# FIN 534/FIN534 WEEK 4 QUIZ 3 (Solution 30/30) Guarantee - 87638

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Question 1

You are considering two equally risky annuities, each of which pays \$5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.

The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.

The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.

The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

2 points

Question 2

A U.S. Treasury bond will pay a lump sum of \$1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

The periodic interest rate is greater than 3%.

The periodic rate is less than 3%.

The present value would be greater if the lump sum were discounted back for more periods.

The present value of the \$1,000 would be larger if interest were compounded monthly rather than semiannually.

The PV of the \$1,000 lump sum has a smaller present value than the PV of a 3-year, \$333.33 ordinary annuity.

2 points

Question 3

Which of the following statements is CORRECT?

A time line is not meaningful unless all cash flows occur annually.

Time lines are 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 cannot be constructed for annuities where the payments occur at the beginning 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 4

Which of the following statements is CORRECT?

The present value of a 3-year, \$150 ordinary annuity will exceed the present value of a 3-year, \$150 annuity due.

If a loan has a nominal annual rate of 8%, then the effective rate will never be less 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 5

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.

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 6

Which of the following statements is CORRECT?

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 val

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