Question 1

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

Accepted Answer

A) True 
 B)False

Question 2

Five years ago you took out a 30-year mortgage with a quoted APR of 6.5% for $200,000.If you were to refinance the mortgage today for 20 years at a quoted APR of 4.25%,how much would you save in total interest expense?

Accepted Answer

A)  $176,846
B)  $75,848
C)  $151,696
D)  $98,770
E)  $108,340F) A) and B)
G) C) and D)

Question 3

Your bank account pays quarterly interest with an APR of 7%.What is the EAR?

Accepted Answer

A)  7.50%
B)  7.2%
C)  7.0%
D)  7.8%
E)  8.0%F) B) and C)
G) D) and E)

Question 4

What care,if any,should be taken when cash flows occur in periodicities that are shorter than a year-e.g.,quarterly or monthly cash flows?

Accepted Answer

In the real world,cash flows can occur w...

Question 5

Joe borrows $100,000 and agrees to repay the principal,plus 7% APR interest compounded monthly,at the end of three years.Joe has taken out an amortizing loan.

Accepted Answer

A) True 
 B)False

Question 6

The yield curve is typically:

Accepted Answer

A)  downward sloping.
B)  upward sloping.
C)  flat.
D)  inverted.
E)  fluctuating.F) A) and B)
G) A) and C)

Question 7

Use the table for the question(s) below.
Consider the following investment alternatives:
 
-Which alternative offers you the lowest effective rate of return?

Accepted Answer

A)  Investment A
B)  Investment B
C)  Investment C
D)  Investment D
E)  Investment EF) A) and E)
G) All of the above

Question 8

Given a real interest rate of 2.5% and an inflation rate of 4.5%,what is the nominal interest rate?

Accepted Answer

A)  2.5%
B)  -2.0%
C)  2.0%
D)  7.1%
E)  4.5%F) All of the above
G) D) and E)

Question 9

Why,in general,do investment opportunities offer a rate greater than that offered by Government of Canada securities for the same horizon?

Accepted Answer

A)  Most investment opportunities offer far greater risk than those offered by Government of Canada.
B)  The return from Government of Canada securities generally attracts less tax than the returns from other investments.
C)  The opportunity cost of capital for a given horizon is generally based on Government of Canada securities with that same horizon.
D)  Government of Canada securities are generally considered to be the best alternative to most investments.
E)  Government of Canada securities are the least attractive investment available.F) A) and D)
G) None of the above

Question 10

The term "opportunity" in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested.

Accepted Answer

A) True 
 B)False

Question 11

The effective annual rate (EAR) for a savings account with a stated APR of 4% compounded daily is closest to:

Accepted Answer

A)  4.00%
B)  4.10%
C)  4.08%
D)  4.06%
E)  4.05%F) None of the above
G) B) and D)

Question 12

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
 
-What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?

Accepted Answer

A)  inverted; higher
B)  normal; higher
C)  inverted; lower
D)  normal; lower
E)  flat; unchangedF) A) and E)
G) A) and C)

Question 13

The table above shows the interest rates available from investing in risk-free Government of Canada securities with different investment terms.What is the present value (PV) of cash flows from an investment that yields $4000 at the end of each year for the next four years?

Accepted Answer

A)  $14,898
B)  $14,956
C)  $14,990
D)  $15,093
E)  $14,822F) A) and B)
G) C) and D)

Question 14

Liam had an extension built onto his home.He financed it for 48 months with a loan at 4.9% APR.His monthly payments were $750.How much was the loan amount for this extension?

Accepted Answer

A)  $32,631
B)  $34,842
C)  $36,000
D)  $38,420
E)  $37,764F) B) and E)
G) A) and B)

Question 15

You decide to take out a car loan at 4.5% APR for 60 months.If your monthly payments are $512.68,what is the price of your car?

Accepted Answer

A)  $30,000
B)  $10,581
C)  $30,761
D)  $32,145
E)  $27,500F) A) and B)
G) C) and D)

Question 16

Historically,why have high inflation rates tended to be associated with high nominal interest rates?

Accepted Answer

A)  Individuals will spend more when they expect their investments to increase in value.
B)  Growth in investment and savings is encouraged when consumers are judged to be overspending.
C)  High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term.
D)  The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
E)  High interest rates mean that savings grow faster,and when people have more money to spend,prices will increase.F) All of the above
G) A) and D)

Question 17

You decide to take out a car loan for $35,000 at 5% APR with monthly payments of $838.12.Over how many years is your loan being paid?

Accepted Answer

A)  2 years
B)  3 years
C)  4 years
D)  5 years
E)  6 yearsF) A) and B)
G) None of the above

Question 18

A Xerox DocuColor photocopier costing $42,000 is paid off in 60 monthly installments at 6.5% APR.After three years the company wishes to sell the photocopier.What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?

Accepted Answer

A)  $18,448
B)  $19,645
C)  $19,842
D)  $26,813
E)  $17,946F) A) and B)
G) C) and D)

Question 19

Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?

Accepted Answer

Yes,in the real world cash flows may hav...

Question 20

Consider an investment that pays $1000 certain at the end of each of the next four years.If the investment costs $3,500 and has a net present value (NPV) of $74.26,then the four year risk-free interest rate is closest to:

Accepted Answer

A)  4.5%
B)  4.58%
C)  4.55%
D)  4.53%
E)  5.0%F) All of the above
G) C) and D)

Exam 5: Interest Rates

Given a real interest rate of 2.5% and an inflation rate of 4.5%,what is the nominal interest rate?

Correct AnswerverifiedShow Answer

A Xerox DocuColor photocopier costing $42,000 is paid off in 60 monthly installments at 6.5% APR.After three years the company wishes to sell the photocopier.What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?

Correct AnswerverifiedShow Answer

Five years ago you took out a 30-year mortgage with a quoted APR of 6.5% for $200,000.If you were to refinance the mortgage today for 20 years at a quoted APR of 4.25%,how much would you save in total interest expense?

Correct AnswerverifiedShow Answer

What care,if any,should be taken when cash flows occur in periodicities that are shorter than a year-e.g.,quarterly or monthly cash flows?

Correct AnswerverifiedIn the real world,cash flows can occur w...View AnswerShow Answer

Consider an investment that pays $1000 certain at the end of each of the next four years.If the investment costs $3,500 and has a net present value (NPV) of $74.26,then the four year risk-free interest rate is closest to:

Correct AnswerverifiedShow Answer

You decide to take out a car loan at 4.5% APR for 60 months.If your monthly payments are $512.68,what is the price of your car?

Correct AnswerverifiedShow Answer

The effective annual rate (EAR) for a savings account with a stated APR of 4% compounded daily is closest to:

Correct AnswerverifiedShow Answer

Joe borrows $100,000 and agrees to repay the principal,plus 7% APR interest compounded monthly,at the end of three years.Joe has taken out an amortizing loan.

Correct AnswerverifiedShow Answer

The table above shows the interest rates available from investing in risk-free Government of Canada securities with different investment terms.What is the present value (PV) of cash flows from an investment that yields $4000 at the end of each year for the next four years?

Correct AnswerverifiedShow Answer

Historically,why have high inflation rates tended to be associated with high nominal interest rates?

Correct AnswerverifiedShow Answer

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?

Correct AnswerverifiedShow Answer

The term "opportunity" in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested.

Correct AnswerverifiedShow Answer

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

Correct AnswerverifiedShow Answer

Your bank account pays quarterly interest with an APR of 7%.What is the EAR?

Correct AnswerverifiedShow Answer

The yield curve is typically:

Correct AnswerverifiedShow Answer

Why,in general,do investment opportunities offer a rate greater than that offered by Government of Canada securities for the same horizon?

Correct AnswerverifiedShow Answer

Use the table for the question(s) below. Consider the following investment alternatives: -Which alternative offers you the lowest effective rate of return?

Correct AnswerverifiedShow Answer

Liam had an extension built onto his home.He financed it for 48 months with a loan at 4.9% APR.His monthly payments were $750.How much was the loan amount for this extension?

Correct AnswerverifiedShow Answer

Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?

Correct AnswerverifiedYes,in the real world cash flows may hav...View AnswerShow Answer

You decide to take out a car loan for $35,000 at 5% APR with monthly payments of $838.12.Over how many years is your loan being paid?

Correct AnswerverifiedShow Answer

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In the real world,cash flows can occur w...
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Yes,in the real world cash flows may hav...
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