Which of the following statements is CORRECT? Answer A time line is not meaningful unless all cash flows occur annually. Time lines are not useful for visualizing complex problems prior to doing actual calculations. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. .2 points Question 3 Which of the following statements is CORRECT? Answer If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator. If you solve for I and get a negative number, then you must have made a mistake. If CF0 is positive and all the other CFs are negative, then you can still solve for I. .2 points Question 4 Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT? Answer The monthly payments will decline over time. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. Exactly 10% of the first monthly payment represents interest. .2 points Question 5 Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT? Answer The monthly payments will increase over time. A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment. The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. Exactly 10% of the first monthly payment represents interest. .2 points Question 6 Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant? Answer The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. .2 points Question 7 You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest? Answer Bank 1; 6.1% with annual compounding. Bank 2; 6.0% with monthly compounding. Bank 3; 6.0% with annual compounding. Bank 4; 6.0% with quarterly compounding. Bank 5; 6.0% with daily (365-day) compounding. .2 points Question 8 Which of the following statements is CORRECT? Answer The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. The proportion of the payment that goes toward interest on a fully amortized loan increases over time. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. .2 points Question 9 Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero. Answer Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). Investment D pays $2,500 at the end of 10 years (just one payment). Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments). .2 points Question 10 You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? Answer The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. The discount rate decreases. The riskiness of the investment