are used when discounting or compounding cash flows and express the time value
of money.
C. Interest rates can be interpreted as required rates of return set by central banks.

Question 3

Which of the following statements is most likely to be true about the nominal risk-free interest rate?

A. Nominal risk-free rate is expressed as the sum of the real-risk free rate and the inflation
premium.
B. The interest rate on a corporate bond is considered to be an example of a nominal risk-free rate.
C. Nominal risk-free rate is the rate for a completely risk-free security in a zero-inflation
environment.

Question 4

Bank A has a stated annual interest rate equal to 12%. If this rate is equivalent to an effective annual
rate of 12.683%, what is the compounding frequency?

A. Daily
B. Monthly
C. Yearly

Question 5

John deposits $100,000 in a bank for 3 years. The stated annual interest rate is 4%, while the
compounding frequency is quarterly. Calculate the future value of the deposit at the end of year 3.

A. $112,480
B. $112,682
C. $114,212

1
Question 6

Company X Inc. has an unfunded pension liability of $100 million that must be paid in 10 years. A group
of financial analysts wants to discount this liability back to the present. If the relevant discount rate is
8%, what is the present value of this liability?

A. $46,319,348
B. $56,319,348
C. $76,319,348

Question 7

Jessica wants to have $200,000 three years from now for her trip around the world. How much money
does she need to deposit in her bank account so that in three years she accumulates the required
amount? Assume that the stated annual interest rate is 5%, and the compounding frequency is monthly.

A. $122,000
B. $156,000
C. $172,195

Question 8

What is the future value (FV) of a $5,000 deposit invested for two years using continuous compounding,
if the stated annual interest rate is equal to 5%?

A. $5,155.27
B. $5,215.36
C. $5,525.86

Question 9

A security pays $500 annually for a total of 10 years. Payments occur at the end of each year, and the
annual interest rate is equal to 4%. The present value (PV) of the investment is closest to:

A. $4,055.45
B. $4,155.45
C. $4,255.45

2
Question 10

A 10-year annuity pays $700 at the end of each year starting from year 6 onwards. The annual interest
rate is 10% during all the years. The present value (PV) of the investment is closest to:

A. $2,570.71
B. $2,670.71
C. $2,770.71

Question 11

Melissa invests in a security that pays $500 at the beginning of each of the next 5 years, starting from
today. If the annual interest rate is equal to 5%, the future value (FV) of the security is closest to:

A. $2,800.96
B. $2,850.96
C. $2,900.96

Question 12

John buys a perpetual preferred stock that pays $75 on a yearly basis, starting one year from now. If the
annual rate of return is equal to 8%, the present value (PV) of the stock is closest to:

A. $937.50
B. $983.50
C. $1003.50

Question 13

Assuming that the annual interest rate is equal to 5%, calculate the present value (PV) of the following
uneven cash flows:

Time (Years) Cash flow($)


1 $2,500
2 $3,000
3 $1,700

A. $4,759
B. $5,286
C. $6,571

3
Question 14

Veronika wants to save enough to buy a new car in 4 years by making equal end-of-year deposit
payments. The value of the car is expected to be $40,000. The relevant interest rate for the deposit
account is equal to 3%. The amount of equal yearly payments, which will allow her to achieve her dream
is closest to:

A. $9,561.08
B. $9,661.08
C. $9,861.08

Question 15

At 12% rate of return, how long does it take to quadruple your initial investment of $100,000?

A. 11.23
B. 12.23
C. 14.23

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