Financial Modeling Exam 1 Questions with Correct Answers Fully Solved Latest 2025
The 3 equivalent ways of calculating the present value of a single cash flow are: - Answers 1. PV formula
2. PV function
3. PV timeline
The effect of future value of a single cash flow when you increase the PV - Answers an increase in the FV
The effect of future value when you increase the discount rate - Answers an increase in FV
The effect of future value when you increase the number of periods - Answers an increase in the FV
Fully explain the formula used for calculating the FV of each cash flow - Answers Each cash flow is
compounded at the Discount Rate for the remaining periods
What is the name of the term that the Present Value is divided by to get the Payment. Why does this
formula give the Payment amount? - Answers Present Value Interest Factor of Annuity. APV = PMT X
PVIFA. So, dividing by the Present Value Interest Factor undo's the product, and gives you the PMT.
Show the formula for calculating the Annuity Present Value using the Annuity Future Value, Discount
Rate, and # of Periods in Excel Notation - Answers APV = AFV/(1+r)^t
State the effect of increasing the payment amount on the APV and AFV - Answers APV = increase in FV
AFV = increase in FV
Can the constant discount rate method be used to calculate NPV in the general case where the discount
rate changes over time? Why/Why not? - Answers No, because the NPV function & constant discount
formula only allow for one constant discount rate.
Fully explain the NPV function used to calculate the NPV in cell b21 - Answers The NPV function in Excel
assumes that Year 0 cash flow occurs at the end of the year instead of the beginning, so you add it to the
NPV of the remaining years using the NPV function. The NPV function takes the cash flows from each
year, discounts it by the nominal discount rate (which is found by compounding the inflation rate & the
real discount rate) and summing them up (including the initial investment)
Is the NPV of the project shown acceptable for investment? Why/Why not - Answers A project is
acceptable if the NPV is positive
If we add the inflation rate and the real discount rate to get the nominal discount rate, how will it be
different from the formula in b9? - Answers It won't give us the effect/measurement of the increase in
the real discount rate due to inflation
Why is the coupon bond yield to maturity close to, but not exactly equal to, the yield to maturity of the
four-year treasury strip? - Answers Because the yield of the coupon bond is a weighted average of the
, yields for each of the 8 periods. The biggest cash flow is on the maturity date, and the biggest weight in
the weighted average is on that date. So, it's closest to the yield at the maturity date. But now the same.
State whether the EAR convention results in a higher or lower bond price than the APR convention in
and give the reason for this. - Answers higher bond price because it is a lower discount rate, which from
the laws of discounting cash flows results in a higher bond price.
State and explain the differences between the curvatures of the yield to maturity curve and the forward
rate curve. - Answers Forward rates curve is not smooth, whereas the Yield Curve is a compounded
average of the Forward rates so it has a smoother curve.
Fully explain the formula for calculating the forward rate of the Ten Year Treasury Strip. - Answers Take
the 10 year yield to maturity and divide it by the 5 year rate compounded for 5 years to give the 5 year
compounded value between years 5 and 10. Then take the 5th root to convert it to annual rate, and
subtract 1 for the principal.
Explain why the yield curve often has lower yields at the short end and the long end due to market
segmentation. - Answers There is more demand for short-term bonds for cash management, which
increases prices of short term bonds, resulting in low yields at the short end.
List the static features regarding the shape, level, and curvature of the U.S. yield curve. - Answers A.
Four different shapes: upward sloping, downward sloping, flat, and humped.
B. The overall level of the yield curve ranges from low to high
C. The amount of curvature at the short end ranges from a little to a lot.
List the dynamic properties regarding the volatility of the U.S. yield curve. - Answers A. Short Rates (0-5
yrs) are more volatile than long rates (15-30 yr)
B. The overall volatility of the yield curve is higher when the level is higher (early 80s)
C. Sometimes there are sharp reactions to government interventions
Can the general discount rate method be used to calculate NPV if the discount rate is constant over
time? If yes, how? - Answers Yes, it can if you adjust the discount rate and inflation rate and make them
both constant so that the nominal rate is constant.
The 3 equivalent ways of calculating the present value of a single cash flow are: - Answers 1. PV formula
2. PV function
3. PV timeline
The effect of future value of a single cash flow when you increase the PV - Answers an increase in the FV
The effect of future value when you increase the discount rate - Answers an increase in FV
The effect of future value when you increase the number of periods - Answers an increase in the FV
Fully explain the formula used for calculating the FV of each cash flow - Answers Each cash flow is
compounded at the Discount Rate for the remaining periods
What is the name of the term that the Present Value is divided by to get the Payment. Why does this
formula give the Payment amount? - Answers Present Value Interest Factor of Annuity. APV = PMT X
PVIFA. So, dividing by the Present Value Interest Factor undo's the product, and gives you the PMT.
Show the formula for calculating the Annuity Present Value using the Annuity Future Value, Discount
Rate, and # of Periods in Excel Notation - Answers APV = AFV/(1+r)^t
State the effect of increasing the payment amount on the APV and AFV - Answers APV = increase in FV
AFV = increase in FV
Can the constant discount rate method be used to calculate NPV in the general case where the discount
rate changes over time? Why/Why not? - Answers No, because the NPV function & constant discount
formula only allow for one constant discount rate.
Fully explain the NPV function used to calculate the NPV in cell b21 - Answers The NPV function in Excel
assumes that Year 0 cash flow occurs at the end of the year instead of the beginning, so you add it to the
NPV of the remaining years using the NPV function. The NPV function takes the cash flows from each
year, discounts it by the nominal discount rate (which is found by compounding the inflation rate & the
real discount rate) and summing them up (including the initial investment)
Is the NPV of the project shown acceptable for investment? Why/Why not - Answers A project is
acceptable if the NPV is positive
If we add the inflation rate and the real discount rate to get the nominal discount rate, how will it be
different from the formula in b9? - Answers It won't give us the effect/measurement of the increase in
the real discount rate due to inflation
Why is the coupon bond yield to maturity close to, but not exactly equal to, the yield to maturity of the
four-year treasury strip? - Answers Because the yield of the coupon bond is a weighted average of the
, yields for each of the 8 periods. The biggest cash flow is on the maturity date, and the biggest weight in
the weighted average is on that date. So, it's closest to the yield at the maturity date. But now the same.
State whether the EAR convention results in a higher or lower bond price than the APR convention in
and give the reason for this. - Answers higher bond price because it is a lower discount rate, which from
the laws of discounting cash flows results in a higher bond price.
State and explain the differences between the curvatures of the yield to maturity curve and the forward
rate curve. - Answers Forward rates curve is not smooth, whereas the Yield Curve is a compounded
average of the Forward rates so it has a smoother curve.
Fully explain the formula for calculating the forward rate of the Ten Year Treasury Strip. - Answers Take
the 10 year yield to maturity and divide it by the 5 year rate compounded for 5 years to give the 5 year
compounded value between years 5 and 10. Then take the 5th root to convert it to annual rate, and
subtract 1 for the principal.
Explain why the yield curve often has lower yields at the short end and the long end due to market
segmentation. - Answers There is more demand for short-term bonds for cash management, which
increases prices of short term bonds, resulting in low yields at the short end.
List the static features regarding the shape, level, and curvature of the U.S. yield curve. - Answers A.
Four different shapes: upward sloping, downward sloping, flat, and humped.
B. The overall level of the yield curve ranges from low to high
C. The amount of curvature at the short end ranges from a little to a lot.
List the dynamic properties regarding the volatility of the U.S. yield curve. - Answers A. Short Rates (0-5
yrs) are more volatile than long rates (15-30 yr)
B. The overall volatility of the yield curve is higher when the level is higher (early 80s)
C. Sometimes there are sharp reactions to government interventions
Can the general discount rate method be used to calculate NPV if the discount rate is constant over
time? If yes, how? - Answers Yes, it can if you adjust the discount rate and inflation rate and make them
both constant so that the nominal rate is constant.
