FINA 3317 STANDARD EXAMS ALL ANSWERS AND
QUESTIONS SET A+
✔✔An ordinary annuity and an annuity due have the same number of payments and the
same FV at 10%. Which one has the higher payment?
A. same payment
B. cannot tell
C. annuity due
D. ordinary annuity
E. they cannot have the same FV - ✔✔The ordinary annuity has the higher payment.
An annuity due pays earlier, giving each payment one extra period to earn interest, so it
needs a smaller payment to reach the same FV.
✔✔According to liquidity-premium theory of interest rates:
A. term structure must always be upward sloping
B. investors are indifferent across maturities if long-term spot rates equal average
expected short rates
C. long-term spot rates are higher than the average of current and expected future
short-term rates
D. investors prefer certain maturities and will not switch
E. long-term spot rates are unrelated to expected short rates - ✔✔Long-term spot rates
are higher than the average of current and expected future short-term rates.
Liquidity-premium theory adds compensation for the extra maturity/liquidity risk of long-
term securities.
✔✔Which is the most likely effect of an increase in income tax rates?
A. decrease in savings rate
B. all of these
C. increase in interest rates
D. decrease in supply of loanable funds - ✔✔All of these choices are correct.
,Higher taxes reduce disposable income and saving, shifting the supply of loanable
funds left and tending to raise interest rates.
✔✔Investment A pays 8% simple interest for 10 years. Investment B pays 7.75%
compound interest for 10 years. Both start at $10,000. FV(A) - FV(B) equals:
A. $3,094.67
B. -$2,500.00
C. -$3,094.67
D. $1,643.32
E. $2,500.00 - ✔✔-$3,094.67.
FV(A)=10000(1+0.08×10)=$18,000. FV(B)=10000(1.0775)^10≈$21,094.67. Difference ≈
-$3,094.67.
✔✔You buy a car for $38,000 with a 60-month loan at a monthly interest rate of 0.55%.
What is the required monthly payment?
A. $634.24
B. $605.54
C. $745.29
D. $764.07
E. none - ✔✔$745.29.
Using N=60, monthly rate=0.55%, PV=$38,000, FV=0 gives a payment of about
$745.29.
✔✔You want $5 million in 40 years and expect to earn 9% per year. How much must
you invest each year?
A. $11,619
B. $10,412
C. $14,798
D. none
E. $15,295 - ✔✔$14,798.
PMT = 5,000,000×0.09 / [(1.09)^40 - 1] ≈ $14,798 per year.
✔✔An investor wants 4% more purchasing power in the future and expects prices to
rise 2%. Which are true? I) 4% is the desired real risk-free rate. II) 6% is the
approximate nominal rate. III) 2% is expected inflation.
A. III only
B. II only
, C. I and II only
D. I, II, III
E. I only - ✔✔I, II, and III.
Real rate=4%, inflation=2%, approximate nominal rate=6%; exact nominal rate is
1.04×1.02-1=6.08%.
✔✔Classify each effect on interest rates: I) perceived risk of financial securities
increases; II) near-term spending needs decrease; III) future profitability of real
investments increases.
A. I↓ II↓ III↓
B. none
C. I↑ II↓ III↓
D. I↓ II↑ III↑
E. I↑ II↑ III↑ - ✔✔None of these choices are correct.
Higher perceived risk and lower near-term spending needs increase the supply of funds,
tending to lower rates, while higher expected real-investment profitability increases
demand and tends to raise rates.
✔✔Classify each effect on interest rates: I) borrowing covenants become more
restrictive; II) Fed increases money supply; III) household wealth increases.
A. I↑ II↑ III↑
B. I↓ II↑ III↑
C. I↓ II↓ III↓
D. none
E. I↑ II↓ III↓ - ✔✔I decreases; II decreases; III decreases.
Restrictive borrowing reduces demand; more money supply and greater household
wealth increase supply. Each tends to lower equilibrium interest rates.
✔✔Inflation causes the demand curve for loanable funds to shift to the ______ and the
supply curve to shift to the ______.
A. left; left
B. right; left
C. right; right
D. left; right - ✔✔Right; left.
Inflation increases nominal funding needs, shifting demand right, while reducing real
surplus funds available to lend, shifting supply left.
QUESTIONS SET A+
✔✔An ordinary annuity and an annuity due have the same number of payments and the
same FV at 10%. Which one has the higher payment?
A. same payment
B. cannot tell
C. annuity due
D. ordinary annuity
E. they cannot have the same FV - ✔✔The ordinary annuity has the higher payment.
An annuity due pays earlier, giving each payment one extra period to earn interest, so it
needs a smaller payment to reach the same FV.
✔✔According to liquidity-premium theory of interest rates:
A. term structure must always be upward sloping
B. investors are indifferent across maturities if long-term spot rates equal average
expected short rates
C. long-term spot rates are higher than the average of current and expected future
short-term rates
D. investors prefer certain maturities and will not switch
E. long-term spot rates are unrelated to expected short rates - ✔✔Long-term spot rates
are higher than the average of current and expected future short-term rates.
Liquidity-premium theory adds compensation for the extra maturity/liquidity risk of long-
term securities.
✔✔Which is the most likely effect of an increase in income tax rates?
A. decrease in savings rate
B. all of these
C. increase in interest rates
D. decrease in supply of loanable funds - ✔✔All of these choices are correct.
,Higher taxes reduce disposable income and saving, shifting the supply of loanable
funds left and tending to raise interest rates.
✔✔Investment A pays 8% simple interest for 10 years. Investment B pays 7.75%
compound interest for 10 years. Both start at $10,000. FV(A) - FV(B) equals:
A. $3,094.67
B. -$2,500.00
C. -$3,094.67
D. $1,643.32
E. $2,500.00 - ✔✔-$3,094.67.
FV(A)=10000(1+0.08×10)=$18,000. FV(B)=10000(1.0775)^10≈$21,094.67. Difference ≈
-$3,094.67.
✔✔You buy a car for $38,000 with a 60-month loan at a monthly interest rate of 0.55%.
What is the required monthly payment?
A. $634.24
B. $605.54
C. $745.29
D. $764.07
E. none - ✔✔$745.29.
Using N=60, monthly rate=0.55%, PV=$38,000, FV=0 gives a payment of about
$745.29.
✔✔You want $5 million in 40 years and expect to earn 9% per year. How much must
you invest each year?
A. $11,619
B. $10,412
C. $14,798
D. none
E. $15,295 - ✔✔$14,798.
PMT = 5,000,000×0.09 / [(1.09)^40 - 1] ≈ $14,798 per year.
✔✔An investor wants 4% more purchasing power in the future and expects prices to
rise 2%. Which are true? I) 4% is the desired real risk-free rate. II) 6% is the
approximate nominal rate. III) 2% is expected inflation.
A. III only
B. II only
, C. I and II only
D. I, II, III
E. I only - ✔✔I, II, and III.
Real rate=4%, inflation=2%, approximate nominal rate=6%; exact nominal rate is
1.04×1.02-1=6.08%.
✔✔Classify each effect on interest rates: I) perceived risk of financial securities
increases; II) near-term spending needs decrease; III) future profitability of real
investments increases.
A. I↓ II↓ III↓
B. none
C. I↑ II↓ III↓
D. I↓ II↑ III↑
E. I↑ II↑ III↑ - ✔✔None of these choices are correct.
Higher perceived risk and lower near-term spending needs increase the supply of funds,
tending to lower rates, while higher expected real-investment profitability increases
demand and tends to raise rates.
✔✔Classify each effect on interest rates: I) borrowing covenants become more
restrictive; II) Fed increases money supply; III) household wealth increases.
A. I↑ II↑ III↑
B. I↓ II↑ III↑
C. I↓ II↓ III↓
D. none
E. I↑ II↓ III↓ - ✔✔I decreases; II decreases; III decreases.
Restrictive borrowing reduces demand; more money supply and greater household
wealth increase supply. Each tends to lower equilibrium interest rates.
✔✔Inflation causes the demand curve for loanable funds to shift to the ______ and the
supply curve to shift to the ______.
A. left; left
B. right; left
C. right; right
D. left; right - ✔✔Right; left.
Inflation increases nominal funding needs, shifting demand right, while reducing real
surplus funds available to lend, shifting supply left.
