FIN 221 - Practice Questions with Correct Answers

Which of the following statements is NOT correct? Correct Answer An investment that compounds interest semiannually, and has a nominal rate of 10%, will have an effective rate less than 10% Which of the following investments provides the highest effective rate of return? Correct Answer An investment that has a 9.9% nominal rate and quarterly annual compounding Which of the following statements regarding a 30-year, $100,000 mortgage with a nominal interest rate of 10%, compounded monthly, is NOT CORRECT? Correct Answer The monthly payments will decline over time Suppose someone offered you the choice of two equally risky annuities, each paying $10,000 per year for five years. One is an ordinary (or deferred) annuity, while the other is an annuity due. Which of the following statements is CORRECT? Correct Answer The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of the annuity due also exceeds the future value of the ordinary annuity Which of the following bank accounts has the highest effective annual return? Correct Answer An account that pays 10% nominal interest with daily compounding A $10,000 loan is to be amortized over 5 years, with annual end-of-year payments. Given these facts, which of these statements is CORRECT? Correct Answer The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were higher Which of the following statements is NOT CORRECT, assuming positive interest rates? Correct Answer An investment's nominal interest rate will always be equal to or greater than its effective annual rate You are analyzing the value of an investment by calculating the present value of its expected cash flows. Which of the following would cause the investment to look better? Correct Answer The discount rate decreases You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker. This is an example of: Correct Answer A secondary market transaction Which of the following statements is CORRECT? Correct Answer The New York Stock Exchange is an auction market with a physical location Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is